Singapore Air Mulling Debt Points to Potential Dollar Bonds

(Bloomberg) -- As Singapore Airlines Ltd. considers broadening its debt sources amid plans to spend S$30.1 billion ($22 billion), some analysts are pointing to the likelihood of a shift to U.S.-dollar bonds and the higher borrowing costs that may entail.

Chief Financial Officer Stephen Barnes said on May 19 that the carrier is looking to raise funds in different currency bonds. “Frankly, we will want to diversify,” he said, without mentioning any specific currencies. While the local-currency market has been “quite receptive” to its issues, the airline is in “no pressing hurry” to diversify its funding and will take its time over the next year or so to look at options, Barnes said.

It would be “natural” for Singapore Air to raise funds in U.S. dollars given that the carrier’s capital commitments are denominated in that currency, according to Ajith Kom, analyst at UOB Kay Hian Pte. The brokerage is assuming some increase in borrowing costs for additional debt, Kom said.

Should it decide to tap international debt markets, the choice of currency would be one factor in determining the cost of financing. All of the company’s outstanding notes are in Singapore dollars, where borrowing costs are on average lower than in the U.S.-dollar debt market in Asia but higher than in the euro or yen.

Mounting Competition

Shares in Southeast Asia’s biggest carrier posted their biggest two-day drop through May 22 since 2011 after the firm last week reported a surprise loss. Despite booming demand for air travel in Asia, Singapore Air and Cathay Pacific Airways Ltd. are among premium carriers in the region facing rising competition from Middle Eastern, Chinese and low-cost carriers.

“Singapore Airlines has always maintained a modern fleet and the years ahead will see us taking delivery of many new-generation aircraft,” Nicholas Ionides, a company spokesman, said in an email. “Our capital expenditure will be rising as we take advantage of new growth opportunities.”

Investments will be financed by cash flows from operations and an increase in debt in the coming years, Ionides said. “We see this as ultimately being a good move for the SIA Group, and for our shareholders, since it will improve the mix of equity and debt in SIA’s balance sheet, and so help us better manage our overall cost of capital.”

None of the three major credit-rating firms has a rating on Singapore Air. The carrier is 55.7 percent held by state-owned investment firm Temasek Holdings Pte, which has AAA credit ratings from both Moody’s Investors Service and S&P Global Ratings. If Singapore Air were to be rated, “we are talking about an investment grade name,” said Bertrand Jabouley, director of Asia Pacific corporate ratings at S&P.

Dollar Costs

The airline benefits from being a well-recognized brand name in Singapore with perceived government support, but it would be more challenging for it to issue in U.S. dollars because international buyers wouldn’t be as familiar with the company, according to Todd Schubert, head of fixed-income research at Bank of Singapore, the private banking unit of Oversea-Chinese Banking Corp.

“It would likely be more expensive to borrow in the U.S.-dollar market,” he said. That would also be because international investors “would likely not ascribe the same degree of government support as would domestic Singapore investors,” Schubert said.

Average yield premiums for Asia corporate dollar bonds are 193 basis points, compared with 142 basis points for Singapore-dollar company securities, according to Bank of America Merrill Lynch indexes. They are 74 basis points for euro notes and 37 for yen securities, the indexes show.

Singapore Air has a total capital expenditure plan of S$30.1 billion for the next five years, mostly on aircraft, according to a slide presentation during a briefing on May 19. That comes as the business faces headwinds. Passenger yield, or the money earned from carrying a passenger for one kilometer, fell to 10.1 Singapore cents in the fourth quarter, hovering around the lowest level since the quarter ending September 2009.

“If the operating weakness were to persist, Singapore Airlines’ credit metrics may deteriorate in the longer term,” said Wong Hong Wei, credit research analyst at Oversea-Chinese Banking Corp.

Singapore Air Mulling Debt Points to Potential Dollar Bonds

If the company offered a dollar bond, that would be good due to a lack of quality corporate issuance from Singapore, according to Owen Gallimore, Singapore-based head of credit strategy at Australia & New Zealand Banking Group Ltd.

“But it will struggle to fund in the U.S. dollar market close to what they get in the Singapore dollar bond market,” he said. “It’s state owned and has a strong balance sheet, which helps. However, if they were rated, I’m sure the agencies would struggle to be too generous given the cyclical nature of the industry and rising competition.”