In a first for the local financial market, Bay Street Finance plc announced last week that it will be seeking to repurchase all its outstanding bonds amounting to €6.5 million at a price of 102 per cent. This offer will be valid between October 15 and November 15.

While in recent months we have had announcements by various companies buying back their bonds on the secondary market (also including Bay Street Finance plc), this is the first time that a company has formally written to all its bondholders to purchase all their bonds at a premium to the market price.

Bay Street Finance originally launched their bond issue in May 2002 when it offered a total of €6.99 million (Lm3 million) with an over-allotment option of a further €6.99 million. Despite the high coupon of 8 per cent per annum, the issue was not entirely successful as Bay Street only raised a total of €7.6 million. The bonds are guaranteed by the parent company Bay Street Holdings Ltd and the funds were used by the holding company to reduce the outstanding amounts due to capital creditors in respect of the construction and completion of the complex.

An interesting feature within the terms of the original bond issue was that bondholders had an option to exchange the bonds at a price of 107 per cent into shares of the parent company if Bay Street Holdings decided to go public and offer shares between 2005 and 2012. No mention has been made of the company’s plans in this respect in the document sent to all bondholders recently.

Bay Street Holdings suffered losses until 2007, mainly due to the high level of interest payments on its outstanding borrowings. However, the company registered a profit in excess of €300,000 in each of the past two financial years (2008 and 2009) mainly on (i) lower levels of depreciation, and (ii) a decline in interest payments reflecting the reduction in borrowings coupled with lower interest on bank borrowings and overdraft facilities.

The company’s EBITDA peaked at €1.96 million in 2008 before declining by 13.6 per cent in 2009 as expenditure increased by almost €200,000. The interest cover of Bay Street Holdings improved from 1.6 times between 2005 and 2007 to 2.33 times in 2009, a much healthier ratio following the lower level of interest payments.

Shortly after the 2002 bond issue, the holding company sold its shareholding in the hotel within the complex to a sister company, Bay Street Company Ltd. The 2009 financial statements of Bay Street Holdings signed by the auditors on 28 April 2010 reveal that an outstanding amount of €4.37 million is due by Bay Street Company to the guarantor of the bonds in settlement of the sale of the hotel. This amount is due to be paid by 2012.

Settlement of this outstanding amount due will enable Bay Street Holdings to reduce some of its borrowings. The balance sheet of Bay Street Holdings as at December 31, 2009 shows total indebtedness of €15.8 million. This is made up of the €7.6 million due to Bay Street Finance in respect of the outstanding bonds in issue as at the balance sheet date and an amount of €8.2 million in bank loans and overdrafts. In recent weeks, Bay Street Finance reduced the amount of outstanding bonds by €1.1 million through purchases on the secondary market at par value (100 per cent). Shareholders’ funds increased to €7.8 million in 2009, with the gearing ratio remaining on the high side at 67 per cent.

Given the financial performance of the holding company in recent years and the high level of borrowings, one would ask how Bay Street intends to finance the repurchase of all the outstanding bonds. The answer lies in the document sent to all bondholders which reveals that Bay Street Holdings has obtained full financing from its bankers to meet the bond repurchase programme as part of a general reorganisation of its facilities and the operational activity of the company.

In recent years, Bay Street Holdings reported that most of the international brands present within the complex have extended their lease contracts until 2020. This is very positive for the company.

On the other hand, the 2009 financial statements make reference to a statement made by the company’s auditors. Although the auditors did not qualify their report, they made specific reference to the ‘going concern’ basis and the company’s ability to continue in operation.

In order to meet its obligations (both in respect of annual interest payments as well as redemption of the bonds at maturity date) Bay Street Holdings depends on the timely receipt of the €4.4 million due by Bay Street Hotel Complex; the continued support of the shareholders namely Christopher Grech, Paul Camilleri and George Muscat; as well as the support from its bankers.

The shareholders have given an undertaking to provide all the necessary support to meet the company’s obligations while the banks are supporting the company through the facilities being made available to enable the company to make an offer to bondholders to redeem their bonds one and a half years prior to the redemption date in 2012.

Investors who opt to refuse the buy-back offer at 102 per cent would expect to receive the nominal amount of bonds at 100 per cent on final redemption on June 26, 2012, together with their eight per cent per annum interest. In the document sent to bondholders, Bay Street state that presently they have no intention to roll over the bonds on maturity date. Investors refusing the offer and opting to retain ownership of their Bay Street bonds should note that if a large number of investors take up the offer, the bonds may be de-listed from the Alternative Companies List and investors will end up with an unlisted bond, effectively eliminating any possibility of selling the bonds prior to maturity in 2012.

The offer price of 102 per cent is generous as the bonds have never touched this price level in the market in recent months. The company has acquired €1.1 million worth of bonds at their par value of 100 per cent.

The repurchase programme by Bay Street will result in a further injection of liquidity into the local corporate bond market as investors will seek new investment opportunities once Bay Street settle the buy-back on November 24.

Dolmen Properties plc will also be providing investors with additional investible funds since this company has opted to redeem 50 per cent of all its outstanding bonds following the successful performance by the Dolmen Hotel and the accumulation of over €5 million in excess funds. Investors will be seeking to re-invest these redemption monies when they become available.

Correction

In last week’s article entitled “FIMBank announces new short-term bond issue in EUR and USD”, the offer prices for preferred and non-preferred applicants were erroneously quoted. The offer price for non-preferred applicants is 100 per cent (par), while the offer price for preferred applicants (bondholders, shareholders, directors and employees) is 99 per cent, at which price the yield to maturity is of 4.60 per cent per annum.

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

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

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