Stock Market Review - Analysing Malta's corporate bond issuers
The European Central Bank reduced interest rates by a further 50 basis points on November 6 on the back of the global coordinated rate cut also of 50 basis points on October 8. ECB president Jean Claude Trichet did not rule out further easing of monetary policy and various commentators expect a eurozone benchmark rate closer to 2 per cent during 2009.
In the light of this scenario, investors holding bank deposits or Treasury bills are likely to seek higher rates of return from longer-term investments. Local corporate bond yields vary from 5.1 per cent per annum to 9 per cent per annum. Good quality corporate bonds are therefore expected to remain in strong demand and new bond issues should remain popular as long as pricing is commensurate with the company's risk profile, project feasibility, competing market interest rates and general market conditions at the time of issue.
As such, whereas it has been the practice generally to only keep track of the annual financial performances of those companies which have their equity listed on the Malta Stock Exchange, it is also important to follow and analyse the annual accounts of bond issuers. While a fair degree of analysis is normally conducted at the initial launch of a bond issue due to the availability of financial information by issuers, corporate bond issuers should increase their efforts to make more timely information available to allow the market to monitor the state of affairs of borrowers during the lifetime of the bond.
This will help advisers and investors understand the ongoing ability of the company to cover periodic interest payments and to be in a position to meet the eventual repayment of the bond. This is especially important locally since bond issuers in Malta are not rated by approved rating agencies. On the other hand, when seeking to purchase bonds on the international markets, investors can verify the issuer's rating prior to investing.
Companies rated BBB and higher are classified as "investment grade" with the highest rating being AAA. Such ratings fluctuate depending on a company's financial performance and future outlook which would alter an issuer's risk profile. It is recommended that local bond investors get accustomed to ratings classification and accompanying descriptions through the respective rating agencies websites (www.moodys.com; www.fitchibca.com; www.standard andpoors.com).
Equity investors would tend to mainly focus on the bottom line of a company's results, i.e. the after-tax profits, since this figure normally influences the amount of dividend that could be paid to shareholders. Furthermore, the level of profitability would normally also impact a company's share price in the market. On the other hand, bond investors should focus on the company's operating profit and compare this to the total interest expense on bank loans and other borrowings. This so called "interest cover" indicates the ability of a company to meet its interest payments.
Apart from the interest cover, investors should also take into account the amount of equity in comparison to a company's level of debt. This helps analysts understand the extent of the company's leverage and whether the outstanding debt could be rolled over at a later stage. The debt to equity ratio, also known as the gearing ratio, measures the relative proportion of equity and debt used to finance a company's assets.
Thirty one bonds are presently listed on the Malta Stock Exchange of which 24 feature on the Official List while those companies which have a very limited track record are listed on the second-tier market - the Alternative Companies List. All bonds are denominated in euro with the exception of the 8 per cent Bank of Valletta plc 2010 bond denominated in US dollars. In many instances companies create a special purpose vehicle, i.e. a finance company to undertake the bond issue. In such circumstances investors should analyse the performance of the group company or guarantor which receives the proceeds of the bond issue from the finance company.
Bank of Valletta, HSBC and the European Investment Bank have been excluded from tables showing the interest cover and gearing ratio of the existing issuers of bonds, since such ratios are not really appropriate to banks. Also excluded are the October 2007 figures of AX Holdings Ltd since their financial statements have not been published while the CareMalta Group only published its abridged accounts and such accounts are not sufficient to calculate the interest cover. Moreover the accounts of Mariner Spa, the guarantor of the Mariner Finance bonds, are not available since the company is not registered in Malta.
On the Official List, the highest interest cover is that of the Gasan Group with a ratio of over seven times. Gasan also has the best gearing ratio. In fact as at December 2007 the Group's cash and financial investments exceeded the total level of debt largely following the sale of its shareholding in Melita Cable plc during the year for a value of €71.7 million.
