Friday, March 22, 2019

The SIA 3.03% Bond: The Bedokian’s Take

Another corporate bond is coming to town, and yes, it is the Singapore Airlines (SIA) 3.03% bonds. A few financial blogs had articles on it, so I shall just concentrate my post from a Bedokian Portfolio investor’s point of view.

Let us run through this bond using my conservative selection guidelines stated in my ebook1:

  • Bond is priced at par or discount: If you are applying for the bond at this stage and got it, it is considered as getting it at par (well almost. There is this $2 application fee which makes it slightly above par, but we will just let it be).
  • At least five years to bond maturity date: Pass, since the bond tenure is exactly five years.
  • Credit rating of “investment grade”: This is the gripe. According to the product highlights sheet2, it was stated that the issuer (i.e. SIA) and the bonds are not rated by any credit agency. We shall look at this later.

In conjunction with the selection guidelines, we still need to conduct a full fundamental analysis (FA), using the Bedokian Portfolio’s three-level FA approach, on SIA. However, we shall only highlight some of the important points from our own analysis as well as from other sources.

Company Level

First up we will look at SIA from an equity investor’s perspective. Key indicators pertaining to bonds (a.k.a. debts) will be the debt-to-equity (D/E) and current ratios, which are (from Yahoo Finance)is 40.03 and 0.5 respectively. Going by The Bedokian Portfolio’s equity selection guidelines4, that is not so good.

SIA, being in the airline industry, having a high D/E is the norm due to the capital-intensive nature (in fact, the issuance of these bonds are meant for the purchase of aircraft and aircraft related payments5). In the case of having high leverage, a strong cash flow is very important for the company.

Kyith from Investment Moats had detailed SIA’s financial information and cash flow, and concluded: Their financial position looks strong enough to pay the coupon payment”. He also highlighted that the non-current liabilities were mostly past bond issues and very little bank loans6.

Environmental Factors Level

The airline industry is very competitive and price-sensitive, period. A rise in air ticket prices will send customers to another airline that offers lower ones, ceteris paribus. This means for an airline that is not so cheap, it has to offer some other value-added services or experiences, which in other words, qualitative advantages.

SIA got the world’s best airline title, as well as best first class, best first class airline seat and best airline in Asia, as ranked by research firm Skytrax in the priod Aug 2017 to May 20187. Such awards are important as SIA can be seen as a premium in terms of quality, thus it may appeal to customers who does not only see price in choosing an airline. 

Still, SIA has an answer to price-only customers, in the form of their subsidiary Scoot.

Economic Conditions Level

Air travel has become part and parcel of travellers wanting to go overseas, or to go from one part to another part in a large country efficiently.  The same goes to air freight and the transportation of cargo and goods.

During an economic downturn, demand for discretionary travel and goods tend to fall as consumers would want to ride out the storm and save, thus there is some positive correlation between airlines and the state of the economy. To prove this point, the annual growth rate in global air traffic passenger fell from 7.9% to 2.4%, and then to -1.2%, in the years 2007, 2008 and 2009 respectively, the latter two being the Global Financial Crisis years8.

No Ratings and Not Secured

I guessed I may have got carried away with my FA. Now back to the bond. Remember that this bond is not rated? Then there is only one other thing that you have to rely on, and that is faith.

On another related note, the product highlights sheet mentioned that the bonds are not secured9, meaning the bonds are not tied to any collateral except for the good faith of the company. Hence in the event of SIA’s winding up before the bonds mature:

“…the Bondholders will not have recourse to any specific assets of the Issuer and its subsidiaries and/or associated companies (if any) as security for outstanding payment or other obligations under the Bonds and/or Coupons owed to the Bondholders and there can be no assurance that there would be sufficient value in the assets of the Issuer after meeting all claims ranking ahead of the Bonds, to discharge all outstanding payment and other obligations under the Bonds and/or Coupons owed to the Bondholders.” 

Sounds morbid? Well in any investment, we have to consider all risks, and this will depend on how you view those risks. It is up to you how to judge the probability of those risks.

Judging from the past performance (though it is not an indicator of future returns), SIA had returned positive net profits and good cash flow, so in my opinion, the “no-ratings” and the unsecured bond issues would be on a low.

The Coupon Rate

At 3.03%, this coupon rate is considered low among corporate bonds. Taking a 5-year Singapore Government bond that was issued recently on 1 Feb 2019 (at 2% coupon rate, which I use it as the risk-free rate) for comparison10, the risk premium is 1.03% (3.03% – 2.00% = 1.03%). Meaning for that extra 1.03%, assuming holding the bonds till maturity, you will have to worry whatever bad points that were said in the above sections. 

Seedly had compared the coupon rate with other investment instruments with different tenures, like CPF, fixed deposit rates, etc11.

Finally, The Bedokian’s Take

And the anti-climatic answer is: it boils down on the individual’s comfort level and risk tolerance. If you are interested, do remember that diversification is paramount in an investment portfolio, and adhere to the 12% limit rule.

You have until 26 Mar 2019, 12:00 pm to decide, so take this weekend to have a thought-out.

1 – The Bedokian Portfolio, p100-101

2, 5, 9 – Product Highlights Sheet. 19 Mar 2019. (accessed 22 Mar 2019)

3 – Singapore Airlines Limited. Yahoo Finance. (accessed 22 Mar 2019)

4 – The Bedokian Portfolio, p96-97

6 – Singapore Airlines SIA issues a Safe 5 Year 3.03% Retail Bond – My Take. Investment Moats. 19 Mar 2019. (accessed 22 Mar 2019)

7 – Kaur, Karamjit. SIA bags world’s best airline title. The Straits Times. 18 Jul 2018. (accessed 22 Mar 2019)

8 – Statista. Annual growth in global air traffic passenger demand from 2006 to 2019. (accessed 22 Mar 2019)

10 - The Monetary Authority of Singapore. Results of auction of taxable book-entry Singapore Government Bonds to be issued on 01 February 2019. 29 Jan 2019. (accessed 22 Mar 2019)

11 – Tan, Cherie. SIA Retail Bond 2019 – The Good, The Bad and Everything You Should Know. Seedly. 21 Mar 2019. (accessed 22 Mar 2019)

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