The Malta Financial Services Authority has launched a consultation document on two Listing Authority policies.

Feedback on the 'Sinking Fund' - a pool of assets created for the purpose of establishing a reserve by means of which, all or part of a debt may be redeemed - and the 'Financial soundness of applicants for admissibility to listing' will be accepted until July 26, the regulator said this week.

The two policies will be adopted in respect of certain applicants for admissibility to listing on a regulated market.

The sinking fund policy has been applied by the Listing Authority over the past two years and seeks to ensure that, in carrying out their financial management, bond issuers do not overlook bondholders' interests. It requires issuers to establish a reserve funded from operating profits to, at least, partly finance the redemption of the bonds on maturity. This creates an obligation on the issuer to manage company assets diligently in the interest of bond holders.

The new sinking fund policy introduces a number of changes to the current framework.

There is a new definition based on the primary objective for requiring the establishment of a sinking fund.

While the current policy on the required funding of a sinking fund makes no reference to a single set of criteria which must be applied by an issuer for the determination of the amount to be allocated to the fund annually, a definite set of criteria have now been established.

The commencement date for the funding of the sinking fund is to be reduced from two years to one where the term of the bond is five years or less.

The Listing Authority believes it is more appropriate for the fund to be held by a 'sinking fund custodian' rather than a 'trustee', to ensure the assets are controlled rather than owned by a third party. The new policy requires the sinking fund custodian to be vested with certain prescribed duties to ensure the assets within the sinking fund are used in the best interest of bondholders. The sinking fund custodian must either be a credit institution or an investment services licence holder with a Category 2, 3, or 4 licence issued by the MFSA.

According to the current policy, sinking fund assets may only be used to repurchase the securities of the same issue and for investment in certain admissible assets. As such, the policy will be retained, but it is to be redefined to refer to specific investment parameters similar to those set out in Schedule II of the Investor Compensation Scheme Regulations of 2003.

The enhanced policy will give the issuer the opportunity to use the assets in the sinking fund as collateral when it is facing liquidity problems. Safeguards are also being proposed in this regard, including a requirement that the sinking fund custodian's prior permission should be obtained from the issuer.

The revised listing policy will require certain fundamental information on the sinking fund and the sinking fund custodian to be included in the issuer's prospectus, which is currently standard market practice. A 'comply or explain' policy has to be adopted where directors of the issuer are required to include a section regarding compliance with the requirements of the sinking fund in the report with the issuer's interim and annual financial statements. The issuer should draw up an annual report addressed to the Listing Authority and the bondholders on the extent of compliance by the issuer with the requirements relating to the sinking fund. A copy of such a report must be included in the issuer's annual financial statements.

The regulator is also introducing an additional safeguard to the 'financial soundness of applicants for admissibility to listing' policy.

The Listing Authority is concerned about the possibility that companies may resort to tapping the regulated market to obtain liquidity where this is not available from credit and financial institutions in view of poor creditworthiness and other financial difficulties which a particular company might be facing.

Under an additional safeguard, applicants for admissibility to listing are requested to demonstrate their financial soundness and strength to the Listing Authority. They will be required to submit an assessment of financial soundness from their auditors or bankers or from a credit rating agency. Certain criteria for the preparation of this report are also being introduced as part of this new policy.

The MFSA said that following the consultation period, and once the Listing Authority has considered any feedback received, the new and finalised policies will be published. They will be enforced on new applications from corporate applicants for admissibility to listing of bonds available to local retail investors, with the exception of licensed credit institutions which are already subject to strict prudential requirements.

More information is available at mfsa.com.mt. Feedback on the policies is to be submitted to su@mfsa.com.mt.