Simonds Farsons Cisk also has a very high interest cover of 6.6 times and this is followed by the individual companies forming the Mizzi Organisation Group with an interest cover of over five times. On the other hand, the lowest interest cover is of GlobalCapital closely followed by United Group. The United Group and Eden Leisure Group are the most leveraged companies with a debt to equity ratio of 2.4 times implying that the level of debt is close to three times the amount of capital and retained earnings.
On the Alternative List, the Annual Report of Pavi Shopping Complex plc for the year to April 30, 2008 reveals an interest cover of almost 3.4 times followed by the guarantor of the Big Bon bond issue with a cover of 2.3 times. The interest cover of Mediterranean Investments Holding and GAP Developments cannot be computed since these are still in start-up phase and do not have sufficient revenue to cover interest payments for the time being.
MIH, however, had disclosed in their recent Prospectus that the company has sufficient liquidity to meet interest payments until the Palm City Residences complex welcomes its first tenants in 2009 and the company begins receiving rental income. Moreover MIH has more cash than debt while the GAP Developments gearing ratio exceeds 16 times! The company which is developing over 300 apartments on the former Holiday Inn site has amassed debts of €72 million (apart from capital creditors) compared to shareholders' funds of only €4.5 million.
Another aspect which ought to be taken into consideration is the security attached to the issue. Some bonds, especially those related to hotel or property financing, are secured by properties held in a trust for the benefit of bondholders in the eventuality of default. While this is surely comforting, one must also determine whether the valuation attached to the property is indeed in line with current market conditions.
Mr Rizzo is director of Rizzo, Farrugia & Co. (Stockbrokers) Ltd.
Rizzo, Farrugia & Co. (Stockbrokers) Ltd, RFC, are members 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 issuer/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. RFC, its directors, the author of this report, other employees or RFC on behalf of its clients, have holdings in the securities herein mentioned and may at any time make purchases and/or sales in them as principal or agent. Stock markets are volatile and subject to fluctuations which cannot be reasonably foreseen. Past performance is not necessarily indicative of future results. Neither RFC nor any of its directors or employees accept any liability for any loss or damage arising out of the use of all or any part thereof and no representation or warranty is provided in respect of the reliability of the information contained in this report.
© 2008 Rizzo, Farrugia & Co. (Stockbrokers) Ltd. All rights reserved
In the light of this scenario, investors holding bank deposits or Treasury bills are likely to seek higher rates of return from longer-term investments. Local corporate bond yields vary from 5.1 per cent per annum to 9 per cent per annum. Good quality corporate bonds are therefore expected to remain in strong demand and new bond issues should remain popular as long as pricing is commensurate with the company's risk profile, project feasibility, competing market interest rates and general market conditions at the time of issue.
As such, whereas it has been the practice generally to only keep track of the annual financial performances of those companies which have their equity listed on the Malta Stock Exchange, it is also important to follow and analyse the annual accounts of bond issuers. While a fair degree of analysis is normally conducted at the initial launch of a bond issue due to the availability of financial information by issuers, corporate bond issuers should increase their efforts to make more timely information available to allow the market to monitor the state of affairs of borrowers during the lifetime of the bond.
This will help advisers and investors understand the ongoing ability of the company to cover periodic interest payments and to be in a position to meet the eventual repayment of the bond. This is especially important locally since bond issuers in Malta are not rated by approved rating agencies. On the other hand, when seeking to purchase bonds on the international markets, investors can verify the issuer's rating prior to investing.
Companies rated BBB and higher are classified as "investment grade" with the highest rating being AAA. Such ratings fluctuate depending on a company's financial performance and future outlook which would alter an issuer's risk profile. It is recommended that local bond investors get accustomed to ratings classification and accompanying descriptions through the respective rating agencies websites (www.moodys.com; www.fitchibca.com; www.standard andpoors.com).
Equity investors would tend to mainly focus on the bottom line of a company's results, i.e. the after-tax profits, since this figure normally influences the amount of dividend that could be paid to shareholders. Furthermore, the level of profitability would normally also impact a company's share price in the market. On the other hand, bond investors should focus on the company's operating profit and compare this to the total interest expense on bank loans and other borrowings. This so called "interest cover" indicates the ability of a company to meet its interest payments.
