ACS Finance – Malta’s first rated bond

The new €29 million bond issue by ACS Finance plc is not yet another new corporate bond that will be listed on the Regulated Main Market of the Malta Stock Exchange.

This transaction marks an important milestone for the Maltese corporate bond market since it introduces an important dimension for the investor community – Malta’s first bond with a credit rating from an approved European credit rating agency.

The business of ACS Finance

ACS Finance plc is a financing vehicle, incorporated under Maltese law and forming part of the Audentia Group, a regulated investment management group which has been operating in Malta since 2011. The purpose of the company is specifically to acquire what are termed as “Credit Rights” relating to the operation and maintenance services of certain stations on Section 1 of Barcelona’s Metro Line 9. This bond therefore is linked to an important infrastructure asset in one of Europe’s most popular tourism destinations.

The chain of cash flows is one of the main features in reviewing the credit assessment. The Generalitat of Catalonia, the regional government of Catalonia, funds the public agency IFERCAT, which in turn supports the concessionaire CEAL9 through concession arrangements. CEAL9 pays a joint venture known as MEL9 for the operation and maintenance of the metro stations. The Credit Rights being acquired by ACS Finance derive from the 36 per cent participation in MEL9 that originally belonged to the Spanish construction group OHLA. Essentially, bondholders are not exposed to passenger numbers utilising the metro but to the timely collection of contractually predefined payments that flow from a public-sector payer.

The infrastructure connecting Barcelona Airport to the wider metro network is a critical asset. It is worth noting that even throughout the COVID-19 period, there was no negative impact on the contractual cash flows.

The relevant maintenance work has been subcontracted to reputable specialists such as ThyssenKrupp and Indra under long-term contracts that are themselves capped at maximum annual increases also of 3 per cent. This gives good visibility on the cost base and supports the view that profitability margins can be broadly maintained over the life of the bond.

Visible cash flows until 2041

The visibility and strength of the underlying cash flows also warrants the attention of investors. The concession operates on an availability-payment mechanism, meaning the amounts billed depend on the infrastructure being available and properly maintained rather than on the number of commuters utilising the various stations. The billing amount is contractually predefined and rises by 3 per cent annually, providing a degree of certainty that is very rare among local issuers.

Although the bond matures in October 2034, these cash flows extend beyond the maturity of the bond. The Credit Rights to be transferred to ACS Finance carry underlying cash flows running until 2041, with an aggregate value of approximately €87 million at the time of issuance. In essence, there is a substantial cushion of contractual receipts remaining after the bonds are due to be repaid, which provides an additional layer of comfort for bondholders.

The credit rating report

This €29 million bond carries a preliminary ‘BBB’ rating from EthiFinance Ratings S.L. The rating will be finalised once the security is constituted within 20 business days of admission to listing. Although EthiFinance is not a known name in Malta, it is a recognised European credit rating agency, registered with the European Securities and Markets Authority since 2012 and recognised by the European Banking Authority as an eligible credit assessment institution. It specialises in credit ratings for European corporates, particularly smaller and medium-sized enterprises.

This is the first time a bond listed on the MSE will have a public rating from a European credit rating agency. This is an important milestone following ongoing debates across the media ranking the absence of independent ratings as one of the structural shortcomings of the Maltese corporate bond market.

In its report, the rating agency notes that the ultimate payer is the Generalitat of Catalonia, via IFERCAT, which it considers having sufficient creditworthiness to support the debt rating.

The Generalitat is rated investment grade, with ratings of Baa3 by Moody’s and BBB+ by Fitch. It is important for investors to compare the prevailing yields on Catalonia bonds with those being offered by ACS Finance when assessing the pricing of the new bond issue.

ACS Finance has provided an undertaking to renew the rating annually. Should this not take place for any reason whatsoever, ACS finance would then have to publish a financial analysis summary similar to the requirement of many other local bond issuers as stipulated in the Listing Policies of the MFSA.

Excess cash and the prospect of buybacks

There is another feature that is important to highlight especially in the context of the lack of a liquidity provider in the Maltese corporate bond market. Since ACS Finance is structured as a single-purpose vehicle with predictable obligations including the annual bond interest and the eventual bond repayment in October 2034, it is expected to generate excess cash from year 1. The contractual receipts comfortably exceed the annual costs producing a build-up of retained cash estimated at circa €3 million annually which will then be used for the full repayment of the bond in 2034. The interest coverage ratio is projected at 1.8 times in 2026 rising to above 3 times as the bond approaches maturity.

During a meeting with financial analysts detailing the various features of this new bond, the executives of ACS Finance indicated that the company may use part of its accumulated cash to repurchase its own bonds on the secondary market. They described this as their preferred use of surplus funds.

The regular proceeds to be generated from their 36 per cent participation in MEL9 will remain ring-fenced under the oversight of the security trustee and may only be used for permitted purposes, namely into a portfolio of investment-grade fixed income instruments or the repurchase of ACS bonds. This limits any leakage of surplus cash and helps ensure that retained funds remain available for the benefit of bondholders.

Since the bonds carry a coupon of 5.5 per cent which is materially higher than the prevailing returns available on investment-grade instruments, there is a clear incentive for the company to buy back their bonds thereby reducing both future interest expenses and the principal due upon maturity.

This essentially addresses a source of major frustration among the local investor community. Since there are no liquidity providers across the local corporate bond market, holders of larger nominal amounts often find it difficult to exit their holdings. A company with both the financial ability and the incentive to repurchase its own bonds effectively introduces a natural source of demand into the secondary market.

This new bond combines predictable and contractual cash flows from a core infrastructure asset in Barcelona coupled with an investment-grade rating, a built-in mechanism that should support secondary-market liquidity as well as favourable pricing compared with the ultimate payer. Moreover, it provides geographical diversification into Spain and sectoral exposure to a long-term infrastructure concession.

The MSE should increase its focus on attracting similar issuers to utilise the domestic capital market. Our small size presents advantages in attracting issuers seeking to raise between say €15 million and €50 million since they would not gain the required attention in the larger and deeper capital markets that generally require issuers to raise significantly larger amounts.

Rizzo, Farrugia & Co. (Stockbrokers) Ltd is acting as Sponsor and Co-Manager to ACS Finance plc.

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