Tumas Investments plc, the financing arm of the Tumas Group subsidiary Spinola Development Company Ltd, published a prospectus in connection with a new €20 million bond issue. Tumas Investments may opt to increase the bond issue to a total of €25 million. This is the second bond issue by Tumas Investments within the past year. In June 2009, a €25 million seven-year bond at 6.25 per cent per annum was issued and the company had then received applications for over €37 million worth of bonds.

The maturity date of the new bond is 10-years and the company will be availing itself of the option it has to redeem the €16.3 million 6.7 per cent bonds on July 9, 2010 - two years in advance of the final redemption date. Holders of these maturing bonds will be treated as preferred applicants. As such €17 million of the new bond issue has been reserved for existing bondholders who can exchange their holdings into the new bond by rounding up their holding to the nearest €100 or €1,000. The remaining €3 million plus a €5 million over-allotment of the new bond issue proceeds will be loaned to Spinola Development Company Ltd to re-finance its existing bank borrowings. As a result, the total borrowings of the Portomaso owner will not increase following the bond issue.

During a recent stockbrokers' briefing, Tumas Group finance director Ray Sladden explained that in order to maximise shareholders' returns, a certain level of borrowing is always required by a company and the Tumas Group understands the benefit of using the bond market to attain its financing requirements thereby fixing their interest expense commitment for a specified period of time. In the coming years, Spinola Development Company Ltd plans to retain a gearing of circa 25 per cent to 30 per cent of the value of the company's assets representing borrowings of circa €30 million to €35 million from the current level of almost €70 million. The level of borrowings in the coming years is expected to be reduced primarily from the remaining property sales of the new Portomaso apartment wing that is expected to be completed in the short-term as well as from the healthy cash generation of the company over the years.

The extension to the Portomaso complex is expected to be completed in 2011. The total stock of unsold apartments amounts to 98 having an estimated sales value of €43 million. Sixty-seven of these apartments are already subject to promise of sale agreements valued at €22.4 million, the majority of which will be recorded in the company's books in 2011. The substantial cash inflows to be generated by the remaining property sales in the coming years will go towards the reduction in bank borrowings as well as for the build-up of the sinking fund with respect to the company's bond issues.

At the stockbrokers' briefing, the Tumas finance director presented the 2009 financial performance of Spinola Development Co Ltd as guarantor to the Tumas Investments bonds. At the time of the previous bond issue last year, forecast results for 2009 had been published in the prospectus. Although the actual revenue generated in 2009 was 5.1 per cent below that anticipated at the time of the previous prospectus, the overall level of profit achieved by the guarantor of €2.2 million exceeded the 2009 forecast of €1.8 million. The company benefited from a reduced cost base as well as from a lower level of interest payments.

In 2009, Spinola Development generated a total EBITDA of €10.3 million split up as follows: (i) €2.2 million from sale of apartments and (ii) €8.1 million from the ongoing operations composed of the Hilton Malta and the rental income from the Business Tower, commercial outlets and the car park. The larger part of this is accounted for by the healthy contribution of the Hilton Malta hotel together with a steady contribution from rental income of the commercial properties as well as the office facilities within the Business Tower.

Mr Sladden explained that the hotel benefitted from the extension carried out in late 2008. The group finance director also revealed that the Hilton Malta remains the most profitable five-star hotel in Malta. All key performance indicators (KPIs) normally used in the hotel industry (such as occupancy and room rates among others) rank Hilton substantially higher than the average of the other five-star properties. For example, the gross operating profit per available room in 2009 was double that of the average five-star hotels in Malta.

Mr Sladden emphasised that this performance must also be viewed in the light of the impact of the global economic recession on Malta's tourism industry. With respect to the current financial year, the group finance director said that the company is cautiously optimistic for 2010 and the actual results achieved in the first quarter of the year confirm the improving trend. This also reflects the views from other operators in the industry who are anticipating an improvement, primarily as a result of the significant increase in airline capacity in the coming months especially following the recent commencement of the six additional routes by Ryanair.

Besides the Portomaso complex, Spinola Development Co Ltd also owns the Halland site. In the prospectus, it is revealed that the Halland Hotel closed its doors at the end of 2009 as had been planned in anticipation of a new property development. The initial application for planning approval is expected to be lodged with the authorities in the near future and the development will only take place subject to approvals and once the property market shows clear signs of improvement. Mr Sladden confirmed during the meeting that the development of the Halland site has not been included in the future financial projections of the guarantor when it comes to their debt reduction programme over the years.

The robustness of Spinola Development Company Ltd is easily evidenced from the very comfortable interest cover achieved. Despite the general slowdown last year, the interest cover in 2009 was 3.3 times substantially higher than many bond issuers on the local market. Although as depicted in the table the interest cover has been on a downward trend in the past few years, this was mainly due to the lower level of property sales.

The more positive aspect is that the profitability from the ongoing operations has been improving on a yearly basis and the 2009 interest cover of 3.3 times provides an adequate cover for investors. Meanwhile with respect to the overall indebtedness of the company, the total net borrowings amounted to €66 million as at December 31, 2009 compared to shareholders' funds of €41 million translating into a gearing ratio of 1.61 times or 63 per cent. Shareholders' funds comprise total share capital of €13.7 million and accumulated profits over the years of over €20 million.

This bond issue is mainly directed towards current holders of the 6.7 per cent maturing bonds who would need to submit the pre-printed Application Form A by June 23. If all bondholders elect to retain their investment with the Tumas Group, a maximum amount of €8 million is left for subscription by the public. The strong responses received by the Government of Malta and Simonds Farsons Cisk plc in their recent bond offerings confirm the substantial appetite for fixed interest securities by the investing public.

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

Rizzo, Farrugia & Co (Stockbrokers) Ltd acted as sponsors 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.

© 2010 Rizzo, Farrugia & Co. (Stockbrokers) Ltd. All rights reserved.

www.rizzofarrugia.com

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