Seven-year Tumas bonds at 6.25%

Tumas Investments plc, a fully-owned subsidiary of Tumas Group Company Ltd, recently announced a €20 million bond issue carrying a rate of 6.25 per cent per annum payable semi-annually. Shortly before the official announcement, the company held a briefing for stockbrokers and financial intermediaries providing details of the bond as well as a review of the financial performance of Spinola Development Company Limited, the company owning and operating the Portomaso project which is the guarantor of these bonds. SDC is utilising the eventual proceeds from the bond issue mainly to refinance its existing bank borrowings and therefore the overall debt level of the company will not increase markedly.

This is the second bond issue by Tumas Investments plc but the third for the Tumas Group since Dolmen Properties plc had issued a €10.9 million secured bond in 2003.

SDC became a fully-owned subsidiary of Tumas Group Company Ltd in 1986 and 10 years later the Hilton International Hotel was demolished to make way for the extensive redevelopment of the area. Today the Portomaso project (which has been largely completed) comprises the Hilton Malta hotel and conventional centre, numerous upmarket residential apartments (most of which have been sold), the business tower, commercial areas, catering outlets, extensive underground parking facilities with a capacity of 1,200 spaces and the yacht marina with 120 berths.

The vast parcel of land comprising the Portomaso area is freehold as the temporary emphyteusis was redeemed in December 2005 by SDC.

Apart from the Portomaso project, the guarantor to the bonds also owns the Halland Hotel in l-Ibraġ, Swieqi. This acquisition was recently completed from another company forming part of the Tumas Group for €9 million and the Tumas Group have decided to close the hotel by the end of 2009 to redevelop the site into a luxurious residential project. Design work for the Halland site is at an advanced stage and applications for the permits are planned to be submitted to Mepa in the coming months with development works expected to commence in 2010 or 2011 depending on market conditions at the time.

Following an introduction by George Fenech, the Tumas Group finance director Ray Sladden presented the meeting with a brief overview of the origins of the Tumas Group from the early 1960s and focused on the recent group diversification strategy currently underway into office space development (mainly in Mrieħel), gaming and port operations. This strategy gained further ground in recent weeks as the group's associate company Valletta Gateway Terminals was selected as the preferred bidder for one of the units forming part of the Malta Shipyards.

Since SDC is the guarantor of the Tumas bonds, Mr Sladden provided a detailed insight into recent years' financial performance of the company and the expected results for 2009.

With the Portomaso project now in a mature phase of development, it would be inappropriate to compare SDC to other property development companies especially those that are still at the initial stages of their development. Real-estate companies are initially dependent on the extent of the sale of properties concluded during the year and therefore suffer from volatile performances. On the other hand, the financial results of SDC centre around the long-term commercial elements within the project, mainly the highly successful Hilton Malta hotel as well as various commercial outlets, rental income from the tenants within the Business Tower as well as revenue from the car park.

The Tumas Group finance director explained that the cash generation from sale of properties has largely diminished as most properties have been sold. Meanwhile, the operating profit of the commercial elements within the development have increased considerably.

The consolidated 2008 financial results of SDC reveal a six per cent increase in revenue to €35 million and a 6.4 per cent rise in EBITDA (earnings before interest, depreciation and amortisation) to €10.4 million. The company's net debt level increased during the year to €51.6 million as a result of the additional borrowings required to build a further 110 rooms as part of the Hilton Malta hotel. Despite the rise in debt, the gearing ratio dropped to 1.29 times on a larger equity base following an increase in share capital.

When presenting the 2009 forecasts, Mr Sladden explained that although the Hilton Hotel is likely to suffer from an overall downturn in tourism in 2009, SDC should benefit from the recent hotel extension and other revenue sources which are expected to remain stable as the office space and commercial outlets remain fully occupied at premium rates. As a result, SDC is forecasting a 6.1 per cent growth in EBITDA to €10.9 million despite the effects of the international economic crises on the local tourism industry. Almost 75 per cent of this operating profit is generated from the ongoing operational elements within the project (mainly the 5-star Hilton) with sale of property amounting to only €2.9 million in 2009. This shows the operational maturity of the complex and the low reliance on property sales to finance the ongoing interest on current borrowings.

The company's interest cover is anticipated to reach a healthy 3.1 times in 2009 despite the recessionary environment with a gearing ratio of 1.31 times. Essentially total net borrowings amount to €53.1 million compared to shareholders funds of €40.6 million. The Tumas finance director claimed that the aim is to maintain a healthy balance between long-term borrowings and equity.

In order to depict the robustness of SDC, Mr Sladden went as far as displaying the projected cash flows of the guarantor for the eight years to the final maturity date of the bond in 2016. Essentially these projections reveal that the substantial cash flows being generated by SDC will be sufficient to enable the company to finance the acquisition of the Halland property of €9 million over a period of three years; repay the existing €16 million 6.7 per cent bonds on maturity in 2012 and gradually build up a sinking fund of €12.5 million (equivalent to 50 per cent of the maximum amount of the new 6.25 per cent bond).

This cash flow excludes potential cash inflows from the redevelopment and sale of the luxury properties earmarked for the Halland site. Mr Sladden revealed that after taking all these assumptions into consideration, the guarantor's borrowings would have decreased to €16 million by 2016 from the current €53 million.

A pre-placement exercise in respect of the new bond offering will take place on July 1with opening of subscriptions on July 3. Minimum applications at pre-placement stage are for €10,000 while in the general offer this will be only €2,000. The new bonds are unsecured, however they are guaranteed by SDC.

The hugely oversubscribed BOV bond issue has proven the strong appetite of local investors for corporate bonds. As such, it is very likely that this issue will also be comfortably subscribed for given the robust financials of SDC and the growth of the Tumas Group over the years establishing itself as one of Malta's leading family businesses.

Issuers, however, should be mindful that investors expect a more liquid secondary market to develop in their respective securities during the bonds lifetime. Should this not materialise within a reasonably short timeframe, the strong interest being shown by investors to accumulate a number of bonds within their local investment portfolios may diminish. Issuers, together with the authorities concerned, should therefore seek to establish proper market making mechanisms for the benefit of all investors and the market at large.

Rizzo, Farrugia & Co (Stockbrokers) Ltd are acting as Sponsoring Stockbrokers to Tumas Investments plc in respect of this Bond Issue.

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 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.

Mr Rizzo is director of Rizzo, Farrugia & Co. (Stockbrokers) Ltd.

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