Introduction
The COVID-19 pandemic caused significant disruptions across the world, and the aviation industry was one of the hardest-hit industries. Singapore Airlines (SIA), one of the world's leading airlines, was also severely affected by the pandemic. To overcome the financial difficulties arising from the pandemic, SIA decided to raise capital. This case study will examine how SIA raised capital during the COVID-19 pandemic.
Background
SIA is a Singapore-based airline company established in 1972. It is one of the leading airlines in the world, known for its high-quality service and innovative approach. The company has a fleet of more than 130 aircraft and flies to over 60 destinations worldwide.
The COVID-19 pandemic had a severe impact on SIA's business. The company was forced to cancel many of its flights due to travel restrictions, and demand for air travel significantly decreased. As a result, SIA's revenue plummeted, and the company faced significant financial difficulties.
To overcome these challenges, SIA decided to raise capital. The company had to find ways to raise funds quickly to meet its financial obligations, such as paying salaries, leasing aircraft, and repaying loans. SIA also had to ensure that it had enough cash to survive the pandemic's uncertainties.
Methods of raising capital
SIA adopted various methods to raise capital during the pandemic. The following are the methods used by the company to raise funds:
1. Rights Issue
SIA's first method of raising capital was through a rights issue. The company offered shareholders the opportunity to purchase additional shares in the company at a discounted price. This method allowed SIA to raise funds quickly without taking on additional debt. The rights issue was oversubscribed, and SIA was able to raise S$5.3 billion in capital.
2. Convertible bonds
SIA also raised capital through the issuance of convertible bonds. Convertible bonds are a type of bond that can be converted into equity at a future date. This method of raising capital allowed SIA to raise funds without increasing its debt burden. The company raised S$850 million through the issuance of convertible bonds.
3. Sale-and-leaseback agreements
SIA also raised funds through the sale-and-leaseback of aircraft. In this method, SIA sold some of its aircraft to leasing companies and then leased them back. This method allowed SIA to raise funds quickly while still maintaining control of its aircraft. The company raised S$2.2 billion through sale-and-leaseback agreements.
4. Medium-term notes
SIA also raised capital through the issuance of medium-term notes. Medium-term notes are a type of debt security with a maturity of 5 to 10 years. This method of raising capital allowed SIA to access funds from investors quickly. The company raised S$1 billion through the issuance of medium-term notes.
5. Mandated lead arrangers and bookrunners
1. Case Study on:-
SINGAPORE AIRLINES: RAISING CAPITAL
DURING COVID-191
SUBMITTED TO:-
Dr.Sonam Arora
LJ IMBA
Integrated MBA – 5 Years Program
(School of Management Studies)
3. SUMMARY
Singapore Airlines has been impacted by the COVID-19
pandemic, resulting in a decline in passenger demand and
revenue. To cope with the situation, the airline took various
measures, including cost-cutting, reducing capacity, and
raising capital. They raised approximately S$8.8 billion
through a rights issue in June 2020, obtained S$4 billion in
financing from its majority shareholder, Temasek Holdings,
through a convertible note, and raised capital through a sale
and leaseback arrangement. These measures helped the
airline to strengthen its financial position and improve its
liquidity, enabling it to navigate the ongoing crisis more
effectively.
4. ● Furthermore, Singapore Airlines also raised capital through a sale
and leaseback arrangement, where it sold aircraft to lessors and
then leased them back. This allowed the airline to unlock the value
of its aircraft and raise cash while still being able to use the aircraft
for its operations.
● Overall, Singapore Airlines took a multi-pronged approach to raising
capital during the COVID-19 pandemic, which included a rights
issue, a convertible note, and a sale and leaseback arrangement.
These measures helped the airline to strengthen its financial position
and improve its liquidity, enabling it to navigate the ongoing crisis
more effectively.
5. 1. Analyze the rationale behind the way SIA choose
to raise the capital. How would this capital-raising
exercise impact the overall capital structure?
ANS:-
SIA (Singapore Airlines) chose to raise capital by issuing new shares to
existing shareholders through a rights issue. A rights issue is an offer to
existing shareholders to buy new shares at a discounted price, in
proportion to their current shareholding. This approach is a common
way for companies to raise funds from their existing shareholders, as it
allows them to maintain their proportional ownership in the company.
In March 2020, SIA announced a plan to raise SGD 15 billion
(approximately USD 11 billion) through a combination of new equity and
convertible bonds. The plan included a SGD 5.3 billion (approximately
USD 3.8 billion) rights issue, which would allow existing shareholders to
buy new shares at a discounted price. In addition, SIA would issue SGD
9.7 billion (approximately USD 7 billion) in convertible bonds, which
could be converted into SIA shares at a later date.
6. The rationale behind this capital-raising exercise was to shore up SIA's
balance sheet and provide it with the financial flexibility to weather the
COVID-19 pandemic. The airline industry has been hit hard by the pandemic,
with travel restrictions and border closures leading to a sharp decline in
demand for air travel. SIA, like many other airlines, has had to cancel flights,
cut costs, and seek government support to survive.
