Medserv plc obtained approval of a €20 million debt issuance programme to finance its expansion plans. The programme enables the company to issue various tranches or series amounting to a maximum of €20 million over a 12-month period.
Shortly after approval of the debt issuance programme, Medserv announced the first issue of €13 million notes carrying a coupon of six per cent per annum with a final maturity date of September 30, 2023 although these may be redeemed as from September 30, 2020. These fixed rate instruments are defined as notes under a debt issuance programme as opposed to bonds. However, the notes and the typical bond issues that have been launched on the local market to date have identical attributes with a fixed rate of interest and a final maturity date. The Medserv notes will also feature on the Official List of the Malta Stock Exchange.
During the next 12 months Medserv may opt to issue further tranches with identical terms, namely coupon, currency, interest payment dates and maturity date. Otherwise, it may also issue other series of notes with different terms depending on circumstances at the time and the required use of the funds. However, any tranche or series issued under this programme will also be secured and guaranteed by one of the Group’s subsidiaries Medserv Operations Limited.
The security is in the form of a special hypothec over the emphyteutical grant held by Medserv in respect of the site valued at €40 million as at June 30, 2013. In view of the security attached to the notes, if the Issuer had to default on its obligations, investors may request the Security Trustee to use the assets of Medserv Operations Ltd as guarantor and its rights on the Medserv site to settle the amounts due under the notes.
The Medserv Group has been involved in the oil and gas industry since it was originally set up in 1974. Medserv provides logistics services to companies involved in the upstream sector (exploration and production), principally offshore, operating mainly in the Mediterranean basin with a focus on North Africa. Medserv’s clients include some of the world’s leading oil and gas exploration companies such as ENI Group, Hess Corporation, Petrobras, Gazprom and Exxon amongst others. A number of international service companies also form part of the Group’s client base including Schlumberger, MI Swaco, Baker Hughes, Halliburton and Saipem.
Currently, Medserv has facilities in Malta, Libya, Sicily and Cyprus although no operational activity has yet commenced in Sicily and Cyprus. The existing operations principally cover the Central Mediterranean and North African regions through its specialised dedicated onshore facilities in Malta and Libya (Misurata).
The Malta base within the Freeport is 100 per cent owned by Medserv while the logistics base within the freezone area of the Misurata Freeport in Libya is 60 per cent owned by Medserv.
The Medserv Group had a rather erratic financial performance since its Initial Public Offering on the Malta Stock Exchange in 2006.
The Group generated strong profits in 2008 and 2009 from both bases as they supported exploratory projects in the Mediterranean rim, particularly offshore Libya, with such activities carrying attractive profit margins.
However, performance was subdued since then as exploratory and production activity was brought to a standstill by a number of events including the 2010 BP incident in the Gulf of Mexico as well as the 2011 civil war in Libya and the instability across other parts of the North African region.
As a result of these events, the Medserv Group registered lower turnover and suffered reduced profitability levels due to the fixed operating cost base and given the higher incidence of low margin works such as bunkering activities during this period.
Furthermore, since 2011, the Misurata base witnessed no activity from customers except for storage of equipment which only generated sufficient revenue to cover the day-to-day expenditure. This slowdown in business activity eventually led to negative earnings before interest, tax, depreciation and amortisation (EBITDA) of €0.48 million for the Group for the financial year ended December 31, 2012.
However, during the second half of 2012 the Group experienced a pick-up in business activity related to logistical work and support being carried out in anticipation of major oil and gas projects offshore Libya. This trend also continued in the first half of 2013 and the Medserv Group generated EBITDA of €0.9 million and pre-tax profits of €0.57 million. The performance during the past 12 months was also boosted by a new revenue stream. In 2012, Medserv set up a new maintenance services unit which has since completed two lucrative contracts and has already secured other works for the remainder of 2013.
The Supplement published by Medserv concurrently with the announcement of the terms of the first tranche under the programme includes the 2013 forecasts and projections for the financial year ending December 31, 2014.
Medserv envisages further improvements in the financial performance largely due to the services that the Group is expected to provide to a number of exploratory and production projects across the Mediterranean particularly offshore Libya. Medservs expect its overall EBITDA level to reach €3.7 million in 2014.
Medserv will therefore be required to publish a Financial Analysis Summary update on a yearly basis providing forward guidance on their expected financial performance
The net proceeds from the issuance of the first tranche of notes, estimated at €12.6 million after issuance costs, will be used by Medserv as follows: (i) to on-lend €3.5 million to the Guarantor to enable it to prepay and cancel its current loan and overdraft facilities; (ii) to finance the installation and completion of the photovoltaic farm and related infrastructure by on-lending the funds to the Guarantor estimated at €5 million; (iii) to finance improvements and/or the development of the Group’s existing base in Cyprus and possibly other bases identified for this purpose by the Issuer amounting to €2.8 million; (iv) to finance the Group’s working capital in the amount of €1.3 million.
The envisaged improvement in performance during 2013 and 2014 is mainly from the Malta base which has been involved in most of the major offshore activities that took place in the Central Mediterranean and North Africa.
Although the political situation in Libya is still very uncertain, the oil and gas sector is fundamental for kick starting the economic turnaround of the country and there are very strong indications that the major International Oil Companies (IOCs) are planning to begin work on their concessions as from early 2014 and using the Medserv site in Malta as their logistical base.
In addition, the photovoltaic farm that will be built in Malta will provide the Group with a new stable revenue stream of over €0.5 million per annum for the next 20 years.
The projections for 2014 also include an initial contribution from the new operation in Cyprus. Medserv and its Cypriot partners secured a quay and appropriate warehousing facilities in Limassol and Larnaca which will enable them to service existing clients (namely some of the major IOCs) which intend to drill or operate in the Eastern Mediterranean in view of the substantial discoveries of fossil fuels in the region. The Cypriot operation is expected to become an important contributor to Group revenues from 2014 and to profits in subsequent years.
Based on the financial projections published by Medserv, the interest cover ratio is expected to be healthy at 6.7 times and 4.8 times for the financial years ending December 31, 2013 and 2014 respectively. This strong interest cover is partly attributable to the fact that more than 60 per cent of interest costs on these notes will be covered by the contracted income on the photovoltaic farm. Meanwhile, the gearing ratio is expected to increase to over 50 per cent as from the financial year ending 2013 given the increased indebtedness following the issue of these notes.
However, the ‘Total Assets’ figure does not include the value of the temporary emphyteusis and the lease the Group owns (through the Guarantor) with respect to the land at the Freeport which is currently treated as an operating lease. This was valued at €40 million as at June 30, 2013 and if this value were to be included, the overall leverage position would improve substantially.
This is the first offer of a non-financial fixed interest security following the latest revision to the Listing Policies last March. It should be followed by other issuers in the months ahead as indicated by the tentative Listing Calendar published by the Malta Stock Exchange some weeks ago.
The revised Listing Policies have helped issuers to return to the market since the policies now exclude some very onerous obligations for most companies. However, the Financial Analysis Summary has been retained as a requirement and this is included in the Supplement to the Base Prospectus published by Medserv. Medserv will therefore be required to publish a Financial Analysis Summary update on a yearly basis providing forward guidance on their expected financial performance.
Since Medserv also has its equity listed on the Malta Stock Exchange, this will provide very valuable information for shareholders and financial analysts.
Rizzo, Farrugia & Co. (Stockbrokers) Ltd acted as Sponsors to the Medserv plc Debt Issuance Programme.
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 from 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.
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Edward Rizzo is a director at Rizzo, Farrugia & Co. (Stockbrokers) Ltd.