Temasek continues to ensure its portfolio companies have sufficient capital for their operations by backing yet another rights issue, this time for Tiger Airways. The Singapore-listed low-cost airline, which went public in January last year, is seeking to raise up to S$158.6 million ($132 million) from a one-for-two rights issue that it aims to complete by mid-November.
Temasek owns a direct 7.4% of Tiger Airways, but is also indirectly involved through Singapore Airlines, which holds 32.8%. Temasek is the controlling shareholder in Singapore Airlines with a 54.9% stake. Tiger Airways has two business units that focus on Singapore and Australia, respectively.
Rights issues are increasingly becoming a preferred means to raise capital in the current environment of low share prices, as the controlling owners don’t have to suffer a significant dilution, as would be the case if they raised the same amount of capital through a discounted share placement. The drawback is that the existing shareholders have to come up with more capital to take up their entitlement of the rights issue. This doesn’t seem to be an issue for Temasek, which has a habit of also providing additional support for rights issues by its portfolio companies by committing to take up excess shares in case of insufficient demand from other shareholders.
In the case of Tiger Airways, Temasek and Singapore Airlines, which own a combined 40.2%, will jointly backstop the issue up to 90%. The remaining 10% will be jointly underwritten by DBS and Standard Chartered. Standard Chartered has also been appointed sole financial adviser for the rights issue. Tiger Airways will pay an underwriting fee of 2.25% plus a management and advisory fee of S$1.5 million for their work.
Temasek is also backing two other rights issues at present: a S$210.2 million ($174 million) offering by Singapore-listed CitySpring Infrastructure Trust, which opened August 18 and will run until September 2; and a Rp5 trillion ($585 million) offering by Indonesia’s Bank Danamon, which will be open for subscriptions from September 14 to 21.
Temasek has committed to buy up to 85% of the CitySpring transaction, which is well above its 27.8% stake in the trust. On the Danamon deal, it will buy only its entitlement, but since it already owns about 67.4% that too translates into significant support.
While there is no information about any further rights issues by Temasek-backed companies, a source said he wouldn’t rule it out as it really is the most sensible option for raising equity in the current market.
In a statement, Tiger Airways said it will use the funds raised towards pre-delivery payments and final payments for new aircraft that are expected to be delivered by the end of 2015. The company is scheduled to take delivery of 42 new aircraft between now and the end of 2015, which will add to its current fleet of 26 aircraft.
The net proceeds, which will amount to about S$155.2 million, will also help strengthen its balance sheet and provide it with “the financial flexibility to fund its expansion plans,” Tiger Airways’ acting CEO, Chin Yau Seng, said in release announcing the transaction.
Based on the company’s accounts until June 30, the rights issue will increase its net tangible assets to S$0.395 per share from S$0.309, without taking into account any potential return on the proceeds. If the rights issue had been completed by the end of June, it would have reduced the net loss in the three months to June 30 to 2.5 Singapore cents per share from 3.8 cents per share.
The price of the rights issue has been fixed at S$0.58 per share, which translates into a 39.3% discount versus the latest market price of S$0.955 yesterday. Tiger Airways was suspended from trading at 12.30pm yesterday, pending the announcement of the deal. The offer price also represents a 30.1% discount to the theoretical ex-rights price, which works out at S$0.83 based on the same closing price. The latter assumes that Tiger Airways will issue the maximum 273.4 million new shares, and that that approximately 1.3 million shares are issued prior to the rights issue either as a result of the exercise of vested options or in the form of performance shares.
Assuming the maximum number of shares is issued, the rights issue will account for just over 50% of the existing share capital.
The timetable has yet to be determined, but according to the source, the deal isn’t likely to open for subscription for another seven or eight weeks, which means there is a risk that the share price will continue to fall, potentially to a level where the discount is no longer attractive even to existing shareholders. In that case, Temasek and Singapore Airlines, will have to make good on their promises and pick up left-over shares to cover 90% of the issue. In a “worst-case” scenario (if no other shareholders buy shares) their combined stake in the company could increase to 56.7% from 40.2%.
In a separate announcement, Singapore Airlines said that in case it will need to take up both its pro-rata entitlement and its excess rights commitment, it will need to fork out approximately S$129.8 million, which it will be able to satisfy from existing funds. It noted that its undertaking is in line with its commitment to support Tiger Airways and will enable it to remain a major shareholder. It said it is “confident of the long-term prospects of Tiger Airways in the low-cost segment of the aviation industry and is committed to its long-term growth.”
The rights offering comes after Tiger Airways reported a net loss of S$20.6 million in the three months to June (the first quarter of its current fiscal year that ends in March 2012), versus a net profit of S$1.9 million a year earlier, partly due to a 59% rise in fuel costs, partly because of a loss at its Australian unit. Revenues gained 23.2% to S$178.8 million as passenger volumes increased by 18.2% and yields and ancillary revenues improved.
The Australian unit has had a tough time in the highly competitive Australian market. In June it suffered disruptions due to the volcanic ash that blew across the Pacific Ocean from Chile and on July 1 the Australian fleet was grounded by the regulators for safety violations. Flights were resumed on August 12 after the airline made improvements with regard to pilot training, crew scheduling and fatigue management. It has also hired more qualified people and CEO Tony Davis has taken over the running of the Australian unit after the former head left. The six-week halt in operations cost Tiger Airways about $10.5 million.
The Australian problems haven’t helped the share price, which has been on a steady decline after reaching a high of S$2.24 in August last year. Again, the rise in oil prices has clearly played a role. Based on yesterday’s close, the company is now trading 36% below its IPO price of S$1.50. Tiger Airways listed in January 2010 following a $178 million IPO that was arranged by Citi and Morgan Stanley.
