Assessing the strength of bond issuers

In last week’s article I mentioned that from a review of the various announcements published via the Malta Stock Exchange, one can conclude that there are a number of companies that possess strong credit metrics indicating a very low probability of default.

I also highlighted that one of the key financial metrics to gauge the financial strength of bond issuers is the net debt to EBITDA multiple. This metric indicates the number of years required for a company to repay its debt obligations normally composed of bank debt and bonds.

In today’s article I will highlight those companies whose bonds are listed on the Regulated Main Market of the Malta Stock Exchange that have a Net Debt to EBITDA multiple of below 3 times. This is indeed a very strong multiple indicating that, on the assumption that the operational profits are at least maintained in the near term, these companies have the ability to repay their financial obligations in under three years. Companies that do not have recurring revenue streams such as property development companies whose revenue is linked to the timing of property sales have not been included in this analysis. Moreover, since the ClearFlowPlus plc bonds are guaranteed by Water Services Corporation (WSC) which is dependent on regular grants provided by the Government of Malta, the financial situation of the WSC is not comparable with other private or public companies in Malta.

Prior to undertaking an investment in fixed income securities and equally important during the lifetime of one’s investment in a corporate bond, investors need to review all the financial information at their disposal to gauge the financial strength of a company in order to ensure its ability to honour its obligations.

Since the financial year-end of Simonds Farsons Cisk plc is 31 January, the Financial Analysis Summary containing the projections for the 2024/25 financial year will be published by the end of July. However, even without taking into consideration the updated projections, the net debt to EBITDA of Farsons as at 31st January 2024 was of only 0.7 times. Although the company has an ongoing investment programme, it is fair to conclude that its net debt to EBITDA is unlikely to deteriorate much in the near term given the strong ongoing profitability levels from its core business.

Spinola Development Company Limited (SDC) is the guarantor of the bonds issued by Tumas Investments plc. Although SDC is forecasting a 6.5 per cent decline in EBITDA to €20 million during 2024 principally reflecting the increase in operational costs, it is expected to have a net debt to EBITDA of just 1.7 times. Furthermore, it is important to note that the EBITDA for 2024 does not include any contributions from property sales, which are envisaged in the near term following the completion of the Halland residential project.

Mediterranean Investments Holding plc, whose only operational asset is the Palm City Residence in Libya, is anticipating a higher level of EBITDA this year (+7.5 per cent to €21.2 million) amid the projected improvement in average occupancy at Palm City Residences. This will help the net debt to EBITDA to improve to 2.0 times, reflecting both the improved performance as well as the lower levels of net debt. By the end of 2024, the net debt is anticipated to amount to €42.9 million.

SD Holdings Ltd as guarantor of the €65 million bonds issued by SD Finance plc, has a March financial year-end. The company has not yet published its March 2024 financial statements. The company was expected to have generated an EBITDA of over €25 million in the financial year ended 31st March 2024 on the back of a strong recovery in tourism and the operations of an increased number of catering establishments. This would translate into a net debt to EBITDA of 2.7 times. It would be important to gauge the expected change in the financial position of the company in the context of the large investment required for the ongoing db City Centre project in St Julian’s which would however also generate substantial revenue upon completion in the coming years.

In last week’s article I mentioned the strong credit metrics of the Hili Ventures Group. The largest and most successful subsidiary of Hili Ventures is Premier Capital plc. During the current financial year to 31st December 2024, Premier’s revenues are expected to grow to a record of €714.6 million reflecting strong growth in business in the majority of regions, particularly in Romania (+9.6 per cent to €383.2 million) and Greece (+22.0 per cent to €125.0 million). EBITDA is projected to increase by 16.4 per cent to €103.7 million and the company expects to have a cash balance of about €30.1 million by the end of 2024 and a net debt to €232.2 million mainly composed of lease liabilities. The net debt to EBITDA multiple is forecasted to remain at a very healthy level of 2.2 times.

Virtu Maritime Ltd as guarantor of the €25 million bonds issued by Virtu Finance plc is expected to have a net debt to EBITDA of 2.7 times by the end of the current financial year. Virtu is anticipating a sharp improvement in EBITDA during the year to €21.4 million reflecting the continued strong performance of the Malta-Sicily route as well as the additional income from the new charter of the HSC Maria Dolores on the Spain-Morocco route. The company is anticipating a further reduction in bank borrowings and an increase in its cash balances resulting in a net debt of €58 million.

Although the corporate bonds of these companies are not rated by a credit rating agency and are therefore classified as ‘unrated’, in my view such strong financial metrics indicate a very low chance of default on their debt obligations in due course.

On the other hand, companies whose ratios are inferior to the ones mentioned here should focus on debt-reduction initiatives in the coming years in order to have a more robust and sustainable financial position. An element of debt for companies that generate recurring revenue streams is an important feature in order to optimise their long-term capital structure but too much debt can be worrisome for various stakeholders.

Read more of Mr Rizzo’s insights at Rizzo Farrugia (Stockbrokers).

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