Bond Issue April 14, 2015

Transcription

1 KEY DETAILS Issuer: 45 million 5.75% 2025 ( IHI or Group ) Listing: 45,000,000 Offer Price: 100% (at par) Official List, Malta Stock Exchange Coupon: 5.75% Interest Payment Date: Annually on 13 May Maturity Date: 13 May 2025 Status: Unsecured Closing Date for Preplacement Offer: Closing Date for Existing Bondholders*: 29 April 2015 Minimum Application 30 April 2015 Minimum Application 25,000 and multiples of 100 2,000 and multiples of 100 Offer Period: 4 6 May 2015 (the offer period may close earlier due to oversubscription) Minimum Application 2,000 and multiples of 100 Recommendation: BUY or ACCEPT * Referring to holders of the 6.25% 2015/19 bonds ( Maturing Bonds ) (IHI) is tapping the local bond market for the ninth time since the company s inception 15 years ago. The new 45 million bond issue is earmarked to fund the redemption of the 35 million 6.25% Bonds ( Maturing Bonds ) which mature on 11 July 2015 and to partly finance the acquisition of the shares of Island Hotels Group Holdings plc. Existing bondholders of the maturing bonds are being given preference over new investors whilst 10 million are being reserved for new investors with applications of a minimum of 25,000 at pre-placement stage. OUR OPINION Since inception just over 15 years ago, IHI increased its room stock from 250 rooms to 2,928 rooms spread across 8 hotel properties in seven different countries. 7 of the 8 hotels are fully-owned while IHI has a 50% stake of the London property. As expected, the financial results for the year ended 31 December 2014 were weaker than those of the previous financial year as the challenges in Russia (sanctions from the US and EU, geopolitical conflict with Ukraine and significant depreciation of the Rouble) and Libya (disagreement between two governments and spurs of terrorist attacks) negatively impacted the performance of the Group s properties in these respective jurisdictions. Nonetheless, it is also encouraging that the fall in earnings before interest tax depreciation and amortisation (EBITDA) was partly offset by the record performance in the Group s other properties across Europe - once again highlighting the importance of the geographical spread achieved to date. Although the IHI Group maintained an overall profitable position from an operational point of view with an EBITDA of 28.9 million, it still reported a pre-tax loss of 29.8 million (2013: a loss of 4 million) after accounting for net impairments in the fair value of its properties, depreciation, interest costs as well as tax (including one-off tax charges related to the sale of the eleven apartments in London). The 2014 figures were also below the forecasts published in the Financial Analysis Summary (FAS) dated 31 July As explained above, given the unprecedented deterioration of the situation in Libya and Russia, the Group s actual EBITDA figure was 5.4% below the expected 30.5 million (reflecting lower revenues and higher costs) and its pre-tax loss was 16.7 million wider than the anticipated 13.1 million pre-tax loss in view of the negative overall fair value movements on the Group s properties which are not included in forecast figures given the unpredictability of such figures as they are dependent on a number of factors. The latest FAS published with the Prospectus dated 10 April 2015 in connection with this new 45 million bond issue also provides a revised forecast for The forecasted 2015 EBITDA figure was reduced by 15.3% as the prevailing challenges in Russia and Libya are expected to further impact the Group s hotels in these two countries during the current financial year. Nonetheless, this EBITDA level still represents an 8.6% increase over the comparable figure for 2014 as the Group s other properties (excluding London) are expected to continue building on the success achieved over recent years particularly the hotels in Budapest and Lisbon. Although the hotel in London, which is not consolidated with the Group s results since IHI only has a 50% shareholding in the property, is expected to improve its performance over 2014 (largely due to further increases in room rates as occupancy is in line with that of its competitive set), the projected results for 2015 were still lowered probably due to the fact that the actual results of this hotel during 2014 were below forecasts. In fact, during a recent briefing with the financial community, the top executives of IHI explained that the results of the London property were lower than the ambitious forecasts for 2014 due to a number of factors including the timing of Ramadan which impacted occupancy at the peak month of July, the lack of a major event in London during 2014, increased supply of hotel rooms, and some degree of inefficiency in transforming the additional revenue generated into profitability as the property is still approaching its maturity stage. Overall, the IHI Group is expected to generate EBITDA of 31.3 million during 2015 and incur a pre-tax loss of 4.5 million (excluding any property impairments or revaluations). Author: Edward Rizzo - edward.rizzo@rizzofarrugia.com