Apart from the interest cover, investors should also take into account the amount of equity in comparison to a company's level of debt. This helps analysts understand the extent of the company's leverage and whether the outstanding debt could be rolled over at a later stage. The debt to equity ratio, also known as the gearing ratio, measures the relative proportion of equity and debt used to finance a company's assets.
Thirty one bonds are presently listed on the Malta Stock Exchange of which 24 feature on the Official List while those companies which have a very limited track record are listed on the second-tier market - the Alternative Companies List. All bonds are denominated in euro with the exception of the 8 per cent Bank of Valletta plc 2010 bond denominated in US dollars. In many instances companies create a special purpose vehicle, i.e. a finance company to undertake the bond issue. In such circumstances investors should analyse the performance of the group company or guarantor which receives the proceeds of the bond issue from the finance company.
Bank of Valletta, HSBC and the European Investment Bank have been excluded from tables showing the interest cover and gearing ratio of the existing issuers of bonds, since such ratios are not really appropriate to banks. Also excluded are the October 2007 figures of AX Holdings Ltd since their financial statements have not been published while the CareMalta Group only published its abridged accounts and such accounts are not sufficient to calculate the interest cover. Moreover the accounts of Mariner Spa, the guarantor of the Mariner Finance bonds, are not available since the company is not registered in Malta.
On the Official List, the highest interest cover is that of the Gasan Group with a ratio of over seven times. Gasan also has the best gearing ratio. In fact as at December 2007 the Group's cash and financial investments exceeded the total level of debt largely following the sale of its shareholding in Melita Cable plc during the year for a value of €71.7 million.
Simonds Farsons Cisk also has a very high interest cover of 6.6 times and this is followed by the individual companies forming the Mizzi Organisation Group with an interest cover of over five times. On the other hand, the lowest interest cover is of GlobalCapital closely followed by United Group. The United Group and Eden Leisure Group are the most leveraged companies with a debt to equity ratio of 2.4 times implying that the level of debt is close to three times the amount of capital and retained earnings.
On the Alternative List, the Annual Report of Pavi Shopping Complex plc for the year to April 30, 2008 reveals an interest cover of almost 3.4 times followed by the guarantor of the Big Bon bond issue with a cover of 2.3 times. The interest cover of Mediterranean Investments Holding and GAP Developments cannot be computed since these are still in start-up phase and do not have sufficient revenue to cover interest payments for the time being.
MIH, however, had disclosed in their recent Prospectus that the company has sufficient liquidity to meet interest payments until the Palm City Residences complex welcomes its first tenants in 2009 and the company begins receiving rental income. Moreover MIH has more cash than debt while the GAP Developments gearing ratio exceeds 16 times! The company which is developing over 300 apartments on the former Holiday Inn site has amassed debts of €72 million (apart from capital creditors) compared to shareholders' funds of only €4.5 million.
Another aspect which ought to be taken into consideration is the security attached to the issue. Some bonds, especially those related to hotel or property financing, are secured by properties held in a trust for the benefit of bondholders in the eventuality of default. While this is surely comforting, one must also determine whether the valuation attached to the property is indeed in line with current market conditions.
Mr Rizzo is director of Rizzo, Farrugia & Co. (Stockbrokers) Ltd.
Rizzo, Farrugia & Co. (Stockbrokers) Ltd, RFC, are members 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 issuer/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. RFC, its directors, the author of this report, other employees or RFC on behalf of its clients, have holdings in the securities herein mentioned and may at any time make purchases and/or sales in them as principal or agent. Stock markets are volatile and subject to fluctuations which cannot be reasonably foreseen. Past performance is not necessarily indicative of future results. Neither RFC nor any of its directors or employees accept any liability for any loss or damage arising out of the use of all or any part thereof and no representation or warranty is provided in respect of the reliability of the information contained in this report.
© 2008 Rizzo, Farrugia & Co. (Stockbrokers) Ltd. All rights reserved
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