The Campari method

During last week’s informative seminar organised by Camilleri Preziosi on Corporate Finance, it was a pleasure listening to Simon Grech, Chief Commercial Officer at Bank of Valletta plc, explaining a common method used in the assessment of credit risk when the bank reviews loans from current or prospective customers.

Mr Grech was part of a panel discussion titled ‘Banks: A Universal Solution for Corporate Finance?’ which preceded another panel discussion in which I participated in, dealing with alternative avenues for corporate finance.

BOV’s Chief Commercial Officer referred to the ‘Campari’ method highlighting six key factors to evaluate the creditworthiness of an applicant for a loan.

During his intervention, Mr Grech highlighted the importance of the ‘C’ factor, the first letter of the acronym, when assessing a corporate loan namely the credit history, track record and also the reputation of the applicant. Moreover, the ‘A’ factor, the second letter within the ‘Campari’ acronym, refers to the ability of the applicant seeking a loan. Mr Grech made reference to the business plan required from the applicant and the importance of analysing common credit metrics such as leverage ratios including loan servicing requirements.

It was also very positive and topical to note that BOV’s Chief Commercial Officer explained that the ‘I’ factor, the sixth letter within the ‘Campari’ acronym, referred to the insurance or the security aspect which is given the least importance within the credit risk assessment. Mr Grech remarked that the credit history and financial strength of an applicant are more important attributes than the type and value of collateral being placed as security in case of default.

In my view, this was indeed an important remark given the similarities between a bank assessing the creditworthiness of an applicant and a financial analyst or an investor evaluating the strength of a bond issuer. I must admit that I had never heard of the ‘Campari’ acronym before.

In view of the recent media attention surrounding the Maltese bond market, I thought it is important to highlight the criteria within the ‘Campari’ acronym since it reinforces the notion, which I advocated several times in the past, on the type of analysis that needs to be undertaken by the financial and investing community.

Given the timely remarks by Mr Grech, I also made reference to this during my own intervention during last week’s seminar which dealt with the capital markets as one of the avenues as an alternative to bank financing.

I felt it pertinent to highlight the specific remarks on the security aspect given the common belief by many investors that secured bonds are safer to invest in than unsecured bonds. Similar to the ‘Campari’ method, the security aspect of a bond issuer should not the primary determining factor for investors to consider when assessing the attractiveness of a bond issue. This remains of fundamental importance for the investing community. Unfortunately, many retail investors have been conditioned by the importance of the security aspect given the prominence in adverts and promotional materials used by issuers as well as certain financial intermediaries in Malta.

In the light of the clear efforts by the European Commission to improve financial literacy within the wider ambitions of the Savings and Investments Union, press releases and adverts by bond issuers and financial intermediaries in Malta ought to refer to other important attributes for investors and not merely whether bonds are secured or unsecured.

Moreover, the continued emphasis on the security aspect of a bond by prospective investors when reacting to new bond issuance taking place in Malta also reminded me of the awareness campaign by the Malta Financial Services Authority (MFSA) exactly one year ago. I had made reference to this campaign in an article published towards the end of November 2024 wherein I had expressed my surprise at the choice of words used in bringing awareness to the public about the bond market since the advert stated that ‘with secured bonds you have better protection in case of bankruptcy’.

As I had the opportunity to state several times in the past, which was correctly emphasized by BOV’s Chief Commercial Officer in the seminar organised by Camilleri Preziosi last week, an assessment of the financial strength of an issuer ranks among the primary factors that one should consider before undertaking a bond investment. This analysis should show the ability of a company to honour its ongoing debt servicing requirements. In essence, it is more beneficial to acquire bonds of companies with a profitable track record and having a strong balance sheet than of those companies with a high level of leverage but which offer a property as collateral which can subsequently be liquidated by bondholders in the event of a default.

There is sufficient data available from the periodic publication of financial statements and the annual publication of a Financial Analysis Summary to assess the financial strength of an issuer or guarantor of bonds not only during the initial offer period of a new bond but also during the lifetime of a bond. Financial intermediaries should feel a duty and responsibility to the investing community to have a summary of a credit risk assessment available to prospective investors. This is the type of information necessary to widen financial literary as opposed to simply highlighting the interest rate and any security attached to an issue in the unfortunate case of an eventual default.

Within this context, it is worth highlighting the very recent developments from a security aspect. In recent weeks, there were some adverts that were promoting a new issue of “partially secured bonds”. The prospectus of this issuer indicated the approximate percentage of the value of the collateral in the event of the inability of the guarantor to honour its obligations. I must admit that this advert and the possible value of the collateral acting as security also came as a great surprise to me. While there was another precedent in the past where the value of the security was below the bond issue amount, we should not end up in a situation across the domestic capital market where investors need to start questioning the exact percentage of the security value. Across the banking sector, the opposite is the typical case, where the value of the property acting as collateral exceeds the value of the loan request.

Given the likelihood that the unprecedent bond issuance that took place in recent weeks with offerings happening concurrently is repeated during the first quarter of 2026, the investing community ought to keep in mind the important lessons from the ‘Campari’ method.

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