A new level of transparency for the market

Gasan Finance Company plc (GFC) has announced a new issue of €15 million bonds (six per cent due 2014-16) to the public. The size of the issue can be increased to €20 million if the over-allotment option is exercised.

The purpose of the issue is: (i) to redeem the existing 6.4% Bonds 2008/11; (ii) for the general funding purposes of Gasan Finance Company plc; (iii) to refinance part of the debt of Gasan Group companies; and (iv) to on-lend to Gasan Group companies.

The main purpose of this issue is to roll over the existing 6.4 per cent bonds that are due at any point between November 30, 2008, and November 30, 2011, subject to the company giving bondholders 30 days' notice. This notice is expected to be given soon.

In the meantime, the company has issued notices to existing bondholders offering them the option of rolling over their existing 6.4% Bond 2008/11 into the new 6% Bonds 2012/14. Bondholders have this option until Wednesday.

GFC's main function is to raise funds from capital markets and to lend these funds in various forms to the Gasan Group. This is fairly standard for a finance company and is a model that is frequently used overseas. GFC has been carrying out this treasury function for the last 15 years when, in 1994, the company issued the first of its five bonds in the form of a Lm3 million 6.5% Gasan Finance Bond due 1998/1999.

The issue of this bond was, in many ways, groundbreaking as it was the first time that a private company had issued a bond directly to the public and listed this on the recently founded Malta Stock Exchange. In a not insignificant way, this latest bond issue by GFC is also groundbreaking and, just as the first bond provided the lead for many other to follow, so it is hoped that other issuers will follow the example set by Gasan.

The 'innovative' feature on this particular bond is the commitment made by Gasan Group Ltd, in the prospectus issued with the new bonds, to publish its consolidated financial statements annually. This commitment is well beyond the listing requirements as laid down by the Malta Financial Services Authority, but serves to underline the increasingly transparent nature of the Gasan Group. In the past, finance companies have published precious little information on their parent company.

Why is it so important to publish information on the parent company when the borrower is a completely separate entity? The answer is one of substance. An investor who is buying a bond is effectively lending his funds to the borrower or issuer of the bond. According to the listing regulations, the issuer of a bond listed on the Malta Stock Exchange must disclose its financial statements.

However, these financial statements are pretty much irrelevant when trying to assess the issuer's ability to pay the interest and ultimately repay the capital. This is because the ability to pay the interest and capital on the bonds lies not with the issuer of the bonds but with the companies that the borrower lends the monies to.

This is normally the parent company. Take the Gasan example. GFC borrows funds from the public and lends these funds to the Gasan Group. Investors should be interested in knowing what the Gasan Group has done with the funds, since this is where the real risks lie.

The decision to make this information available allows investors the possibility of weighing up the strength or weakness of the bond, enabling an investor to properly compare between one bond and another based on an equality of information in the public domain.

If the appropriate information is not forthcoming, questions should be asked, and hopefully investors will become more selective as to which bonds they invest in.

The most recent financial statements made available by the Gasan Group, cover the 12 months to December 31, 2008. Over this period, the group registered an operating profit of €7.97 million compared with €5.99 million in 2007. This implies interest cover of three times in 2008, up from 2.3 times in 2007.

At the GFC level, the interest cover comes in at 1.8 times in 2008 and is expected to rise to 2.15 times in 2009, according to the forecasts published in the prospectus dated April 7.

The Gasan Group continues to remain focussed on its main businesses and the funds raised by this new bond issue will help strengthen the group further in its core areas. There is no doubt that the ability to access capital markets, especially at a time when banks are increasingly becoming wary of lending, is a positive attribute of any company.

GFC's approach to always keeping the door to the capital markets open helps diversify its funding risk and, generally speaking, reduces the funding concentration risk that many Maltese companies are facing today by only borrowing from the banks.

The bonds being issued by GFC are unsecured; however, through the negative pledge made in the prospectus, GFC will continue to hold assets in favour of its bondholders so that the value of these unencumbered assets must at all times be at least 105 per cent of the value of any bonds outstanding. While this, in itself, is not security, as the bonds are not directly secured against assets, it is a very strong commitment from a highly respected and reputable conglomerate in the local economy.

The bond has a maximum lifetime of seven years (2016) with a redemption window that opens after five years, i.e. 2014. This is a relatively tight redemption window which also gives investors the comfort of knowing that this bond has a minimum lifetime of five years with a maximum of seven.

Subscriptions for the bonds start on April 27, although the preplacement part of this bond will take place on Friday. The issue will close on April 30, or earlier at the discretion of the issuer, and it is expected that listing of the bonds on the Malta Stock Exchange will take place on May 15 with the registration advices being issued a few days earlier.

Mr Curmi is a director of Curmi & Partners Ltd, which is acting as sponsoring stockbroker to the issue of €15 million 6% Bonds 2014-16. A prospectus is available from Curmi & Partners Ltd, any financial intermediary or at www.gasan.com.

This article is based on information available to the public and has not been disclosed to the issuer before publication. It is not intended as investment advice, and should not be considered as an offer to sell or buy or subscribe to any securities or other rights pertaining thereto.

The value of financial instruments may rise as well as fall. The bonds are unsecured and if held to maturity the bonds will be redeemed at par.

The company and/or the author may hold positions in the securities mentioned. Curmi & Partners Ltd is a member of the MSE, and is licensed by the MFSA to conduct investment services business.