Rating action

Scope Ratings GmbH has today assigned INDIS Malta Ltd (INDIS Malta) a long-term issuer and senior unsecured local- and foreign-currency rating of A+ with a Stable Outlook. The Agency has also assigned a short-term issuer rating of S-1+ in local and foreign currency with a Stable Outlook. 

The latest information on the rating, including rating reports and related methodologies, is available on this LINK.

Summary and Outlook

The A+ rating for INDIS Malta reflects: i) the explicit, unconditional, unlimited, direct and irrevocable guarantees of the Republic of Malta (A+/Stable) for the entity’s existing financial obligations; ii) strong government control and regular support mechanisms, underpinned by a robust legal framework; iii) its high strategic importance as a key government-related entity (GRE) implementing economic policies for the state; and iv) its dominant market position and stable profitability, which underpin the viability of its business model. Limited geographical and tenant diversification, exposure to cyclical industrial sectors – all a reflection of its public policy mandate –, and rising debt to fund its large investment programme are challenges. The Stable Outlook reflects Scope’s assessment that the risks INDIS Malta faces are manageable and remain balanced.

The ratings could be upgraded if the sovereign rating of the Republic of Malta were to be upgraded, further bolstering its capacity to provide support to the entity. Alternatively, the ratings could be downgraded in the event of: i) a downgrade of the Republic of Malta’s sovereign ratings; ii) changes in the institutional framework, notably weakening operational and financial linkages with the sovereign; and/or iii) a substantial increase in non-guaranteed debt without a commensurate increase in operating margins, leading to a significant weakening of debt metrics.

Rating rationale

The first driver underpinning the A+ rating is the explicit government support granted by the Republic of Malta (A+/Stable) in the form of unconditional, direct and irrevocable guarantees for 84% INDIS Malta’s outstanding financial obligations as of December 2021. The remaining 16% benefit from implicit liability support in the form of letters of comfort from the government that commit the Republic of Malta to ensure that all liabilities contracted by INDIS Malta will be met. These guarantees and formal forms of government support underpin Scope’s equalisation of the ratings with that of the Republic of Malta.

INDIS Malta also benefits from substantial regular government support beyond the explicit guarantees on its debt to underpin the expansion of its activities. The Concession Agreement with the state gives INDIS Malta rights to exclusively manage the largest industrial property portfolio in Malta at very favourable terms, effectively providing the entity with its single largest cash generating unit and cementing its robust domestic market position. Similarly, the government provides regular financial support for INDIS Malta’s infrastructure development activities via grants and capital injections. Scope notes that the entity’s EUR 472m capital expansion programme over the next five years is expected benefit from additional government guarantees.

In addition to the financial interlinkage with the government, INDIS Malta benefits from extensive operational links with the Republic of Malta, reflected in strong government control mechanisms which are reinforced by a robust legal framework which governs the entity’s activities by virtue of multiple public acts and legal notices. The Maltese state appoints the CEO and all members of the Board of Directors, must approve annual accounts, budgets and major investment programmes and is responsible for allocating property to eligible companies via Malta Enterprise, the state agency for economic development and investment promotion.

The A+ rating is further underpinned by INDIS Malta’s high strategic importance to the Republic of Malta. As the state’s sole administrator of public industrial property, the entity plays a pivotal role in achieving key economic policy objectives. By administrating and contributing to the development of government-owned industrial estates, INDIS Malta’s activities are crucial for supporting economic diversification, attracting inward foreign investment, job creation and skills development as well as addressing the scarcity of industrial land. This strategic role has been reinforced in the context of the Covid-19 crisis, as the government has placed an emphasis on industrial development in high-value added sectors that INDIS Malta supports. Scope deems changes in INDIS Malta’s status as that state’s sole industrial estate administrator to be remote.

Overall, Scope notes that the high degree of integration with the Republic of Malta, as reflected in robust control and regular support mechanisms, implies that INDIS Malta’s credit quality is highly intertwined with that of the sovereign.

