Last week, Singapore Airlines Ltd (SGX:C6L) announced that it will be issuing S$500 million worth of bonds with an annual interest rate of 3.03%. The bonds will mature in 2024. Of the S$500 million sum, S$300 million will be issued to the general public while the rest will go to institutional investors. Further, if the bond is oversubscribed, Singapore Airlines will increase the total issuance to S$750 million.
The application for the bond issue closes on 26 March 2019. Here’s what you need to know before investing.
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Details of the bond
- Coupon rate: 3.03%
- Tenor: 5 years
- Minimum amount: S$1,000, and in multiples of S$1,000 thereafter
- Interest payment frequency: Semi-annual payment
- Maturity date: 28 March 2024
- Bond type: Unsecured bond (meaning that there is no collateral backing the bonds)
Singapore Airlines’ financial position
The most important consideration when investing in bonds is whether your capital is secure. There are many factors that can affect the bond-issuer’s ability to pay back its financial obligations, such as the issuer’s balance sheet, earnings, and cash flow generation. Here are the key numbers for Singapore Airlines that investors should take note of, from the first nine months of FY2019 (financial year ended 31 March 2019) and FY2018.
Source: Singapore airlines earnings announcement
There are a few things to note here. First, Singapore Airlines is a profitable business that has been generating positive cash flow from its operations. But in the last nine months, its balance sheet has deteriorated from a net debt position of S$559 million on 31 December 2017 to a net debt position of S$3.60 billion as of 31 December 2018.
The main reason for the higher net debt position is the company’s aggressive stance in making investments in recent times. Singapore Airlines had a net spend of S$8.29 billion on investments for the first nine months of FY2019 and FY2018; the investment amount far exceeds the cash generated from its operations.
You should also consider a few financial ratios that can give you an idea of how easily Singapore Airlines can pay off its debts and interest expenses. I have highlighted some of them in the table below:
Source: Author’s computation using data from Singapore Airlines’ earnings update
The net debt-to-equity ratio and debt-to-asset ratios are both manageable at 29.3% and 17.9% respectively. The interest cover, which is calculated by dividing the company’s earnings before interest and tax (EBIT) by its interest expenses, measures how easily Singapore Airlines can pay off its financial expenses. At 6.7 times, the company looks to be able to comfortably service the interest on its borrowings.
You should compare a bond’s yield against other fixed income securities too. The table below shows the yields from other common fixed-income type of investments.
Source: Author’s compilation of data from various websites
The table above is a non-exhaustive list of other investment options available to retail investors. The Singapore Airlines five-year bond provides a higher yield than interest savings as well as the Singapore Savings 5-year Bond. However, these are relatively risk-free investments, while Singapore Airlines’ bonds – including the latest issue – carry with them the risk of default and missed coupon payments.
The Foolish takeaway
Before investing in Singapore Airlines’ latest five-year bond, you should consider whether your investment capital will be safe and if the company has the means to meet its financial obligations to pay the bond’s semi-annual coupons. Based on Singapore Airlines’ current balance sheet and the cash generated from operations in recent times, the company is in a reasonably good position to meet its financial obligations, in my view.
These being said, you should also take note of the huge decline in Singapore Airlines’ earnings in 2019. An airline’s profits could swing erratically due to fluctuating oil prices, which could, in turn, affect its cash flow generation. An extended period of lower earnings and plunging cash flows could put Singapore Airlines in a more difficult financial position.
On top of the risks involved, investors should be looking at the yield-spread between Singapore Airlines’ latest bond issue and other lower-risk investment options. A 3.03% yield is not much higher than the 2.12% yield on a Singapore Savings Bond with a similar term. As such, you will need to decide whether the marginally higher yield makes it worthwhile putting your money in the more risky Singapore Airlines bond.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Jeremy Chia doesn't own shares in any companies mentioned.