Rating action

Scope Ratings GmbH (Scope) has today affirmed INDIS Malta Ltd.’s (INDIS Malta) long-term local- and foreign-currency issuer and senior unsecured debt rating at A+ with Stable Outlook. Scope has also affirmed the short-term issuer rating at S-1+ in local and foreign currency with Stable Outlook.

The A+ rating of INDIS Malta reflects the following drivers:

• Integration with the public sponsor: The rating is underpinned by INDIS Malta’s integration with its public sponsor, the Republic of Malta (A+/Stable). This reflects its activities which are undertaken on behalf of the state and in the public interest, and substantial financial ties to the government of the Republic of Malta through a full public ownership.
   
• Explicit government guarantees: INDIS Malta’s credit quality is aligned with that of the Republic of Malta thanks to explicit guarantees that cover around 87% of the entity’s outstanding debt as of September 2024, granting creditors a direct claim against the state in case of financial difficulties.
   
• Control, regular support and likelihood of exceptional support: INDIS Malta’s has close ties with the Republic of Malta, which exerts strong control over its activities, strategic orientation and governance. Financial support, provided through investment grant funding and government guarantees, further bolsters this relationship. Moreover, the likelihood of exceptional support is considered ‘high’ due to INDIS Malta’s strategic importance, low substitution risk, and the tangible costs associated with a hypothetical default.
   
• Stand-alone fundamentals: INDIS Malta’s stand-alone fundamentals reflect its policy mandate. The entity benefits from its quasi-monopolistic position as the sole administrator of government-owned industrial land. This supports INDIS Malta’s dominant market position and its stable profitability. However, limited geographical and tenant diversification, exposure to cyclical industrial sectors – all a reflection of its public policy mandate –, and elevated debt amid rising development costs and higher interest rates are credit challenges.

Rating rationale

The first driver of the A+ rating is the integration of INDIS Malta with the Republic of Malta, which underpins Scope’s adoption of its ‘top-down’ approach to the ratings.

INDIS Malta’s strong integration with its public sponsor is reflected in its 100% public ownership, through which state control is exercised. The Republic of Malta is INDIS Malta’s sole ultimate shareholder, with 9,999 out of 10,000 shares directly held via the Ministry of Finance, and the remaining share via a government-owned entity (Malta Investment Management Company). In addition, INDIS Malta’s activities are conducted on behalf of the Republic of Malta to support industrial development and economic policy objectives. The entity develops and manages government-owned industrial land by letting to strategically important industrial players at below-market rates. These operations are conducted on a non-profit maximising basis and for the public benefit.

The second driver of the A+ rating is the explicit liability support provided by the Republic of Malta, which underpin Scope’s equalisation of the ratings with those of the sovereign.

The Republic of Malta¹ has historically provided unconditional, direct and irrevocable guarantees for INDIS Malta’s financial obligations since the entity began operations in 2004. As of September 2024, over 87% of INDIS Malta’s outstanding debt benefitted from explicit, unconditional, direct, and irrevocable guarantees from the Republic of Malta. The remaining 13% benefits from liability support in the form of letters of comfort from the government that commit the Republic of Malta to ensuring that all liabilities contracted by INDIS Malta will be met. As such, creditors have a direct claim against the state for the majority of INDIS Malta’s financial obligations, a key credit strength for the issuer ratings. There are currently no plans for any debt issuance without a sovereign guarantee.

The third driver of the A+ rating is the strong degree of control exercised and evidence of financial support provided by the public sponsor as well as its high likelihood of exceptional support for INDIS Malta.

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

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 deems the likelihood of exceptional support for INDIS Malta to be ‘high’ if it encountered financial difficulty. As the state’s sole administrator of public industrial property, INDIS Malta 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 pandemic, 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, resulting in low substitution risks given the lack of credible alternatives. Finally, a hypothetical default would entail some political and reputational costs as well as constrain industrial development in the Maltese economy. It could also adversely impact other GREs supported by the state given the associated lower credibility of implicit or explicit government support for such entities.

Finally, the A+ rating acknowledges the importance of INDIS Malta’s public mandate for its stand-alone fundamentals, including a dominant market position and stable operating performance but also significant concentration risks. Financial risks consist of elevated debt amid rising development costs and interest rates.

INDIS Malta benefits from its dominant market position, as the sole administrator of government-owned industrial properties. The entity’s property portfolio consists of 16 main industrial sites covering over 3.4m square meters with close to 1000 tenants. It effectively has a quasi-monopolist market position thanks to its administration of the single largest industrial portfolio in Malta and its service offering at preferential rates. Demand for INDIS Malta’s services and properties structurally exceeds supply given the scarcity of land in the country, supporting stability in its EBITDA margin which has been fluctuating around 50% and 60% over 2016-23 despite the turmoil caused by the Covid-19 pandemic and the cost-of-living crisis. INDIS Malta’s business risk profile 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 major tenants. In addition, total assets amounted to around EUR 286m as of December 2023, which is limited in an international context, implying higher sensitivity to shocks and key person risks.

