Hospitality sector review

The end of June was the deadline for most bond issuers and their guarantors to publish their updated Financial Analysis Summary (FAS) providing financial projections for 2025. Although each of these reports are rather lengthy, they contain important information to the market in order to assess the financial strength of each of the issuers or guarantors.

Since local bonds are not officially assigned a rating by a credit rating agency, market participants and investors need to perform their own analysis to assess the credit risk of the issuers and guarantors.

As a result of the increase in the number of bond issuers over recent years, it is difficult to dedicate one article on the important credit metrics that is necessary to assign rankings to each of these companies across the entire bond market. Moreover, the credit metrics need to be analysed depending on the sector in which different companies operate.

Given the strong growth again being experienced in the tourism industry and the large investments being made by most operators, it is interesting to publish the findings of some of the hotel operators who have exposure to the local bond market.

One of the key financial metrics to gauge the financial strength of bond issuers is the net debt to EBITDA multiple. This metric, which is regularly quoted by companies across international financial markets, indicates the number of years required for a company to repay its debt obligations normally composed of bank debt and bonds.

It is important to state that the presence of debt on a company’s balance sheet should not always be regarded as a weakness or failure as some investors do in Malta. Debt forms an important part of the capital structure of most companies and it would be unwise for companies to be totally debt-free if they have strong cash flow from ongoing operations.

Spinola Development Company Limited (SDC) is the guarantor of the bonds issued by Tumas Investments plc. Revenues are expected to increase by four per cent this year to €55 million with the large majority generated from the Hilton Malta hotel. EBITDA is expected to decline by 1.3 per cent to €20.6 million reflecting the higher level of direct costs and administrative expenses.

Net finance costs are expected to decrease to a mere €0.3 million following the maturity of the €25 million bonds in July 2024 which had a coupon of five per cent. Total debt is projected to increase by €3 million to €39.7 million reflecting the draw downs on facilities required for the development and completion of the Halland Residences. Net debt as at the end of 2025 is anticipated at €28.6 million, which translates into a very strong net debt-to-EBITDA multiple of just over 1.3 times.

SD Holdings Ltd is the guarantor of the bonds issued by SD Finance plc. The company has a March financial year-end and as at 31 March 2024, total debt stood at €163 million including lease liabilities of €77.2 million. In the FAS published in September 2024 for the financial year which came to an end on 31 March 2025, it was reported that total debt is forecasted to have reached €250 million by March 2025, including €81 million in lease liabilities. This implies that during the last financial year, SD Holdings is expected to have secured approximately €90 million in additional bank borrowings reflecting the investment in the DB City Centre project. Net debt is anticipated to have increased significantly from €92 million to €196 million with the net debt-to-EBITDA multiple forecasted to have almost doubled to 6.1 times. The interest cover is expected to remain reassuring at 4.1 times.

During 2024, Eden Leisure Group Limited, as guarantor of the bonds issued by Eden Finance plc, increased its bank borrowings by €20 million to finance the development of the VOCO Hotel. This additional financing led to an increase in net debt to €68 million. Consequently, the net debt-to-EBITDA multiple deteriorated to 6.9 times in 2024, both as a result of the higher debt as well as the decline in EBITDA, which fell to €9.8 million from €11.9 million. However, the net debt-to-EBITDA ratio is expected to improve to 5.2 times by the end of 2025, supported by stable debt levels and a forecasted increase in EBITDA to €13.2 million. The interest cover is expected to remain healthy at 4.5 times despite the rise in finance costs.

G3 Holdings Limited, as guarantor of the bonds issued by G3 Finance plc, has also experienced an increase in borrowings as a result of its ongoing development projects.  Net debt is projected to nearly double to approximately €30 million by the end of 2025 (including €10 million in lease liabilities). EBITDA is also expected to increase significantly, rising to €5.7 million during the current financial year. This improvement reflects higher revenue contributions from the upgraded Solana Hotel and the newly-added VITA Hotel in St. Julian’s. Despite this, the net debt-to-EBITDA ratio is expected to deteriorate to 5.3 times in 2025 compared to 3.8 times in 2023 while the interest cover is expected to remain comforting at 3.7 times.

AX Group plc also substantially increased its net debt from €82 million as at the end of their 2020/21 financial year to an anticipated €172 million as at the end of the current financial year ending 31 October 2025. The jump in borrowings is mainly related to the sizeable investments in the AX ODYCY as well as Verdala project which is expected to amount to €83 million. Despite this, the net debt-to-EBITDA multiple is still projected to improve significantly, reaching a six-year low of 4.5 times driven by the strong upturn in EBITDA mainly reflecting the initial deeds of sales of the residential units within the Verdala Terraces project. This will also help the interest cover to improve from 3.1 times to 4.3 times. It would be interesting to gauge the normalised credit metrics of the AX Group once all the sales of the residences within the Verdala terraces are concluded. The Group is however planning another sizeable investment in Qawra which will again require additional debt funding in the coming years.

International Hotel Investments plc (Corinthia Group) continues to be weighed by high levels of borrowings following the COVID pandemic and the sustained expansion in various cities around the world. In the latest FAS, it was reported that a significant stake in the Corinthia Hotel Lisbon is expected to be sold during the current financial year. This transaction, together with the sale of other non-core businesses, is expected to result in net cash inflows of €136 million in 2025 which will reduce the net debt to just under €600 million (including lease liabilities). As a result, the net debt-to-EBITDA multiple is expected to improve to 8.7 times.

The wealth of information available to market participants and the investment community through the annual Financial Analysis Summaries should be sufficient to obtain a clear understanding of those companies that have an elevated credit risk and those have strong financial performances and low levels of debt. These metrics should form the basis of any investment decision irrespective of whether any security is available for bondholders in case of default.

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

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