SIA Managed to ‘Borrow’ Another $850 Million Even When They Just Wanted $750 Million

An analysis conducted by The International Air Transport Association (IATA), a trade association for the world’s airlines, found that airlines are looking at a loss of $84.3 billion in 2020 globally.

IATA also found that the Asia Pacific region alone saw a 53.8% decrease in passenger demand and saw a 29.0 billion loss, the largest net profit impact globally.

With this backdrop of financial stress, Singapore Airlines (SIA) has taken significant steps to stay afloat; one of which is raising S$850 million through a convertible bond issue.

But what – didn’t the headline say SIA “borrowed” the money? Is a bond a loan?

Well, kind of.

What is a Convertible Bond?

Issuing bonds is one way for companies to raise money; a bond, therefore, acts as a loan between an investor and a corporation.

But what about a convertible bond? For those who aren’t familiar with the term, a convertible bond is a bond that can be exchanged for a specific amount of company stock at a later time (in the case of SIA, that amount of time is in five years.)

When issued, they act just like regular corporate bonds but with a tad lower interest rate.

Imagine this: you buy a SIA bond for $10, so you’ve just loaned $10 to SIA. SIA will return the $10 to you five years later with interest.

But as a convertible bond, you can turn that $10 into a SIA stock instead, and therefore own part of the company.

So yes: technically speaking, SIA did borrow the money.

Singapore Airlines Raises S$850m

Announced on Friday the 13th, the offer came at more than the initial S$750 million with strong investor interest (i.e. erm, many people want to lend SIA money).

Remember we were talking about interest and stock earlier?

The five-year bonds will carry a coupon of 1.625%. They can also be converted into ordinary shares at a price of S$5.743. This price comes at a 45.8% increase from its Thursday, 12 Nov, closing price of S$3.94.

This means if you intend to “loan money and turn it into stocks”, you’re essentially getting a “discount” on the stock price – that is, if the stock price remains the same five years from now lah, which is unlikely.

In the media release, SIA said that “the issuance further strengthens the company’s liquidity position, and bolsters its ability to navigate the challenges posed by the impact of the COVID-19 pandemic on the business.”

Proceeds from the bonds will be used to fund operating and capital expenditure, and debt servicing.

Goh Choon Phong, CEO of Singapore Airlines also thanked the SIA investors for their strong support and that “the placement was successfully executed with a highly competitive coupon and substantial conversion premium. Such attractive terms for the company underscore the strong confidence that investors have in Singapore Airlines, as well as our ability to successfully overcome the near-term challenges and emerge as a leader in the airline industry.”

The airline also said that “positive discussions have also taken place on aircraft sale-and-leaseback transactions and the company will continue to explore other means to further strengthen our liquidity as necessary.”

Featured Image: Ryan Fletcher / Shutterstock.com