2 The March 2015 FAS also provides projections for the 2016 financial year during which the IHI Group is expected to register a further recovery in the EBITDA figure to 35.8 million (2015 forecast: 31.3 million) and a marginal pre-tax profit of 4 million (2015: forecasted pre-tax loss of 4.5 million). The potential downside to the 2015 forecasts and 2016 projections include further fair value impairments on the Group s properties, deterioration of the situation in Russia and Libya as well as loss of momentum from the Group s other properties. However, these forecasts exclude any contribution from the imminent acquisition of the entire issued share capital of Island Hotels Group Holdings plc (IHG). In its latest financial year ended 31 October 2014, the IHG Group reported an EBITDA of 8.8 million which would be a meaningful contribution to the current level of IHI s earnings. Furthermore, the eventual approval of the mixed-use project in St George s Bay in Malta where three properties are currently located, which will be phased over a number of years, is likely to lead to an uplift in the value of the land and improved revenue streams over the longer-term. Additionally, the IHI Group strategy is being veered away from the more capital intensive model of owner, developer and operator, to a much less capital intensive strategy whereby IHI will act as originator, developer and operator (under the Corinthia brand) on behalf of third party investors and owners. In this respect, during a recent meeting with the financial community, the top executives of IHI noted that discussions are currently on-going to secure a property located in a large European city under this new business model. The development of this new property presumably in the centre of Rome on behalf of a globally recognised sovereign wealth fund would generate fee income during the development phase. Upon conversion into a luxurious property, CHI will then secure a long-term management agreement. Given the growing brand awareness of Corinthia, IHI aims to secure similar arrangements in the future in other jurisdictions including New York. Moreover, at the opportune time, IHI will also consider disposing of other properties following the sale of 11 residences in London. IHI s executives did not exclude the sale of one or more hotel properties in the coming years subject to maintaining the hotel under management by CHI. In spite of the challenges being faced by the Group in Libya and Russia, the interest cover remained at a healthy level of 2.2 times in Furthermore, bond investors should also be encouraged that the interest cover ratio will remain well above 2 times going forward. Similarly, the Group s gearing ratio (total debt divided by total debt plus shareholders funds) has been maintained at an adequate level of 33.5% as at 31 December 2014 and is envisaged to remain at a manageable level going forward. Notwithstanding this, the working capital deficiency is disappointing and needs to be addressed in the short-term. In view of the Group s geographical spread, its plans going forward and the adequate key financial metrics, we believe IHI should be in a position to continue to service its debt obligations in a timely manner. It is also important to highlight that the lender of the 40 million loan on the Corinthia Hotel in Tripoli has agreed to the postponement of capital repayments until the current situation carries on. Moreover, in our view, the premium of 465 basis points over the yields currently offered by Malta Government Stocks (MGS) of similar maturity adequately compensates for the risk inherent in IHI s business in certain locations. Therefore, we recommend holders of the maturing 6.25% bonds to ACCEPT to exchange their existing holding for an equivalent amount of the new bonds. We also place a BUY recommendation for new investors but highlight the fact that the chances of obtaining a meaningful allocation are limited given that the majority ( 35 million out of the 45 million on offer) of the bond issue is being reserved for the holders of the maturing bond. BEFORE CONTEMPLATING AN INVESTMENT IN THE BONDS, PROSPECTIVE INVESTORS ARE ENCOURAGED TO CONSIDER ALL THE RISK FACTORS LISTED IN THE PROSPECTUS. THIS IS AVAILABLE FOR DOWNLOAD ON OUR WEBSITE. PROFILE OF INTERNATIONAL HOTEL INVESTMENTS PLC IHI was incorporated in March 2000 by the Corinthia Group to invest in a balanced portfolio of mixed-use developments with hotel properties being their main component. IHI s principal shareholders are Corinthia Palace Hotel Company Ltd (58.78%), Istithmar Hotels FZE of Dubai (22.05%) and LFICO (11.03%). The remaining balance of 8.14% is held by the general investing public. The shares of IHI were listed on the Official List of the Malta Stock Exchange in April 2000 and the Company currently has a market capitalisation of million. In December 2010, IHI purchased the Corinthia brand from its parent company Corinthia Palace Hotel Company Ltd (CPHCL) for 19.6 million. The agreement also provided that until 2020, any addition to the portfolio of Corinthia branded rooms will result in an additional payment of 6,400 per room to CPHCL. Hotel Properties: The IHI Group has a stock of 2,928 rooms across the following 8 properties: Corinthia Hotel Budapest & Residences, Hungary (100%); Corinthia Hotel St Petersburg & Commercial Centre, Russia (100%); Corinthia Hotel & Spa Lisbon, Portugal (100%); Corinthia Hotel St. George s Bay, St Julians, Malta (100%); Corinthia Hotel Prague, Czech Republic (100%); Corinthia Hotel Tripoli & Commercial Centre, Libya (100%); Marina Hotel, St. George s Bay, St Julians, Malta (100%); Bond Issue 2

