This past week we have seen the announcement of two new bonds with similar features being issued by two different companies, namely MIDI Plc and International Hotel Investments (IHI) Plc. Both bonds will have a 4% coupon and will mature in 10 years’ time. Furthermore, both are secured, meaning both issuers have safeguarded specific assets that will be tied to the issue of the bonds.
Instead of going through the salient features in great detail I thought it would be more interesting to offer a comparison of one bond against the other. This should help investor to decide which one to opt for if they intend to invest into them.
4% MIDI Plc 2026
4% IHI 2026
|Principal Activity||“development and disposal of immovable property situated in Malta at Tigné Point, Sliema and Manoel Island, Limits of Gzira. MIDI operates principally in the high-end segment of the property market in Malta.
“In June 2000, the Company acquired land comprising Tigné Point and Manoel Island from the GOM by title of temporary emphyteusis for a period of 99 years as from 15 June 2000. Construction works commenced in late 2000. Under the same Emphyteutical Deed, the Issuer also acquired from the Malta Maritime Authority, for a period of 99 years, the right to develop and operate a yacht marina on a defined area facing the south shore of Manoel Island in Ta’Xbiex Creek, Limits of Gzira”
|“ownership, development and operation of hotels and ancillary real estate in Europe and North Africa.
To date, IHI has acquired and/or developed hotels in Prague (Czech Republic), Tripoli (Libya), Lisbon (Portugal), Budapest (Hungary), St Petersburg (Russia) and St Julian’s (Malta). NLI is a joint venture between IHI and LFICO, each party holding 50% of the issued share capital in NLI. NLI owns the 294 roomed luxury hotel and residential development in London (UK)”
|Security||Various properties owned by the Company plus shares in T14 Investments Ltd||The Hungarian company IHI Magyarország Zrt is listed as a Guarantor.|
|Major Risk Factors||The bond is backed by what the Company owns and the Company depends on the selling of high end properties and the leasing of commercial spaces. So if the high end market had to take a hit not only would the Company be in trouble, but even the security of the bond would lose value!||The Company is suffering losses from its ownership of the hotel in Libya and the hotel in St. Petersburg due to the ongoing turmoil and political unrest plus weak currencies in these countries. This is being compensated by the positive results in the other countries, yet still in 2015 the company registered a loss. The highest risk going forward is the major project that the Company is considering for the St. George’s Bay area. So tourism and real estate are the areas that will determine the success going forward.|
|Risk-Reward Ratio||Not worthwhile. The risk involved in definitely not worth the reward of a fixed 4% for 10 years. Having said that, the 4% level is in line with what the secondary market bonds are going for so the Company is right to issue such a low interest rate||Same as for MIDI.|
|Reason for the Issue||To pay off the maturing bonds worth around €40.8mln, paying off other obligations and general maintenance and restoration work||To pay off obligations of the group in respect of outstanding debt and acquisition costs, plus a maximum of €10mln on professional fees for the St George’s Bay Development.|
|Chances of Allotment||Quite Low unless you hold the old bonds – with €40.8mln replacing existing bonds which one would expect an acceptance level of 80-90% and €2mln earmarked for the shareholders of the Company there is not expected to be much left for the general public.||Medium – One would expect high demand for the bonds given the lack of available options. €30mln is earmarked for shareholders, even if this is fully taken up by existing shareholders there are still €25mln left for the general public.|
|Treatment of Existing Bondholders||Unfair. Part of the existing bonds being replaced are denominated in GBP. The conversion rate for the GBP bonds (since the new ones will be issued solely in EUR) was established after the Brexit at €1:£0.834, so the GBP bondholders got a rotten deal on the exchange. On top of that existing holders who used to earn 7% will not be earning 7% until December which is the actual maturity date of the existing bonds. If existing bond holders invest into the new bond they will start earning 4% from when it is issued and forgo the difference in rates until December.||Much Better! In the past whenever IHI or Corinthia have rolled over existing bonds they always paid the full interest until the maturity date of the bond, even when they rolled over for a lower amount. In such cases the company would have paid the difference in the two rates so that the investor is not left worse off for investing into the company again.|
|Would I Buy and Hold?||NO. At 4% fixed for 10 years and given the risk involved I would not expect this to be a great addition to a portfolio to keep until maturity. To keep short term and earn the 4% interest until something better comes alone, ok. But if the price goes up enough, I would definitely sell out and take the profits.||Same as for MIDI.|
|Expected Demand||High. The fact of the matter is that there are not many alternatives and investors have accepted a higher risk tolerance for lower returns (even if they have not realised it yet).||Same as for MIDI.|
The Bottom Line
Comparing the two issues one has to keep in mind that with neither is one getting a good deal here. Having said that they are offering what one could find on the market with other existing bonds which are yielding between 3.5%-4% for similar risk bonds. When deciding between the two one has to keep in mind the chances of being allotted a decent amount for the amount applied. My notes in the above table should be kept in mind, the clear winner would be the IHI bond on this point.
A worrying point in my opinion is the treatment given to these issued by the listing authority which actually shapes the terms and conditions under which the bonds may be sold. Towards the end of 2015 and beginning of this year we had the complex BOV bond issues which were very restricted in to whom they could be sold. A few months ago we had the GlobalCapital roll over which was also very restrictive in o whom it could be sold. Now we have these two issues which are open to anyone. This begs the questions:
- Is MIDI really that much safer than GlobalCapital?
- Are MIDI or IHI safer than BOV as an issuer? – definitely not!
- Is the security being put forward that safe?
- How will the assets of both MIDI and IHI be affected by the Brexit and the concerns in the EU?
- How big of a concern is the exposure to Libya for IHI – both directly and through its strategic partners the Libyan Foreign Investment Company (LAFICO) and its ownership though MIH Plc?
As usual, before investing into any of the mentioned financial instruments please consult the prospectuses and a good financial adviser. Kindly note the usual general disclaimer that applies to all my publications.