Singapore Airlines had earlier issued a retail bond in early 2019.
It’s currently trading at about 90 cents on the dollar reflecting those challenges.
Source: Shareinvestor.com
Although the initial coupon was 3.03%, the fact that it has fallen below PAR means that its yield to maturity is far higher at >6%.
Source: Fundsupermart.com
The next few months will be extremely challenging for SIA given the evaporation of demand.
The Business Times had a recent article on Singapore Airlines highlighting that OCBC Credit Research had lowered its credit rating given the current challenges that it faces and diving into the main challenges it faces.
A lot of it is going to be dependent on factors outside its control.
It certainly has a stronger balance sheet than most other airlines but the scale of what’s happening is unprecedented.
What’s Happening Around The World
There has been plenty of talk of governments extending lines of credit or bailing out airlines around the world.
Air New Zealand was one recent case:
“The New Zealand government has agreed to bail out the nation’s only major airline, Air New Zealand, with a $NZ900 million ($891 million) loan facility if it were to run out of cash amid the COVID-19 pandemic.
Conditions to the agreement include the cancellation of its $NZ123 million interim dividend scheme announced last month and a prohibition on the further dividends while the facility is in use. The government may also order Air New Zealand to raise capital to repay the loan after six months or convert it into equity.”
What’s To Expect Going Forward
The immediate challenge to Singapore Airlines is to ward off a liquidity crunch and to reign in expenses.
The dividend will likely be slashed or even suspended in order to preserve cash until the immediate crisis is over.
Its balance sheet will certainly come under pressure in the coming months as it shores up liquidity and defers CAPEX expenses insofar it is possible.
Are The Bonds Safe?
Despite its deteriorating finances, Singapore Airlines had a relatively strong balance sheet (compared to other airlines) riding into the crisis.
I expect that management is in crisis mode right now working on preserving stability.
And of course let’s not forget who the largest shareholder of SIA is – Temasek Holdings.
SIA is of huge strategic importance to Singapore given that its our national airline carrier that in my opinion will not be allowed to fail especially given the exceptional circumstances of events.
Do I Think The Bonds Are Attractive?
I actually wrote an article almost exactly one year back entitled
Why I Am Going To Avoid The Upcoming SIA 5 Year 3.03% Retail Bond
My main reasons for avoiding it where the CAPEX intensive nature of the business and highly geared balance sheet.
Whilst I think that the government will step in at some point if external financing cannot be obtained, I have no insight as to how to assess that risk or price it.
The airline business is a notoriously competitive on at the best of times, and at its worst it is downright brutal.
The fact that share prices of SIA have fallen only about 30% give testament to its financial strength.
Around the world Airlines are in much worst shape.
I’ve visited and re-visited the bonds multiple times since it fallen below par value but never got comfortable with it.
When it comes to bonds, my goal is to never earn a “high interest” but to earn a reasonable amount of interest above the risk free rate by taking as little credit risk as possible.
In this case, it didn’t fit my criteria and I’ve since passed.
Disclosure: The author has NO interest or vested interest in shares of Singapore Airlines of the SIA 3.03% Retail Bond.
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