The final driver supporting INDIS Malta’s A+ rating is its dominant market position and stable profitability which support its business risk profile. The long-term concession agreement signed with the Republic of Malta granted the entity the rights to manage the largest industrial property portfolio in the country. Given the scarcity of industrial land on the island, INDIS Malta effectively benefits from a quasi-monopolist position. This position is further reinforced by the entity’s pricing policies which set rental rates at below market prices, a reflection of the entity’s non-profit maximising, public policy mandate. In effect, INDIS Malta has no direct competitors, with other commercial real estate companies that are active domestically mostly catering to market segments that are not covered by INDIS Malta’s mandate. In addition, the entity benefits from a long-weighted average unexpired lease term of over 20 years and high occupancy rates of 99%, providing the entity with long-term visibility over its revenue streams and reducing cash flow volatility. These elements are reflected in INDIS Malta’s EBITDA margins, which have stayed between 55% and 64% over 2016-20 despite the disruption caused by the Covid-19 crisis.

Despite these credit strengths, INDIS Malta faces several credit challenges to the A+ rating.

INDIS Malta’s standalone credit quality is constrained by its high portfolio concentration, both in terms of geography and tenants. This is a result of INDIS Malta’s public mandate, which effectively restricts its activities to the island of Malta with a primary focus on promoting industrial development. Tenant concentration is also high given the material share of income coming from a limited number of key tenants, with INDIS Malta’s top three and top ten tenants accounting for 17% and 33% of total rental income respectively in 2020. In addition, total assets amounted to around EUR 256m as of October 2021, which is limited in an international context, implying higher sensitivity to shocks and key person risks. INDIS Malta is thus exposed to economic developments in Malta and its attractiveness for foreign investors. In particular, Malta’s recent grey-listing by the Financial Action Task Force or changes in the context of the OECD agreement on international taxation could adversely impact the country’s foreign investment attractiveness with negative knock-on effects for INDIS Malta’s ability to find new tenants.

Given its historical role in promoting the development of manufacturing activities, INDIS Malta’s portfolio is also highly exposed to cyclical industrial sectors. Close to 62% of the entity’s tenants operate in the manufacturing sector. In addition, its two largest tenants, which together account for 13% of total rental income, operate in the aviation industry and have thus been particularly hard hit by the Covid-19 pandemic although government support measures to industry have mitigated the impact on profitability.

INDIS Malta’s ambitious capital expansion plans, totalling EUR 472m over the next six years will help expand its inventory of industrial land, upgrade its facilities and enhance surrounding infrastructure and will support a reduction in concentration risks and foster economies of scale with positive implications for operating efficiency. Similarly, sectoral diversification is likely to improve moving forward given the extension of its target markets to non-manufacturing sectors including life sciences, ICT and other knowledge-intensive industries. At the same time, INDIS Malta will likely finance the majority of its capital programme through new borrowings, which will lead to a marked deterioration in its debt-to-EBITDA ratio in coming years. Interest coverage and debt-to-assets will be less affected given the commensurate growth in INDIS Malta’s asset base and favourable financing conditions. Scope expects INDIS Malta to benefit from government guarantees on most future debt issuance, which would mitigate risks associated with rising leverage levels. Renewed liability support from the government for INDIS Malta’s financial obligations reflects the strategic importance of its activities. However, Scope notes that any large-scale increase in non-guaranteed debt could present more material risks to INDIS Malta’s ratings given expected adverse developments in its financial profile.

Qualitative Scorecards (QS1 and QS2)

Provided that the GRE benefits from an ‘integral/strong’ level of integration with the government, Scope may apply the ‘top-down’ approach which takes the government’s rating as the starting point and then negatively adjusts it by up to three notches (although exceptions can apply). Equalisation of a GRE’s rating with that of its government is possible if an explicit guarantee exists.

Scope assigns a ‘strong’ level of integration between INDIS Malta and the Republic of Malta (QS1), reflecting i) ultimate public ownership by the state; and ii) the entity’s critical contributions to the government’s economic policies with the main purpose of providing a key public service in the public interest.

Scope applies the rating equalisation factor due to the explicit, unconditional, unlimited, direct and irrevocable guarantees granted by the Republic of Malta (A+/Stable) for most of INDIS Malta’s outstanding financial liabilities.

