Singapore Airlines launches leveraged sovereign play

Asian airline giant will make its debut in the local debt capital market today (Friday) with a deal that will price above 100bp over swaps.

Singapore Airlines (SIA) is to tap the debt capital markets for the first time with an S$800 million ($440.4 million) fixed-rate offering. HSBC and OCBC have been mandated as joint lead managers for the deal, which is likely to launch today.

The deal will have a 10-year maturity and domestic investors report that there is likely to be a yield of between 108bp to 112bp over swaps. At these levels, SIA will come about 20bp wider than Singapore Telecommunications whose S$1 billion 2006 issue is currently trading at 90bp over swaps on a fairly flat curve. Its bond will also represent the highest yielding government-related play in the Singapore bond universe.

Despite the fact that most analysts consider SIA a double-A rating on a stand-alone basis, the company will need to pay a slight premium to compensate for the fact that it is not rated and the airline industry is suffering badly from the effects of September 11. However, majority government-ownership, a long tenor and high yield relative to both credit fundamentals and government bonds in a low interest rate environment are likely to be a strong draws for Singapore's powerful insurance funds.

The transaction further stands out because it marks the first time that HSBC has been mandated for a debt deal by a government-owned issuer. The bank has, nevertheless, been an active player for corporate Singapore and currently stands third in the league tables (by issuance amount) with 22 deals under its belt this year, compared to 17 for Citicorp which stands second and 11 for DBS Bank which stands first. OCBC comes in fourth, having underwritten 13 deals.

In a statement released to the Singapore Stock Exchange, SIA - which became a listed entity in 1985 - says the deal represents the next stage in restructuring the company's capital base after it had returned S$600 million to shareholders in September.

The company added that proceeds from its debut bond deal would help finance capital expenditure and working finance capital requirements.

SIA, which remains one of the world's largest airlines, will hope that local investor sentiment remains sufficiently strong to enable a successful transaction in what has been a traumatic year in the airlines sector.

Increasing concerns about air travel in the wake of September 11 has hit the industry hard and SIA is facing up to its first year of losses since it listed 16 years ago.

Operating profit for the first half of the financial year (April 1 to September 30) dropped 88% to S$134.1 million and the company has also had to write down significant investments in Air New Zealand and Virgin Atlantic.

In the case of Virgin, SIA bought a 49% interest in 1999 for รบ600 million ($879 million) that has been written down to just S$100 million amidst rumors that Virgin Atlantic is on the verge of bankruptcy.

SIA is not the only former government transport company pondering a local currency bond offering. The Singapore Mass Transit Railway (SMRT) is also believed to be targeting a deal in the region of S$300 million to S$500 million, according to market rumors.