Thoughts about the bond market

Preference by the Maltese investment community for bonds was once again evident in the recent offering of Hili Finance Company plc. The company raised over €102 million for its €80 million 5-year offering. An analysis of the results of the bond issue indicates a lower than usual take-up (67 per cent) by the existing holders of the 5.1 per cent 1923 Investments plc bond (another subsidiary of Hili Ventures) that is due to mature in December 2024.

In my view, this is solely due to the early closure of the offering on 19th June (the first day of the offer period and well ahead of the final closing date originally scheduled for 10th July). The very strong demand for this latest bond issue provides further evidence of the insatiable appetite by the investing community for quality names. The mobilisation of excess liquidity in the banking system into the capital market (mainly into bonds/fixed income instruments) is clearly happening. Multiple quality issues of this size can easily be absorbed given the huge amount of idle savings by Maltese residents within the banking system.

In one of my recent articles published following the issuance of the prospectus by Hili Finance, I had highlighted the strong financial performance of the Hili Ventures Group which is anticipated to continue over the current as well as the next financial year with EBITDA expected to reach €160 million in 2025. This is a remarkable achievement which other Maltese public or private companies would find hard to emulate. The financial strength of the Hili Ventures Group is indeed very reassuring and in my view, it was one of the main factors underpinning the strong demand by the investing public.

One of the key financial metrics to gauge the financial strength of bond issuers is the net debt to EBITDA multiple. This is also used regularly across international financial markets. This metric indicates the number of years required for a company to repay its debt obligations normally composed of bank debt and bonds. The net debt to EBITDA multiple for Hili Ventures is expected to improve to 4.1 times in 2024 and 3.3 times in 2025 as a result of the anticipated continued growth in EBITDA.

As such, although Hili Ventures is now among the largest bond issuers in Malta with total corporate bond issuance of over €350 million and all due for redemption by 2029, the net debt to EBITDA multiple shows that the group can indeed repay all its bank debt and bonds by 2029 should its financial projections be achieved.

It is important to state that the presence of debt on a company’s balance sheet should not be regarded as a weakness or failure. Debt forms an important part of the capital structure of most companies. Internationally, even some of the largest and most successful companies have bank debt as well as bonds in issue. It would be unwise for companies to be totally debt-free if they have strong cash flow from ongoing operations.

Over recent weeks, most bond issuers published their Financial Analysis Summary providing financial projections for 2024. With this information now in public domain, one can assess the financial strength of each of the issuers or guarantors. Due to space restrictions, it is impossible to comment on each of the main findings that emerge from such an important analysis. However, it is immediately evident that there are a number of companies which truly possess very strong metrics. This should be very reassuring indeed for the investing community.

Although it is true that corporate bond issuers in Malta are not rated by a credit rating agency and are therefore classified as ‘unrated’, it is unfair to conclude that all the local bonds are highly risky and therefore have a strong chance of defaulting on their obligations.

From a quick review of the numerous documents published over recent weeks, I think it is fair to highlight that apart from Hili Ventures (and its largest subsidiary Premier Capital plc), there are various other companies that possess similar or even better credit metrics indicating a very low probability of default. This is important for investors seeking to channel idle liquidity into fixed income securities of companies without taking undue levels of risk.

Currently, there is another bond exchange offer being pursued. Hal Mann Vella Group plc is partly refinancing the €30 million 5 per cent bonds maturing in November 2024 through the issue of €23 million bonds at 5.35 per cent. Although the company’s debt metrics do not fall within the top quartile highlighted earlier (net debt to EBITDA multiple of 6.3 times and interest cover of 2.6 times for 2024), the progress over recent years especially since their debut on the bond market in 2014 is commendable. One would expect a strong take-up of this new offering by existing holders also in the light of the security attached to the bonds comprising a number of properties within the Hal Mann portfolio.

The secured or unsecured nature of bonds is another source of uncertainty by several retail investors. I had tackled this topic in the past but I don’t mind reiterating my views once again. The security feature should not be viewed as the all-important characteristic on which an investment decision is made. Investors should primarily assess the financial strength of an issuer or its parent company/guarantor before taking into consideration the security aspect.

In essence, an unsecured bond of a very strong company should have a higher ranking and feature more prominently in an investment portfolio than a secured bond of a company with poor financial metrics and high levels of debt.

The information in the Financial Analysis Summary gives sufficient information to assess the overall financial strength of issuers. Authors of such reports, however, ought to provide increased detail in other important sections of the reports, for example when explaining the variances between the actual results and previous year’s forecasts. This would help investors gain a better understanding of any challenges being faced by the issuer in question.

Unfortunately, there are many investors who are still only guided by any security offered and the coupon attached to an issue. The overall financial structure and strength of a company including the understanding of the ongoing profitability are more important attributes to ensure that a company can sustain its debt obligations.

While there are undoubtedly several good companies that offered bonds to the investing public in Malta, there are several others that have poor metrics. As such, investors need to remain truly vigilant and be mindful of the overall indebtedness of such companies before making any investment decisions.

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

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