Scope assigns a ‘high assessment to the ‘control and regular government support’ for INDIS Malta (QS2) as a result of: i) the ‘high’ ability of the government to control the entity given its status as the ultimate owner and a robust legal framework governing the entity’s activities; and ii) the ‘high regular financial support for INDIS Malta’s operations in the form of regular government grants and equity injections to support the entity’s capital development plans; a favourable concession agreement which underpins the entity’s dominant market position, and the track record of government commitments to ensure the financial soundness of the entity.

Scope assigns a ‘high’ assessment to the ‘likelihood of exceptional government support’ for INDIS Malta (QS2), reflecting the entity’s ‘high’ strategic importance to the Maltese state given its pivotal contributions to key economic policy objectives through the development and administration of government-owned industrial properties. Substitution risks are assessed as low given the entity’s dominant position as the sole administrator of government-owned industrial land and its long-term concession agreement with the state, with no credible private actors capable of substituting its services. Scope assesses the hypothetical default implications to be ‘medium’ for the Maltese government. Such a scenario would likely trigger extraordinary government support to avoid the political and reputational consequences.

For further details, please see Appendix I of the rating report. 

Factoring of environment, social and governance (ESG)

Governance and social considerations are material to INDIS Malta’s rating and are included in Scope’s assessment of the entity’s level of integration with the sponsoring government, highlighting the robust legal framework which requires INDIS Malta to comply with its statutes and to fulfil its public mandate as the administrator of government-owned industrial land. The entity’s activities, which include the provision of key services to support the state’s industrial development and economic policy objectives on top of playing a key role in the government’s post-crisis recovery plan, also support social outcomes in Malta by fostering improvements in employment dynamics and contributing to skills development.

Alongside our assessment of rating-relevant credit risks, Scope considers long-term environmental developments, which did not play a direct role in this rating action. INDIS Malta is playing an increasingly important role in supporting the environmental transition of the country via the implementation of climate mitigation policies and the rehabilitation of disused land. The company’s large infrastructural investment programme, which includes several green initiatives, is important to the country’s transition to a less carbon intensive economy and sets the foundation for more sustainable growth. In addition, Scope notes positively that INDIS Malta has taken steps to reduce the environmental impact of its industrial estates, for instance, by promoting the adoption of solar panels on properties’ roofs. 

Rating Committee
The main points discussed by the rating committee were: i) legal frameworks and government control; ii) financial risk profile; iii) investment and funding plans; and iv) the Republic of Malta’s sovereign credit worthiness

Methodology
The methodology used for these Credit Ratings and/or Outlooks, (Rating Methodology: Government Related Entities,5 May 2021) is available on https://www.scoperatings.com/#!methodology/list.
Scope Ratings GmbH and Scope Ratings UK Limited apply the same methodologies/models and key rating assumptions for their credit rating services, while Scope Hamburg GmbH’s methodologies/models and key rating assumptions are different from those of Scope Ratings GmbH and Scope Ratings UK Limited.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other Services’, published on https://www.scoperatings.com/#!governance-and-policies/rating-scale. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://www.scoperatings.com/#governance-and-policies/regulatory-ESMA. Also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope Ratings’ definitions of default and Credit Rating notations can be found at https://www.scoperatings.com/#governance-and-policies/rating-scale. Guidance and information on how environmental, social or governance factors (ESG factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on https://www.scoperatings.com/#!methodology/list.
The Outlook indicates the most likely direction of the Credit Ratings if the Credit Ratings were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The Rated Entity and/or its Related Third Parties participated in the Credit Rating process.
The following substantially material sources of information were used to prepare the Credit Ratings: public domain and the Rated Entity.
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting these Credit Ratings originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data.
Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Ratings and/or Outlooks and the principal grounds on which the Credit Ratings and/or Outlooks are based. Following that review, the Credit Ratings were not amended before being issued.

Regulatory disclosures
These Credit Ratings and/or Outlooks are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and/or Outlooks are UK-endorsed.
Lead analyst Thibault Vasse, Senior Analyst
Person responsible for approval of the Credit Ratings: Dr. Giacomo Barisone, Managing Director
The Credit Ratings/Outlooks were first released by Scope Ratings on 10 December 2021.

Potential conflicts
See www.scoperatings.com under Governance & Policies/EU Regulation/Disclosures for a list of potential conflicts of interest related to the issuance of Credit Ratings.

Conditions of use / exclusion of liability
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