Bond redemptions in the final quarter of 2010
During the final three months of the year, the market will experience five bond redemptions. The government of Malta, Simonds Farsons Cisk plc, Dolmen Properties plc, Bay Street Finance plc, and P G Finance plc (formerly Big Bon Finance plc) will all be redeeming some bonds.
This is a rare occurrence. Normally, the local market is accustomed to a higher amount of new bond issues as opposed to redemptions. However, the final quarter of 2010 will be different. New offerings are limited to the recent short-term bond by FIMBank plc (which closed earlier this week) and the Malta Government Stock issue taking place next week. Apart from this, the only other new offering seems to be a share issue by MIDI plc. This would be the first new equity to be listed in 2010.
The early bond redemptions by Dolmen (50 per cent of the issue) and P G Finance (full amount of issue) indicate that these companies are generating sufficient cash to reduce their borrowings, which is a positive development. On the other hand, the government of Malta, Farsons and Bay Street are refinancing their borrowings at lower rates of interest.
In the most recent announcement, P G Finance plc may have taken the market by surprise by opting for a full redemption of all its bonds on its first optional redemption date of December 20. P G Finance had initially launched this bond issue in November 2002 when it issued a total of €6.99 million (Lm3 million at the time of the offering) at a coupon of seven per cent per annum. At the time this was one of the first secured bonds on the market and since the company had a brief track record it was admitted to the Alternative Companies List.
The bond had been issued eight years ago to finance the acquisition and completion costs of the Sliema property housing the Zara franchise store. This large property was in turn placed under trust with HSBC Bank Malta plc with bondholders being given a first special hypothec over the property. The P G Finance bonds were also guaranteed by the parent company of the Alhambra Group, Alhambra Properties Ltd (formerly Alhambra Complex Ltd). The company performed strongly in recent years reassuring bondholders on the company’s ability to honour its obligations.
With the upcoming redemption of this bond in December of this year, the only other secured bonds remaining on the market will be Dolmen Properties plc, GAP Developments plc, and PAVI Shopping Complex plc. The Dolmen bond issue is secured by a hypothec on the Dolmen Resort Hotel in favour of bondholders; the GAP bond issue is secured through a general and special hypothec over the Phase 1 of the development in favour of the senior lenders and bondholders; and the PAVI bond issue is secured through a first special hypothec over the shopping complex in favour of bondholders.
The majority of corporate bonds in issue are unsecured. However, an important element that one needs to analyse in respect of such bonds is the strength of the issuer or the guarantor of the bonds. In this respect, the gearing ratio (measuring the extent of a company’s debt leverage) and the interest cover (measuring the amount of times the profitability of a company exceeds the interest payments) are important indicators.
Dolmen Properties plc announced that it will be availing itself of the early redemption option. On November20, Dolmen Properties will be redeeming 50 per cent of its total outstanding bonds amounting to €10.95 million. The amount of €5.5 million had been accumulated by the company within its sinking fund following from the strong performance of the hotel throughout the years.
During each of the past four years, Dolmen Properties achieved pre-tax profits in excess of €1 million with a record of €2.33 million in 2008 when a record number of tourists visited Malta. Dolmen has one of the strongest balance sheets among corporate bond issuers with low leverage. As at December 31, 2009, total shareholders’ funds amounted to €26.8 million compared to a net debt position of only €6.3 million. Once the company repays 50 per cent of its bonds, €5.5 million will remain in issue and listed on the Official List of the Malta Stock Exchange with a final maturity date of November 20, 2013.
Meanwhile, Bay Street Finance plc, which do not have an early redemption option, obtained bank funding in order to seek to repurchase all its outstanding bonds amounting to €6.5 million at a price of 102 per cent. Their offer to bondholders is available between October 15 and November 15 and bondholders who accept to surrender their bonds will be receiving settlement on November 24. There is a possibility that if a large number take up the offer, the Bay Street bonds may be de-listed from the Alternative Companies List.
Simonds Farsons Cisk plc will be redeeming their remaining €1.75 million in 6.6 per cent bonds which are held by a few bondholders who had not accepted to roll-over their investment earlier this year in the new six per cent bonds.
A Malta Government Stock amounting to €34.9 million, of which only €4.9 million is held by the public (with the balance held by financial institutions) will be maturing on November 19.
Therefore total redemptions taking place in the final weeks of the year could amount to a maximum of €55.6 million, which is a fairly substantial sum by local market standards. Undoubtedly, some of this money will be reinvested in bonds already listed on the Malta Stock Exchange. Investors may also be considering increasing their exposure to equities within their portfolios. In such circumstances, with insufficient new issues coming to the market to enable investors to reinvest their redemption monies, the need for a more liquid secondary market provided by market makers is fundamental. As the stock market continues to develop and bonds come up for redemption, the need for such a mechanism becomes all the more important.
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.
Mr Rizzo is director of Rizzo, Farrugia & Co. (Stockbrokers) Ltd.