3 Corinthia Hotel & Residences, London, UK (50%) The remaining 50% is held by Libyan Foreign Investment Company (LFICO). The Metropole Building was converted into a 294-room five-star Corinthia Hotel which commenced operations in April Meanwhile, the adjacent building (known as 10 Whitehall Place) had been converted into 12 luxury apartments. 11 residences were sold in 2014 and the penthouse was retained but will be sold in the future. Other Operating Assets: CHI Ltd (100%) This fully-owned subsidiary currently manages the eight hotel properties listed above as well as another four hotels owned by the Corinthia Group and other third party hotel owners. Quality Project Management Ltd (20%): In April 2000, IHI acquired a 20% shareholding in the construction project management company of the Corinthia Group. This company offers a range of project, construction and cost management services both in Malta and overseas. In August 2012, David Xuereb and Associates integrated with QPM to provide more comprehensive professional services within the construction industry. Future Developments: On 16 January 2015, IHI revealed that it has executed a preliminary conditional agreement with the majority shareholders of Island Hotels Group Holdings plc (IHG) with a view to consider making a voluntary offer to acquire the entire issued share capital of IHG. IHI indicated a tentative net equity value of 50 million for IHG which consideration will be made through a cash payment of 1 per share (split into two tranches with the first tranche of 0.55 to be paid on execution of the transaction and the second tranche of the remaining 0.45 will be paid within twelve months) as well as IHI shares per 1 IHG share held. IHI also has a 25% shareholding in Medina Tower Joint Stock Company which was set up for the purpose of developing the Medina Tower, a 200,000 square metre development over a land measuring 13,000 square metres in the centre of Tripoli. Furthermore, IHI holds a 55% interest in Libya Hotels & Developments JSC, a company set up for the purpose of acquiring a site in Benghazi earmarked for the development of a five star hotel and other mixed-use property. However, in the light of the prevailing situation in Libya, works on these two projects have been put on hold. RISK FACTORS It is recommended that potential investors read the Risk Factors found in the Registration Document within the Prospectus dated 10 April 2015 on pages 7 to 12 and in Section 2 of the Securities Note found on pages 7 to 8. Copies of the Prospectus are available from our website USE OF PROCEEDS The net proceeds from the Bond issue, estimated at 44.1 million after issuance costs, will be principally used by the Issuer for the following purposes: (i) (ii) to finance the early redemption of the outstanding 35 million 6.25% bonds; In the event that the subscriptions received do not exceed 35 million, the redemption of the remaining balance of Maturing Bonds shall be financed from IHI s general cash flow. to part finance the first tranche of 20.1 million forming part of the consideration to be paid to the shareholders of Island Hotels Group Holdings plc in connection with the proposed acquisition of all its shares (circa 9.1 million). In the event that IHI decides not to proceed with the acquisition of the Island Hotels Group Holdings plc, the proceeds from the Bond issue shall be applied to reduce the Group s bank indebtedness. RANKING OF THE BONDS The Bonds constitute the general, direct, unconditional and unsecured obligations of the Issuer and shall at all times rank pari passu, without any priority or preference among themselves and with other unsecured debt. FINANCIALS The tables below provide extracts of the consolidated financial statements of for the 4 years ended 31 December 2011 to 2014 as well as the forecast for 2015 and projection for 2016 included in the Financial Analysis Summary (Annex III of the Prospectus). International Hotel ACTUAL ACTUAL ACTUAL ACTUAL FORECAST PROJECTION Investments plc Income Statement Extracts Turnover 104, , , , , ,888 Net Operating Expenses (57,416) (66,634) (64,990) (69,139) (65,170) (69,250) EBITDA 22,378 27,725 34,981 28,850 31,319 35,824 Depreciation and amortisation (24,429) (24,208) (23,763) (18,390) (18,482) (18,814) Impairment (losses)/reversals (2,497) (7,796) 5,000 2, Revaluation of investment property 5,448 4, (15,391) - - Share of profit / (loss) from equity accounted investments 1,155 4,970 (5,788) (14,537) (4,042) (94) Net Interest payable (13,899) (16,783) (15,940) (13,035) (12,392) (12,025) Profit / (Loss) before tax (11,811) (11,383) (4,033) (29,835) (4,477) 4,011 Profit / (Loss) for the year (10,398) (10,263) 266 (16,266) (6,526) (2,581) Bond Issue 3

