The number of new issues in the local bond market during the past two years indicates that the Malta Stock Exchange is now being widely recognised as a source of funding complementary to bank financing for those companies aiming to grow, develop and operate transparently and openly on sound governance principles.
The growth of the local bond market is clearly evident by the increase in the number of issues and the rise in the overall value of listed bonds. From a market capitalisation of just €100 million in 1999 across a mere six corporate bond issues, the size of the market has risen to almost €880 million as at September 20. There are currently 45 bonds listed on the Malta Stock Exchange across 26 corporate names.
Some interesting and varied developments have occurred in the bond market in recent months. On the one hand, some companies opted to re-finance using the early redemption option of their bonds by issuing fresh bonds often at a lower rate of interest. We have also seen some companies starting to re-purchase their bonds on the secondary market. Initially PAVI Shopping Complex plc announced that it acquired a total of €780,000 of its own bonds from the secondary market and this was followed by an announcement from Hotel San Antonio plc that it was willing to re-purchase up to €2 million worth of its own bonds. Bay Street Finance plc and Bank of Valletta plc also resorted to repurchasing some of their bonds. Such acquisitions on the secondary market are a clear sign of the free cash flow available to these companies and represent good news for these companies’ bondholders.
Another interesting development was announced last Friday by Dolmen Properties plc which stated that it will be repaying 50 per cent of its total bond issue to bondholders using the option of redeeming its bonds (in whole or in part) as from 20 November and annually thereafter. This is another first for the market and a clear sign of the availability of strong cash flow in this company which has consistently reported healthy financial results in recent years. In effect, Dolmen Properties plc will be repaying a total amount of €5.47 million on November 20 from the available cash accumulated in recent years in the sinking fund built by the company specifically for the purpose of repaying bondholders by redemption date.
The eagerness of some companies to re-purchase bonds from the secondary market and reducing the amount in issue contrasts with the consistent demand for fixed interest securities by local investors. The continuous thirst for new fixed-interest securities on offer in the primary market has begun to spill over into the secondary market with the result that most new issues have traded at a healthy premium to the offer price after listing.
On the other hand, only two bonds are currently priced at a discount to their nominal value, those of Global Capital plc and GAP Developments plc. Price movements on the corporate bond market normally have more to do with perception of quality and financial performance of the company rather than overall interest rate movements as explained in last week’s article.
It is not surprising that these two bonds are trading below their nominal value of 100 per cent. Global Capital have registered losses in the past few years and although it may be incorrect to say that the market may be sceptical on the company’s ability to repay the bond, the coupon of 5.6 per cent per annum indicates that this bond had been mispriced upon launch.
The price of the GAP bonds had dropped below 100 per cent amid rumours that the company was in dire need of fresh capital to continue with its property development. GAP subsequently succeeded to attract an investor who injected a total of €8 million in equity capital and €7 million in shareholders’ loans in May 2009 and this helped sentiment towards the company. At the time of this capital injection GAP explained that their project should be completed within the envisaged timeframe in mid-2011. The bond price recovered to the 97 per cent level on the news but has since failed to trade at its nominal value of 100 per cent.
So far, only companies registered and set-up locally have tapped the corporate bond market. However, there seems to be a clear opportunity for the Malta Stock Exchange to attract some small companies operating overseas which require financing and which may find it problematic to raise finance in their home market due to the small size of the amount required. While it may be harder for companies to seek financing on, say, the London Stock Exchange, of up to €30 million since offerings need to be of a much larger size, there exists the potential to attract these companies to offer such securities locally.
This will help increase the scope for the local stock exchange and also provide local investors with an increased flow of issuance to satisfy their constant demand for fixed interest securities. The Malta Stock Exchange together with Finance Malta should look into tapping such opportunities to enable our financial market to grow to a more meaningful size.
While acknowledging that the authorities are addressing the question of the need of a more effective functioning of the market, solving the reality of a lack of liquidity in the secondary market is now very urgent. This need became more evident in the summer when no new issues were announced, leaving investors with no investment opportunities in bonds also in the secondary market. With no official market makers operating and quoting two-way prices in listed bonds, the risk of investors settling for riskier alternatives purely out of lack of choice is real.
Constant demand and lack of supply is also very evident in ‘foreign currency’ denominated bonds locally. With only a handful of issues denominated in US Dollars and Sterling, the price of the recently issued 7.15 per cent Mediterranean Investments Holding plc 2015-17 bonds in USD has risen to 105 per cent while the sterling tranche similarly increased to this level.
Likewise, the seven per cent FIMBank plc 2012-19 USD bonds have been bid up to 106 per cent while the seven per cent MIDI plc 2016-18 GBP bonds have traded at a record high of 108 per cent. Despite these levels, supply is still lacking with investors hanging on to their holdings principally because of the difficulty to re-invest their sale proceeds adequately.
To further aggravate the situation, Bank of Valletta plc has opted to make a full repayment of its US$35.1 million bonds on October 2 without offering a new bond. This clearly indicates the need for issuers to also resort to offering bonds in other currencies to satisfy the demand by local investors who wish retain an exposure to US dollars or sterling.
Rizzo, Farrugia & Co. (Stockbrokers) Ltd, “RFC”, is a member of the Malta Stock Exchange and licensed by the Malta Financial Services Authority. This report has been prepared in accordance with legal requirements. It has not been disclosed to the issuer/s herein mentioned before its publication. It is based on public information only and is published solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. The author and other relevant persons may not trade in the securities to which this report relates (other than executing unsolicited client orders) until such time as the recipients of this report have had a reasonable opportunity to act thereon. RFC, its directors, the author of this report, other employees or RFC on behalf of its clients, have holdings in the securities herein mentioned and may at any time make purchases and/or sales in them as principal or agent. Stock markets are volatile and subject to fluctuations which cannot be reasonably foreseen. Past performance is not necessarily indicative of future results. Neither RFC, nor any of its directors or employees accept any liability for any loss or damage arising out of the use of all or any part thereof and no representation or warranty is provided in respect of the reliability of the information contained in this report.
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Mr Rizzo is director of Rizzo, Farrugia & Co. (Stockbrokers) Ltd.