facebookThe Business Times reported that SIA directors opt not to subscribe for rights MCBs. What does it mean for investors? - Seedly

Anonymous

05 Jun 2020

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General Investing

The Business Times reported that SIA directors opt not to subscribe for rights MCBs. What does it mean for investors?

According to the BT article here (https://www.businesstimes.com.sg/companies-mark...), most of Singapore Airlines' directors have chosen to let their mandatory convertible bonds (MCBs) lapse without exercising them.

Does this mean a no-confidence vote from the management? What are your thoughts?

Discussion (3)

What are your thoughts?

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Hello there!

Let me try to analyse the situation and work out some numbers.

Given the terms of right issues for Mandatory Convertible Bonds (MCBs), we know that we have 295 rights for every 100 exisiting SIA shares owned. Assuming if an existing shareholder owns 338 SIA shares, this person would have 1000 rights MCBs. One bond costs $1. And if this shareholder were to exercise such rights, he/she would need to cough out $1000 now. After 10 years, the person would receive $1,806.11, and this translates to 80% return over 10 years, or 6% CAGR. However, instead of giving this person money, SIA decides to pay the shareholder in a form of share valued at $4.84, and this again translates to 373 shares ( $1,806.11 / $4.84).

In order to realise the gain, the person needs to sell away his/her shares at the prevailing market price 10 years later. Assuming the share price is trading at these two scenarios: $4 and $3.50, the person would have earned 4.1% ($1,492) and 2.7% ($1,305.5) CAGR respectively. The breakeven share price must be above $2.69.

Now, the management team needs to ask themself what is the probability of its stock price trading above $4.84 in order to earn the 6% annualised return. Given that they have accessed to business proprietary information and not exercise their MCBs rights, this could probably suggest to us that the stock price 10 years later might not be trading above the conversion price of $4.84. If this is true, the management team would rather place their monies somewhere else.​​​

Elijah Lee

04 Jun 2020

Senior Financial Services Manager at Phillip Securities (Jurong East)

Hi anon,

It is a very telling sign when senior management of the company, who should have access to information such as business strategy, mid to long term plans for the company, don't exercise their MCBs.

It's a vote of no confidence in my view. Look back, there have been instances where senior management of other companies bought into shares of their company in a show of confidence. For example, DBS CEO once bought $2.8 million worth of DBS shares in 2016 when the stock price was severely depressed. That says a lot about his confidence in DBS in the near future. For the SIA directors to let the rights expire worthless, letting Temasek pick up the tab for the MCBs instead, doesn't bode well in my view.

Gabriel Tham

04 Jun 2020

Tag Team Member at Kenichi Tag Team

They do not have confidence in the company. They have insider info but not allowed to share the insi...

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