4 Revenue, EBITDA, Profit/(Loss) after tax ( millions) Interest Cover (times) Gearing Ratio (%) Bond Issue Balance Sheet Extracts Total Assets 1,066,829 1,087,212 1,092,672 1,012, , ,271 Total Liabilities 464, , , , , ,403 Total Cash 28,008 18,646 12,551 19,480 26,255 15,394 Shareholders Funds (including Minority Interest) 602, , , , , ,868 Key Financial Ratios (F) 2016 (P) Return on Equity (%) Profit before tax / Average Shareholders Funds N/A N/A 0.04% N/A N/A 0.44% Return on Assets (%) Profit for the year / Average Total Assets N/A N/A N/A N/A N/A 0.41% EBITDA ( 000) 22,378 27,725 34,981 28,850 31,319 35,824 EBITDA margin (%) 21.5% 23.4% 28.3% 24.8% 27.2% 28.9% Net Interest payable (13,899) (16,783) (15,940) (13,035) (12,392) (12,025) Interest Cover (times) 1.61x 1.65x 2.19x 2.21x 2.53x 2.98x Net Debt ( 000) Total borrowings less cash in hand 298, , , , , Total Shareholders Funds ( 000) 602, , , , , ,868 Debt to Equity ratio (times) Net Debt / Shareholders funds 0.49x 0.55x 0.49x 0.47x 0.44x 0.40x Gearing ratio (%) Total Borrowings / (Total Borrowings + Shareholders funds) 35.1% 36.6% 33.8% 33.5% 32.9% 30.1% The adverse impact of the weakening performances in Russia and Libya on the Group s results in 2014 is expected to continue in 2015 as the challenges in the respective countries are not expected to abate during the current financial year ending 31 December As a result, revenue in 2015 is being forecasted to drop by a further 1.2% to just under 115 million. Although the forecasted improvements in the Group s other properties in Europe (excluding London) is expected to lift EBITDA by 8.6% to 31.3 million and London is anticipated to register further improvements (especially on room rates), after accounting for depreciation and finance costs, the Group is still expected to remain in a loss-making position during An initial recovery is projected during 2016 as the Group is expected to register a pre-tax profit of just over 4 million with Russia and Libya expected to stabilise and most of the Group s other properties registering further improvements. The projections do not account for any fair value adjustments of investment property as well as changes in the value of hotel properties as these two items are very volatile and therefore difficult to forecast. Moreover, the projections do not include any contribution from the potential acquisition of Island Hotels Group Holdings plc. During the last financial year to 31 October 2014, IHG reported an EBITDA of 8.8 million and its Statement of financial position showed total shareholders funds of 40.4 million Revenue, EBITDA & Profit/(Loss) after tax 3.5 Interest Cover & Gearing Ratio 39% % % % % 0 29% % (F) 2016 (P) Revenue EBITDA Profit/(Loss) after tax (F) 2016 (P) 25% Forecast figures for 2015 and projections for 2016 do not account for any possible impairments / reversals on the value of hotel properties and changes in the fair value of investment properties. Interest Cover Gearing Ratio APPLICATION PROCEDURE For Preplacement Offer: Investors wishing to participate at the pre-placement stage are kindly asked to complete our Application Form. This must be returned to us by Wednesday 29 April at hrs. Applications must be for a minimum of 25,000 (nominal) and in multiples of 100. For Bondholders of Maturing Bonds: Holders of the Maturing Bonds are kindly asked to complete and sign the preprinted Application Form A sent by and return it to our office by 30 April at hrs accompanied by a duly completed Investor Declaration form which is available upon request. Existing bondholders are being given preferential allocation for the amount of existing bonds currently held, rounded up to a minimum of 2,000 (if applicable). Holders of the maturing bonds wishing to apply for more bonds may do Bond Issue 4

5 so by including such amount in Box 2 of the pre-printed Application Form A. However, in view of the fact that the majority of the new issue of 45 million is reserved for the holders of the redeeming bond of 35 million, the chances of obtaining a meaningful allocation on any excess amount applied are very remote. The excess amount applied will be considered during the General Public Offer with no preferential allocation. For General Public: Investors wishing to participate at the General Public Offer stage are kindly asked to complete our Application Form. This must be completed, signed and returned to us by Monday 4 May 2013 at hrs. Applications must be for a minimum of 2,000 and in multiples of 100. However, in view of the fact that the majority of the new issue of 45 million is reserved for the holders of the redeeming bond of 35 million while 10 million is available for preplacement, the chances of obtaining a meaningful