Singapore Airlines Ltd‘s (SGX: C6L) recent issue of a five-year retail bond has thrown bond investing into the spotlight. However, before investing in any bond, you should consider three key aspects: (1) The risk of missed coupon payments, (2) the risk of default, and (3) the yield.
Here’s my verdict on each of these three aspects for Singapore Airlines’ latest retail bond.
Risk of missed coupon payment
There are many factors to consider when assessing the risk of missed coupon payments. However, the most easily quantifiable is the bond issuer’s balance sheet and cash flow. Singapore Airlines’ balance sheet has deteriorated slightly over the past couple of years due to heavy investments to maintain existing airplanes and buy new ones. But its balance sheet still remains healthy with its total debt of S$5.06 billion (as of 31 December 2018) giving rise to a debt-to-asset ratio of just 17.9%. And in the nine months ended 31 December 2018, the company generated S$1.8 billion in operating cash flow – this is a good indicator that Singapore Airlines can generate sufficient cash to meet its financial obligations.
It is also important to gauge how easily a bond-issuer can meet its interest payments with current earnings. To do so, I like to look at the interest cover ratio. Mathematically speaking, it is calculated by dividing the company’s earnings by its interest expenses. A high interest cover means a company is generating more than enough profits to cover its interest expenses. In the nine months ended 31 December 2018, Singapore Airlines had a high interest cover of 6.7, so the company looks to be able to comfortably service the interest on its borrowings.
Verdict on risk of missed coupon payment: Low
Risk of default
The risk of default is how likely it is that a bond issuer will not be able to pay back its bond-investors when the bond matures. Unlike missed coupon payments, which is more dependent on liquidity, the only way I see that Singapore Airlines will default on its bonds is if it needs to undergo a restructuring (think Hyflux and Noble).
Singapore Airlines is Singapore’s flag-carrier and a pride of our nation. It is 55%-owned by Temasek Holdings, one of the Singapore government’s investment arms. Even with the highly competitive environment facing Singapore Airlines, the company’s consistent need for high capital expenditure, and the pressure on the airline’s profit from unpredictable oil prices, I am inclined to think that the risk of Singapore Airlines undergoing restructuring is extremely slim.
If Singapore Airlines runs into trouble, there are a few ways that it can raise funds to pay back bondholders. These include refinancing its debt, selling assets or, in extreme cases, raising capital through a secondary offering.
Verdict on risk of default: Extremely low
Lastly, Singapore Airlines’ latest retail bond issue has an annual interest of 3.03%, paid semi-annually. The table below shows the bond’s yield compared with other similar fixed-income assets.
Source: Author’s compilation of data from various websites
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 – still carry with them the slim risks of default and missed coupon payments.
Verdict: Yield-spread over risk-free rate not high enough
The Foolish bottom line
Singapore Airlines’ latest bond issue has probably attracted income-hungry investors who are looking for investments that deliver a better yield than the notoriously low rates that banks provide. Based on what I have seen so far, I believe that the risk of loss in the airline’s bond is very low. Singapore Airlines’ balance sheet is healthy and it generates a decent amount of operating cash flow. Further, taking into account Temasek’s 55% stake, the likelihood that Singapore Airlines will fall into a situation where it needs restructuring is extremely slim.
However, the yield of 3.03% on the airline’s latest bond is still somewhat low compared to the risk-free rate. Investors should decide whether the marginally higher yield makes it worthwhile putting their money into the Singapore Airlines bond that has a low but still non-zero risk of default and missed coupon payments.
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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.