The capital-raising exercise would impact SIA's overall capital structure by
increasing the proportion of equity and convertible bonds in its capital
structure. This would dilute the ownership of existing shareholders, as new
shares and convertible bonds are issued. However, it would also reduce
SIA's reliance on debt financing, which could improve its credit rating and
reduce its interest expenses.
The funds from the rights issuances would be used to strengthen SIA's
liquidity amid the global coronavirus disease (COVID-19) pandemic and to
support its long-term growth
7. 2. How should SIA shareholders respond to the right issues? Should
SIA shareholders have exercised their right to buy new shares, sold
their rights, or sold existing shares? What factors do you consider?
ANS:-
The financial health of SIA: Before making any decision, shareholders should evaluate
the company's financial health. They should assess whether the company's long-term
prospects are strong enough to warrant additional investment.
Personal financial goals: Shareholders should consider their own financial goals,
investment timeline, and risk tolerance. If they need cash in the short term or are close
to retirement, they might choose to sell their rights or shares.
Market conditions: Shareholders should analyze market conditions to evaluate the
demand for SIA shares. If the market conditions are favorable, it might be a good
opportunity to exercise the right to buy new shares or hold on to existing shares.
8. Future prospects: Shareholders should also evaluate the company's long-term
prospects, such as future growth plans, dividend payouts, and potential
earnings. They should consider if the rights issue will be beneficial for the
company in the long run.
Current share price: Shareholders should assess the current share price and
compare it with the offer price for the rights issue. If the current share price is
higher than the offer price, it might be better to sell the rights or existing shares
and buy back at a later time.
All in all, from the personal point of view If I was a shareholder I would like to
hold the existing shares and get the benefits of getting new shares from the
company as future growth has been promised and my trust for the company
and also I would like to take risk factors in consideration as well in company’s
future and it's growth and finances in future.
9. 3. Temasek, as the substantial shareholder in SIA, agreed to pick up the
balance of any unsubscribed rights. Why do you think Temasek agreed to
this? Whether this is favorable for them or not?
ANS:- Temasek is a Singaporean investment company and is the majority
shareholder of Singapore Airlines (SIA). When SIA issues new shares through a
rights issue, existing shareholders are given the option to buy these new shares at a
discounted price. If some shareholders choose not to exercise this right, there may
be some unsold shares remaining.
In this case, Temasek agreed to pick up the balance of any unsubscribed rights, meaning
that it will purchase any shares that are not taken up by other shareholders. This ensures
that the rights issue will be fully subscribed and SIA will be able to raise the intended
amount of funds.
10. There could be several reasons why Temasek agreed to this. One possibility is that Temasek may
have wanted to maintain its existing shareholding in SIA and did not want to see its stake diluted by
the issuance of new shares. By agreeing to pick up any unsubscribed rights, Temasek is essentially
ensuring that its stake in SIA remains unchanged.
Another reason could be that Temasek believes in the long-term growth prospects of SIA and is
willing to invest more capital into the company. By picking up the unsubscribed rights, Temasek is
providing additional funding to SIA, which could be used to finance new growth initiatives or pay
down debt.
Whether this is favorable for Temasek or not depends on a number of factors, such as the price of
the new shares, the performance of SIA, and the overall market conditions. If SIA performs well and
the price of the new shares increases, Temasek could potentially benefit from the appreciation of its
investment. On the other hand, if SIA performs poorly and the share price declines, Temasek could
potentially suffer losses. Ultimately, the decision to pick up the balance of unsubscribed rights would
have been made after careful consideration of various factors and risks.
11. Conclution:-
Singapore Airlines (SIA) was one among the airlines hit hard by the
COVID-19 pandemic. The company's revenue fell significantly as a result
of travel restrictions and a drop in demand for air travel. In response, SIA
was forced to cut expenses by eliminating routes, stopping planes, and
enacting salary cuts and furloughs.
SIA took many steps to raise funds during this challenging period. First,
the corporation funded S$8.8 billion through a rights issue, a mandated
convertible bond issue, and a share private placement. The proceeds
were utilised to improve the company's financial status, pay off
outstanding obligations, and provide operating capital.
Second, SIA tried to minimise its operating costs by employing steps
such as renegotiating supplier contracts and cutting staff costs. To
acquire additional funds, the business also delayed aircraft deliveries and
sold off some of its planes.
12. Conclution:-
Third, SIA attempted to earn money by changing its business model. The
airline introduced a new nonstop service from Singapore to New York and
collaborated with other organisations to provide alternative services such
as pre-flight COVID-19 testing.
Despite the COVID-19 pandemic's hurdles, SIA was able to acquire
significant funds and employ cost-cutting initiatives to lessen the impact
on its operations. While the aviation business remains unpredictable,
SIA's initiatives have contributed to the company's financial stability and
resilience in the face of adversity.
SIA was able to raise a sizable amount of money and apply cost-cutting
strategies to lessen the impact of the COVID-19 outbreak on its business.
SIA's efforts have helped to ensure the company's financial stability and
resilience in the face of upcoming challenges, notwithstanding the
continued uncertainties in the aviation industry.
