Filling the Gap

On May 28, Gap Developments plc issued an announcement via the Malta Stock Exchange informing the market that during an extraordinary general meeting held a month earlier a number of resolutions have been approved which effectively resulted in a new investor injecting fresh equity capital into the property development company as well as additional loans being provided by the two shareholders. This announcement was preceded by consistent rumours for a number of months.

Towards the end of April, the chairman of Gap George Muscat revealed in a newspaper interview that fresh capital had been provided by Tigné Skies Limited. Tigné Skies is owned by the Azzopardi brothers, owners of the Azzopardi Fisheries Group of Companies. Tigné Skies became a 50 per cent shareholder of Gap Developments plc through the injection of €8 million in equity. Concurrently, the previous 100 per cent shareholder, Gap Holdings Limited (owned by George Muscat, his son Adrian and son-in-law Paul Attard), injected a further €2 million into the company.

In total, the new issued share capital increased from €6 million to €16 million. Moreover, on May 27 it was also agreed that the two shareholders, namely Gap Holdings and Tigné Skies, would advance Gap Developments €1.5 million each while Tigné Skies also agreed to advance a further €5.5 million to the company.

This fund-raising exercise by Gap Developments saw a fresh equity injection of €10 million and new loans from its shareholders totalling €8.5 million. In the words of George Muscat the total amount of €18.5 million will enable the project to be completed on schedule by mid-2011.

Gap Developments had tapped the bond market in March 2007 when it launched a €35 million issue in order to part-finance the purchase of the Fort Cambridge site which had been sold by the government of Malta through a public tender in June 2006. The bond issue was marginally oversubscribed as the company raised just under €38 million from some 2,300 investors.

The total acquisition cost of the area on which the Fort Cambridge development is being constructed amounted to around €66.4 million and the purchase of the land was also financed by a €34 million loan from BAWAG Malta Bank Limited and London Forfaiting Company Ltd (a fully-owned subsidiary of FIMBank plc) together with the proceeds from the public bond issue. The construction and completion of the apartments and other amenities including the communal swimming pool was to be financed from the deposits received on sales of the apartments.

By June 30 last year, Gap reported that it had entered into a total of 208 "promise of sale" agreements through which it generated €9.7 million from prospective buyers. However during the second half of 2008 only eight new agreements were concluded.

This fresh capital and shareholders' loans should provide the necessary cashflow to enable the company to proceed with the development as originally planned and have sufficient liquidity to meet any contractual obligations as the development gathers momentum in the coming months.

At the time of the bond issue, Gap Developments had a total issued share capital of €4.6 million compared to net debt of €64 million, giving a gearing ratio of an overwhelming 14 times. By the end of 2008 the share capital increased to €6 million, but with an overall debt figure also rising to €71 million, the leverage of the company still remained at an unsustainable level of 12.5 times.

The fund-raising exercise conducted recently has naturally altered the financials of Gap Developments. The precise details of the revised financial situation will be included in the June 30, 2009 interim report which should be available by the end of August. As shareholders' funds have increased towards the €16 million level and net debt possibly in the region of €80 million, leverage works out at around five times. This could still be considered high but certainly an improvement on the previous figure of between 12.5 and 14 times.

Gap's bond price rose to a high of 103 per cent shortly after the commencement of trading on the Borża in May 2007, but within a short period of time the price traded below par value possibly as a result of delays incurred to obtain the full development permit from the planning authority. This was granted on July 7, 2008 after a long-drawn battle with environmentalists and certain changes necessary to the height structure of the development.

By summer 2008 the price of the Gap bonds had slipped to the 95 per cent level and as indications of the property slowdown gathered momentum and rumours within business circles were rife on the need of a new fund-raising exercise by Gap, the bond price on the secondary market skidded to a low of 83 per cent before partly recovering to the 90 per cent level. However, shortly after the announcement of the new financial agreements, fresh demand for Gap bonds helped clear the available supply in the market and the price recovered to 95 per cent.

At this level the yield to maturity is of 8.9 per cent per annum for a bond with less than four years to redemption on April 30, 2013. This represents a premium of over five percentage points above the benchmark "risk-free" rate recently offered by the Malta government also for four-year paper, and the significant yield pick-up is commensurate with the increased risk element as evidenced by the high leverage of the company.

The Gap bonds are subordinated and rank below the senior loans provided by BAWAG and LFC. Consequently the interest on the bonds rank below and subsequent to interest on the senior loans. However, the bonds are secured by virtue of a general and special hypothec over the Hypothecated Property (all the apartments and underground parking facilities of the project) which GAP has granted in favour of the lending banks and bondholders. The apartments are kept by BAWAG as the bond trustee.

The €18.5 million fund-raising exercise is welcome news for bondholders because the new loans of €8.5 million provided by the two shareholders (Gap Holdings and Tigné Skies) are repayable to them only following repayment of existing bank facilities and the €35 million bonds in issue.

Effectively, the two shareholders have shouldered a considerable amount of the risk going forward and will only receive their loans advanced to the company after all external debt is repaid to the banks and the few thousand bondholders. Additionally the benefits accruing to them as shareholders in the company and return achieved from undertaking this large property development could be lower than originally anticipated by them, given the increased funds needed to complete the project.

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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