Mizzi Organisation launches its second bond issue

The Mizzi Organisation is launching its second bond issue through its finance company following its initial bond offer in May 2002. Since the first bond issue, the Mizzi Organisation invested a total of €75.6 million mainly related to the new factory of General Soft Drinks; car showrooms, garage facilities and offices at Muscats Motors and Continental Cars; as well as the significant expansion in retail activities by the Arkadia Group.

This substantial capital investment was financed mainly through cash generation (€47.9 million) but also through additional bank funding (€27.7 million). While this new bond issue is mainly directed towards the refinancing of the 2002 bonds which are due for redemption on May 31, 2010, the surplus proceeds will be used to reduce some of the existing bank borrowings taken out for the construction of the General Soft Drinks factory and other investments in recent years.

In fact this second bond issue forms part of the organisation's overall strategy to reduce and re-organise its overall borrowing levels through sale of property and the strong cash generation on a yearly basis. The recent intensive investment programme brought the organisation's overall net debt to €75.3 million. The total equity base of over €86 million gives a debt to equity ratio of 0.84 times. Comparing the overall debt level to the total equity and borrowings gives a ratio of 46 per cent borrowings to 54 per cent equity.

The medium-term strategy of the Mizzi Organisation is to reduce this level of borrowings to between 20 per cent and 25 per cent implying an overall level of borrowings in the region of €40 million. Apart from the repayment of loans through internal cash generation, the aim of the Mizzi Organisation is to dispose of certain properties which are surplus to their requirements such as the site in Qormi which used to house the GSD factory prior to the construction of the new plant. Furthermore, on the real estate front, the Mizzi Organisation plans to achieve a better return on "idle" property and seek to develop some parcels of land.

During the construction of the new car showrooms of Muscats Motors and Continental Cars, an area dedicated to offices was included in the plans. While the entire office space of Muscats Motors has been leased out to third parties in recent years, the recently completed office space at Continental Cars is earmarked for leasing thus providing a new income stream to the organisation. Moreover, development permits are being sought for two large tracts of land in Blata l-Bajda (behind the petrol service station and the head office) as well as in Gżira (near the Muscats Motors showroom). Once the appropriate planning permit is granted for either of these areas, the Mizzi Organisation intends to sell/redevelop this area to turn their real estate assets into more important contributors to their annual financial results.

Since the Mizzi Organisation is not a legal entity in its own right, a "combined" set of financial statements was drawn up for the purposes of the bond issue. These financial statements comprise the consolidated financial information of all four guarantors of the bond issue (Mizzi Holdings Ltd; Kastell Ltd; Consolidated Holdings Ltd; and The General Soft Drinks Company Ltd) together with their various operating subsidiaries as well as the separate entities Falcon Wines & Spirits and Mizzi Motors, which, although do not fall under the four holding companies, form an integral part of the business activities of the Mizzi Organisation.

It is also worth highlighting that, although the three Mizzi family companies equally own each of the four guarantors, between them they also have a shareholding in Banif Bank (Malta) plc. However, any gain or loss arising from this latter investment does not impact the financials of any of the guarantors and therefore the performance of this bank will not affect bondholders of Mizzi Organisation Finance plc.

In addition to the full-year financials for 2007 and 2008, the prospectus published in connection with this new bond issue also included a forecast for the current financial year ending December 31, 2009. The Mizzi Organisation which commenced operations in 1919 is today mainly focused on the automotive sector, the beverage industry as well as the retail division with smaller contributions from its interests in the tourist industry, contracting and real estate.

The automotive sector is the single most important contributor to the overall business performance of the Mizzi Organisation due to the importation of several world-renowned brands by a number of its subsidiaries. During the last financial year to December 31, 2008, the automotive division contributed 41 per cent of the overall revenue of the Mizzi Organisation which totaled €111.1 million. Revenue of Muscats Motors and Continental Cars amounted to €21.9 million and €5.2 million respectively.

Between the second half of 2008 and early 2009, the car importation companies experienced a substantial decline in sales of motor vehicles as customers postponed their car purchases in anticipation of a change in tax regulations. This was also coupled with a severe recession in the UK and a significant decline in the value of sterling resulting in an influx of second-hand imports from the UK. However, the chief operations officer of the automotive division Hugh Mercieca explained during a recent stockbrokers' meeting that auto sales in recent months have begun to rise again as the recent influx of car imports from the UK has decreased.

This is one of the main reasons behind the anticipated increase in the pre-tax profits of the Mizzi Organisation for 2009 to €1.6 million from €0.96 million in 2008. Although this may seem marginal given the amount of overall revenue generated, it is worth highlighting that the group's level of depreciation exceeds €5 million on a yearly basis. As such the EBITDA level is an important indicator to gauge the performance of this business conglomerate. Total EBITDA of the Mizzi Organisation is expected to increase from €10.5 million in 2008 to €11 million in 2009 helping the interest cover to rise to just over three times.

This performance must be seen in the light of the current subdued economic climate and the resulting negative impact across most of the companies forming the organisation. Moreover, it is worth pointing out that the expected EBITDA of €11 million represents a decrease of only €0.65 million from the 2007 figure which had been positively impacted by a one-off €1.5 million in fair value gain on investment properties. In fact the EBITDA margin is expected to increase to 10.5 per cent in 2009 from 9.7 per cent in 2007.

The new bonds are primarily targeted towards the existing 2002 bondholders who are being given preference over new investors should they opt to exchange their bonds for the new ones. In fact a total of €24 million has been reserved for subscription by these bondholders. Due to the interest rate differential, bondholders who accept the exchange offer will receive a cash payment of 0.5 per cent on the value of the bonds surrendered for exchange. This will be paid on the maturity date of the 6.7 per cent bond in six months time.

Rizzo, Farrugia & Co. (Stockbrokers) Ltd acted as Sponsor to the Mizzi Organisation Finance plc Bond Issue

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

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.

Mizzi Organisation launches its second bond issue

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