Hal Mann Vella bond issue

Financial market participants were long aware that the Hal Mann Vella Group was seeking to tap the bond market.

On October 8, the company confirmed the publication of a prospectus for €30 million in secured bonds following approval by the Malta Financial Services Authority two days earlier.

The first thing to question when a company offers bonds for subscription is the purpose of the fundraising exercise. In this case, the group will be (i) refinancing €13.7 million in bank loans; (ii) financing the modernisation of the Hal mann Vella factory at a cost of €5 million; and (iii) financing the construction of a mixed-use development earmarked for lease to third parties which is expected to cost €7 million. The remaining €3.6 million will be used for general corporate funding purposes.

The origins of the Hal Mann Vella Group date back to 1954, when brothers Vincent and Nazzareno Vella started producing terazzo tiles. Over the years, the group expanded operations and established itself as one of the leading family-run tile manufacturers in Malta. The issuer is the parent company of a group which is still predominantly involved in the manufacturing of tiles and pre-cast elements, importation of marble, granite and natural stone as well as tendering for real-estate related projects both in Malta and internationally. After the two founders split up in 2004, Vincent Vella and his children (who own the Hal Mann Vella Group in its present form) began to diversify and today the group is involved in property development and letting, fashion retail and hospitality.

Although the group’s operations are split into four main divisions, the Hal Mann Vella Group is still predominantly involved in the manufacturing of tiles and general contracting services. This division generates 80 per cent of overall group revenues and is strongly linked with activity in the construction industry and dependent on the number of contracts completed during the year. Unfortunately, the prospectus and the financial analysis summary (FAS) do not provide the profit contributions of each of the divisions.

The management claims that profit contribution from the core business was significantly stronger prior to 2008, when construction in Malta was at a peak and the group was actively engaged in a number of overseas projects. Given the weak financial performance with group EBITDA only ranging between €1 million and €1.3 million, one would have expected the documents published by the company to include historical financial statements for a longer number of years to gauge the higher profitability at times of improved economic conditions.

In the recent bond issue of Mariner Finance plc, the FAS included the 10-year track record of the Baltic terminal which helped analysts gauge the limited impact from the financial crisis and the strong rate of profitability growth over the years. The Hal Mann Vella Group ought to have published similar statistics to prove to the market the group’s ability to generate higher profits.

One of the reasons for the bond issue is to finance the €5 million investment in the modernisation of the Lija factory to increase capacity and achieve cost efficiencies in order to spearhead the group’s future growth. The directors claim the renovated factory will improve margins and enable the group to once again venture into overseas markets. Although historically the group successfully secured and completed some projects in the UK, on the basis of the information made available we are unable to gauge the number of projects required in order to have an optimum utilisation rate of its newly refurbished factory as well as assess the group’s ability to compete for such projects on an international scale.

This project is expected to be completed in the fourth quarter of 2015 and as such the impact is not visible in the projections for 2015 as presented in the FAS annexed to the prospectus. However, management clarified that they are anticipating additional revenue of €400,000 per annum shortly after completion (and rising during the lifetime of the bond) and cost savings of over €100,000 per annum. The various large property projects being planned locally should be a natural target market for the group although from the financial statements of the last three years, some of the projects completed did not seem to lead to attractive profit margins. Once again additional information and forward guidance would have helped to gauge the merits of such assumptions.

The future profitability growth of the Hal Mann Vella Group is also centred around the planned mixed-use property development project in Lija. The development, comprising office space, warehouse facilities and parking, is expected to start generating income from 2017, when the initial leasing contracts are projected to come into effect. The issuer expects to generate €0.9 million in annual rental income at full occupancy in the years ahead although the FAS does not indicate the profit contribution from this investment. The development comprises 9,300 square metres of office space and the projections are based on a considerably lower rental rate per square metre compared to other developments in Sliema, St Julian’s as well as the SkyParks Business Centre.

This seems to be justifiable given that the location is not as sought-after. Although demand for quality office space is currently strong and is expected to be sustained given the evolving nature of the local economy, the Hal Mann Vella Group will be competing against a number of upcoming developments in more desirable locations. Also worth taking into consideration is the planned construction of a large shopping village across the road by another investor (PG Holdings Ltd, which is independent of the issuer). The shopping village should eventually host retail outlets and according to media reports it will not have any area dedicated to offices. As such, the Hal Mann Vella project will compete with the shopping village for retail space but not office rental and the transformation of the area from such a development is actually likely to complement the Hal Mann Vella development and attract potential tenants to this part of the island.

The Hal Mann Vella Group is also active in the fashion retail industry (via three Guess outlets and one outlet of Brooks Brothers) as well as in the hospitality sector with two properties in Buġibba. The contribution from both divisions to the overall group performance is still a minor one and is likely to remain immaterial over the coming years.

Based on the financial projections published in the prospectus, the group is expected to have an interest cover of only 1.2 times in 2015, which is the weakest compared to a number of the recent bond issuers on the local market. Meanwhile, the gearing ratio is expected to rise to above 55 per cent by 2015 as a result of the additional borrowings. However, it is worth pointing out that the Hal mann Vella gearing ratio is more favourable than that of companies such as Island Hotels Group Holdings plc, Mariner Finance plc and Tumas Investments plc. Although the ratios of Hal Mann Vella might strengthen beyond 2015 in line with the directors’ expectations of improved revenue and earnings – mainly from the core business and the new commercial property development – we are unable to gauge the extent of this anticipated improvement given that the contributions from these investments commence in 2016 and the forward guidance provided by the group in the prospectus covers only until 2015 in line with the Listing Policies.

In view of the timing of the contributions from the new investments, management ought to have published projections beyond the required minimum established by the Listing Policies to validate their claims.

Notwithstanding the limited financial projections available to calculate the interest cover during normalised operations, investors may be comforted by the security granted to bondholders. The group is granting a first-ranking special hypothec on a number of properties owned by the group and one of the subsidiaries, Sudvel Ltd (as guarantor to the bond issue), as well as a first-ranking general hypothec over all other assets of the group.

Following this bond issue, a further two new issuers are expected to tap the bond market next month. Unfortunately, retail investors will not be able to participate in the next MGS issues taking place next week since the Treasury has structured these in the form of an auction with a minimum tender of €250,000.

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