INDIS Malta’s financial risk profile is characterised by elevated debt levels mitigated by a strong interest cover. Leverage has been declining in recent years, with INDIS Malta’s loan-to-value ratio declining from 85% in 2017 to 79% in 2023 thanks to sustained growth in its asset portfolio. This is also reflected in the improving net debt-to-EBITDA ratio which declined from about 17x in 2017 to 10x in 2023. Risks associated with elevated debt are mitigated by an interest cover that has remained solidly anchored in 2023 (3.6x) on its long-term average (3.5x), reflecting INDIS Malta’s favourable funding conditions that are underpinned by government support. Scope expects INDIS Malta’s debt metrics to moderately weaken in coming years, given development and maintenance cost pressures as well as rising interest rates. Upward pressure on INDIS Malta’s interest payment burden is likely to persist given that almost all of its debt is variable rate and mostly indexed to the Euribor rates, which have peaked in 2023. However, credit risks associated with INDIS Malta’s debt are mitigated by explicit liability support from the Republic of Malta.

Outlook and rating sensitivities

The Stable Outlook reflects Scope’s assessment that risks to the ratings are balanced over the coming 12 to 18 months.

Upside scenarios for the ratings and Outlooks are (individually or collectively):

1. The ratings of the Republic of Malta were to be upgraded.

Downside scenarios for the ratings and Outlooks are (individually or collectively):

1. The ratings of the Republic of Malta were to be downgraded.
    
2. Changes in the institutional framework weakened operational and financial linkages with the sovereign.
    
3. Non-guaranteed debt increased substantially.
    
4. The entity’s business or financial risk profile and/or governance quality weakened materially.

Qualitative Scorecards (QS1, QS2)

Scope applies a top-down approach (QS1) in assessing the creditworthiness of INDIS Malta, which takes the public sponsor’s rating (Republic of Malta: A+/Stable) as the starting point and then potentially negatively adjusts it based on the assessment of i) control and regular support; and ii) likelihood of exceptional support (QS2). The approach also includes a supplementary analysis of INDIS Malta’s business and financial risk profiles.

The adoption of the 'top-down approach’ (QS1) reflects a “medium” degree of integration between INDIS Malta and its public sponsor, the Republic of Malta, resulting from: i) a ‘limited’ integration assessment for its legal status; ii) a ‘high’ integration assessment regarding its purpose and activities; iii) a ‘high’ integration assessment on shareholder structure; and iv) a ‘limited’ integration assessment for its financial interdependencies.

Scope recognises the importance of explicit, unconditional, unlimited, direct and irrevocable guarantees that cover the vast majority of INDIS Malta’s debt for its credit quality by equalising the rating with that of the Republic of Malta.

Scope assesses control and regular support for INDIS Malta as ‘high’ (QS2) as a result of: i) the ‘high’ control from the public sponsor over its strategic and operational decision-making; ii) the ‘high’ control over its key personnel, governing and oversight bodies; and iii) the ‘medium’ evidence of financial support provided to the entity by its public sponsor.

Scope assesses the likelihood of exceptional support to be ‘high’ (QS2), reflecting: i) a ‘high’ assessment for INDIS Malta’s strategic importance; ii) ‘high’ substitution difficulty; and iii) a ‘medium’ assessment of the implications resulting from a hypothetical default of the entity.

The assessments under QS1 and QS2 result in an indicative rating of A+ for INDIS Malta. The supplementary analysis of its stand-alone business and financial risks did not lead to an adjustment, resulting in a final rating of A+. This reflects stand-alone credit risks mitigated by the state liability support mechanisms.

The results were discussed and confirmed by a rating committee.

Factoring of Environment, Social and Governance (ESG)

ESG factors material to INDIS Malta’s credit quality are captured by Scope’s rating approach through several analytical areas.

Scope's A+ rating for the Republic of Malta, INDIS Malta’s public sponsor, includes an appraisal of ESG factors, which are weighted at 25% overall per Scope's ‘Sovereign Ratings’ methodology.

INDIS Malta’s pivotal role for the state’s economic policies and source of job-rich growth, as the sole administrator of government-owned land for the public benefit is captured in Scope’s ‘high’ assessment for purpose & activities and ‘high’ assessment of strategic importance to the public sponsor. Scope also captures the social consequences of a disruption in INDIS Malta’s activities under its ‘medium’ assessment of default implications. Governance considerations are captured in the ‘high’ assessments of government control over INDIS Malta’s strategic and operational decision making and key personnel, governing & oversight bodies, highlighting the extensive government oversight over its activities.

Alongside the assessment of rating-relevant credit risks, Scope considers long-term environmental developments. 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. Finally, 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) developments in the Republic of Malta’s credit quality; ii) INDIS Malta’s operational and financial ties to the sovereign; iii) liability support mechanisms for outstanding debt; and iv) INDIS Malta’s business and financial risks.

Rating driver references
1. Scope affirms the Republic of Malta’s long-term foreign-currency ratings at A+ with Stable Outlook, August 2024

Methodology
The methodology used for these Credit Ratings and/or Outlooks, (Government Related Entities Rating Methodology, 4 September 2024), is available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
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-governance/definitions-and-scales. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://scoperatings.com/governance-and-policies/regulatory/eu-regulation. 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-governance/definitions-and-scales. 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://scoperatings.com/governance-and-policies/rating-governance/methodologies.
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 and/or Outlooks 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: Thomas Gillet, Director
Person responsible for approval of the Credit Ratings: Jakob Suwalski, Senior Director
The Credit Ratings/Outlooks were first released by Scope Ratings on 10 December 2021. The Credit Ratings/Outlooks were last updated on 17 November 2022.

Potential conflicts
See www.scoperatings.com under Governance & Policies/Regulatory for a list of potential conflicts of interest disclosures related to the issuance of Credit Ratings, as well as a list of Ancillary Services and certain non-Credit Rating Agency services provided to Rated Entities and/or Related Third Parties.

Conditions of use / exclusion of liability
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