Bond market developments

Article #655 by Edward Rizzo - Published Weekly

Early last month I had explained that the bond market was back in the limelight with three new bonds in the process of being issued following no new primary market issues for a number of months.

I had concluded the article by stating that the response from retail and institutional investors to these issues will be a good indication of the appetite among the investing community which would then be helpful for other companies contemplating a fund raise in the months ahead.

The very strong response to the new issue by Mediterranean Investments Holding plc was possibly the biggest surprise to most market observers. MIH issued a €20 million 5.5% bond with a 3-year maturity to replace the 5.5% maturing bond on 31 July 2020. MIH announced that it received 4,307 applications for a value of €49.5 million. Undoubtedly, the unchanged coupon of 5.5% was a determining factor in the investment decision-making process. However, it is also worth highlighting the recent strong financial performance of the company. Despite the instability in Libya, MIH reported that it generated revenue of €27.3 million and an EBITDA of €19.5 million during 2019 as occupancy at the Palm City Residences improved to 55.2%. MIH also published its 2020 financial forecasts with the company anticipating a decrease in the average occupancy level to 46.1% resulting in a 20% decline in revenue to €21.8 million and EBITDA amounting to €15.2 million (-22.3%).

While Mediterranean Investments Holding plc was an existing issuer (it was indeed the 7th issue by this company over the years), the two other bond issues that took place in recent weeks were from companies raising funds publicly for the first time. Shoreline Mall plc stated that it raised the entire amount of €40 million for the two bonds on offer as follows (i) €14 million in a 6-year bond carrying a coupon of 4% and (ii) €26 million in a 12-year bond with a coupon of 4.5%. Meanwhile, in the prospectus dated 21 July, Cablenet Communication Systems plc confirmed that it had entered into pre-allocation agreements with a number of authorised financial intermediaries in advance of the offer period, where a total of €32 million were taken up. The remaining balance of €8 million were available for subscription by preferred applicants (namely GO plc shareholders and GO plc employees) during the offer period which closed last Thursday 6 August.

In the meantime, two other existing issuers indicated their intention to seek approval for the raising of additional funds through the bond market. On 16 July, Endo Finance plc announced that it had submitted an application to the Listing Authority of the Malta Financial Services Authority requesting the admissibility to listing of €28 million in bonds carrying a coupon of 5.125% per annum maturing in 2030. However, no further announcements have been made since then. Furthermore, last week, Premier Capital plc announced that it submitted an application to the Listing Authority requesting the admissibility to listing of €20 million in bonds with an interest rate of 3.75% maturing in 2026. Part of the proceeds of the new debt is earmarked towards the acquisition of the remaining 10% minority shareholding in Premier Capital Srl which, in turn, is the indirect operator of the McDonald’s restaurants in Romania – the major contributor to the overall business of Premier Capital. Subject to regulatory approval, the new bonds will be fungible with the existing bonds originally issued in 2016 totalling €65 million.

Over the past two months, a number of companies proceeded with the publication of their annual Financial Analysis Summary as required under the Listing Policies providing forecasts for the 2020 financial year. The figures disclosed by each of the companies begin to reveal the impact caused by the pandemic to some operators. While the damage to a number of companies is evident, others are anticipating minimal impact and disruptions, expecting to continue registering a resilient performance also in 2020.

The pandemic is having an understandable negative impact on companies exposed to the hospitality and retail sectors. By way of example, AX Group plc is anticipating that during the current financial year to 31 October 2020, revenue will decline by 44% to €29.2 million and EBITDA will amount to only €3.2 million compared to €16.6 million in the prior year.  Likewise, Bortex Group Holdings Co Ltd as guarantor to the bonds issued by Bortex Group Finance plc is anticipating a major impact to its core business from the COVID-19 outbreak with a forecasted EBITDA of only €64,000 from the manufacturing, retail and hospitality operations. However, the overall profitability of Bortex during the current financial year will be positively impacted by the sale of a number of properties which are already subject to promise of sale agreements. Another company that is also expected to be materially impacted by the pandemic due to a delay in a number of projects that were being anticipated is Medserv plc. The oil and gas logistics operator is anticipating an EBITDA of only €5.5 million in 2020 compared to €12.7 million in the last financial year.

On the other hand, two of the companies from those that have so far published their annual Financial Analysis Summary which continue to forecast a strong performance in 2020 are Hal Mann Vella Group plc and the guarantor to the bonds issued by Exalco Finance plc. Although Hal Mann Vella Group plc is anticipating overall revenue to decrease by 8.4% to €20.5 million primarily due to the expected impact of the pandemic on the ‘manufacturing, products & contracting services segment’, EBITDA is only forecast to ease by 6% to €5.2 million as 14 residential units which are subject to promise of sale agreements are expected to be sold helping revenue from property development to rise by €3 million to €3.9 million. Exalco Properties Limited as guarantor to the bonds issued by Exalco Finance plc is expecting EBITDA to increase from €3.3 million in 2019 to €3.5 million in 2020 as a result of (i) the commencement of rental income from the remaining available space at the latest addition to the property portfolio (the Phoenix Business Centre) effective January 2020; (ii) the renewal of some agreements at higher rates in specific buildings also effective from the beginning of 2020; and (iii) annual rent increments as stipulated in existing lease agreements with existing tenants.

Other companies availed themselves of the extension permitted by the MFSA to delay the issuance of projections by up to a maximum of two months. As such, in the next few weeks, several other announcements will be made providing useful information to the market on the damaging impact of the pandemic and the resilience of other companies. Some of the more interesting reports that would be worth analysing to gauge the impact of the pandemic are of International Hotel Investments plc, Eden Finance plc, Simonds Farsons Cisk plc and Virtu Finance plc.

Unfortunately, the virus is still very much around as we are realising in Malta with a surge in cases in recent weeks. Various international sources including widely recognised investment banks continue to expect at least one of the many vaccines to be approved by the end of 2020 but not widely available for distribution before Q2 2021. As such, the negative economic impact will continue to be felt throughout the large part of 2021 and the recovery in certain sectors may well turn out to be more prolonged and weaker than originally anticipated at the start of the outbreak earlier this year. Companies should therefore continue to publish regular information to the market to keep their stakeholders informed of business developments. On their part, governments around the world should continue to deploy expansionary fiscal support to ensure the momentum across economies is maintained thereby assisting to soften the downturn and aid the recovery in the years ahead.

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Rizzo, Farrugia & Co. (Stockbrokers) Ltd, “RFC”, is a member of the Malta Stock Exchange and licensed by the Malta Financial Services Authority. This report has been prepared in accordance with legal requirements. It has not been disclosed to the company/s herein mentioned before its publication. It is based on public information only and is published solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. The author and other relevant persons may not trade in the securities to which this report relates (other than executing unsolicited client orders) until such time as the recipients of this report have had a reasonable opportunity to act thereon.

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