allocation are very remote. Subscriptions must be accompanied by the appropriate payment (if any). In the case of existing bondholders holding less than 2,000 (nominal), the difference between the minimum application amount and the number of bonds actually held as indicated in Box 3 must be settled. Payment may either be sent by cheque (payable to 'Rizzo, Farrugia & Co. Stockbrokers Ltd - Clients A/C') or transferred by direct credit into either one of our Clients Accounts as detailed below: HSBC Bank Malta plc Bank of Valletta plc EUR A/C No IBAN MT46 MMEB MT18 VALL SWIFT CODE MMEB MTMT VALL MTMT For further information including the Risk Factors, prospective investors should read the Prospectus published by the Issuer in accordance with the provisions of Chapter 4 of the Listing Rules issued by the Listing Authority and in accordance with the provisions of Commission Regulation (EC) No 809/2004 of 29 April, Copies of the Prospectus dated 10 April 2015 are available by upon request or from our website at This document has been prepared by Edward Rizzo, Director, Rizzo, Farrugia & Co. (Stockbrokers) Ltd based on the Prospectus dated 10 April 2015 issued by International Hotel Investments plc. It is intended solely for distribution to its clients. Any information in this report is based on data obtained from sources considered to be reliable, but no representations or guarantees are made by RFC with regard to the accuracy of the data. The opinions contained herein constitute our best judgement at this date and time and are subject to change without notice. This report is for information purposes only. It is not intended to be and should not be construed as an offer or solicitation to acquire or dispose of any of the securities or issues mentioned herein. Since the buying and selling of securities by any person is dependent on that person s financial situation and an assessment of the suitability and appropriateness of the proposed transaction, no person should act upon any recommendation in this report without first obtaining professional investment advice. RFC accepts no responsibility or liability whatsoever for any expense, loss or damages arising out of, or in any way connected with, the use of all or any part of this report. RFC, its directors, employees or clients may have or have had interests in the securities referred to herein, and may at any time make purchases and/or sales in them as principal or agent. Past performance is not necessarily a guide to future returns. The value of investments and the income derived therefrom may fall as well as rise and investors may not get back the amount originally invested. Bond markets are volatile and subject to fluctuations which cannot be reasonably foreseen. No part of this report may be reproduced at any time without the prior consent of RFC. RFC did not disclose the recommendation to the company/ies mentioned herein prior to the dissemination of this report. By accepting this report and acting on the information contained therein, the reader confirms that he/she acknowledges, understands and accepts the terms, conditions and risks associated with such investment, and the clauses outlined in this disclaimer. All intellectual property and other rights reserved. Bond Recommendation Gradings: Our recommendations are graded as follows: STRONG BUY or ACCEPT AND ADD (in the case of bond exchange offers) - The Company s financial performance and ratios are strong. Risk is relatively low and the interest rate adequately compensates for the level of risk undertaken. BUY or ACCEPT (in the case of bond exchange offers) - The Company s financial performance and ratios are good. Risk is manageable and the interest rate is commensurate to the level of risk undertaken. WEAK BUY or ACCEPT WITH CAUTION (in the case of bond exchange offers) - Although the Company s financial performance is acceptable and financial ratios are reasonable, the interest rate does not adequately compensate investors for the present levels of risk/uncertainty and as such we recommend a small exposure to such instruments. HOLD or REJECT (in the case of bond exchange offers) - The Company s financial performance is weak and its financial ratios are presently acceptable. However, we are cautioning in view of certain circumstances which may lead to significantly increased levels of risk and which should be carefully assessed. SELL - The Company s financial performance is weak and the company s ratios are poor indicating a higher level of risk. Investors holding bonds in such a company should consider disposing of their holdings. AVOID - The Company s financial performance is weak and the ratios are poor indicating a high level of risk. As such we do not recommend an exposure to such a bond. NOT RATED - Mainly due to the lack of sufficient information/ data to analyse the company s state of affairs, the Company is not rated. UNDER REVIEW - The previous rating, if any, is no longer in effect and should not be relied upon until a revised analysis of the company is completed. Bond Issue 5