SINGAPORE (Apr 24): Singapore Airlines (SIA) has responded to an open letter to the Securities Investors Association Singapore (SIAS) on Friday.

The letter by SIAS contained some 12 questions that covered issues concerning the airline’s issuing of 1.7 billion new ordinary shares at an issue price of $3 per share, raising some $3.50 billion in aggregate principal amount of mandatory convertible bonds (MCBs) at $1 each, and the proposed issue of up to $6.2 billion worth in aggregate principal amount of additional MCBs.

See also: Singapore Airlines to raise $15 bil via rights issue of new shares, mandatory convertible bonds

The response by SIA, which was sent on Friday on behalf of the Board after market close, justified its actions in a written response to SIAS’s questions.

According to SIA, the Covid-19 outbreak has impacted the aviation industry, such that the “the International Air Transport Association (IATA) estimates a global passenger revenue loss of US$314 billion in 2020”, and that “typical airlines” only had cash reserves of about “two months of revenues”.

The letter also addressed its reasons behind the large amount, stating that SIA has already taken measures to decrease its expenditure. These include cutting 96% of the airline’s capacity scheduled up to end June 2020, deferring non-essential capital expenditure, and proactively building liquidity and strengthening its balance sheet through the release of new shares and bonds.

“This will also give us the financial flexibility to capture medium-to-long term growth beyond the Covid-19 situation, while also continuing the important task of fleet renewal, to improve future operating efficiencies and competitive advantages. We are also seeking to preserve our highly talented and committed employee base, which we see as a key point of differentiation between us and our competitors,” it says, noting that after evaluating its statements, the airline has determined the amount of $8.8 billion.

See also: SIA announces further capacity cuts amid 'greatest challenge' it has ever faced

The $8.8 billion will cover their fixed costs and other operating expenses, capital expenditure which includes the purchase of aircraft and aircraft-related payments, as well as other fixed services such as debt, “for a good part of FY2020 and FY2021”.

On the subject of raising funds via its shareholders instead of seeking other avenues, SIA said it will “continue to explore other traditional funding channels such as secured financing and sale-and-leaseback transactions,” even though it might not be possible to raise the same amount from these channels in the current climate.

Despite the bargain of $3 per share, which is an estimated 53.8% discount to SIA’s last transacted price of $6.50 on March 25, SIAS still raised doubts that the discount “was in line with the market”. This was countered by SIA, saying that “it also represents a discount of some 31.8% to the theoretical ex-rights price (TERP) of $4.40 per share, which is the theoretical market price of each Share based on the last transacted price of S$6.50 on 25 March 2020.”

The issue price and discounts were said to be determined after considering precedent rights offerings of SGX-listed issuers and are generally in line with market precedents.

SIAS also took issue with SIA’s MCBs, which will convert into shares only after 10 years from its issue date, citing that it might even be cheaper for shareholders to buy the shares in the open market at TERP instead of buying the MCBs that may lead to shareholders receiving less shares after the conversion.

“While shareholders may be able to buy SIA shares at TERP in the open market as an alternative to the Rights MCBs, they will not be able to enjoy the defined returns in the form of the accreting yield that the Rights MCBs offer,” says SIA.

“The conversion price for Rights MCBs will be adjusted downwards for any dividends that SIA pays so that Rights MCB holders are also accorded the benefits of any dividends paid by SIA in the future”, the letter adds.

The issue price and discounts were said to be determined after considering precedent rights offerings of SGX-listed issuers and are generally in line with market precedents.

SIA will be conducting a virtual Extraordinary General Meeting (EGM) for its shareholders, which will be accessible through a “live” webcast or audio feed on April 30. Shareholders who wish to vote must submit a proxy form, and they may submit their questions via SIA’s website by April 27, 11.30am.

The letter also highlighted SIA’s largest shareholder, Temasek Holdings’ involvement in the $15 billion rescue on March 27, citing concerns that it may not be fair to SIA’s minority shareholders.

See also: Temasek to lead $15 billion rescue of SIA

“We assure all shareholders that, in these circumstances, their support for us over many years is something that we are truly grateful for. We seek shareholders’ understanding and continued support as we work through the most serious event to confront our business since our inception,” came the response.

It has not been a good year for SIA. Since the Covid-19 pandemic, shares in SIA took a nosedive, which saw a 52-week-low of $5.28 per share in March.

SIA shares closed today at 10 cents lower, or down 1.6%, at $6.04.