Revised listing policies should reignite corporate bond market
The Malta Financial Services Authority issued another consultation document on February 19 proposing some further changes to the listing policies. These policies had been the subject of various debates by issuers and members of the financial community since they first came into force in August 2010. Some articles had appeared in the media on the subject and I had also publicly criticised these policies which practically led to a complete halt in new corporate bond issuance by non-financial companies since 2010.
Before commenting on the proposed revised changes of a few weeks ago and which have since come into force, it would be worthwhile providing a brief overview of the original listing policies and the main areas of contention by issuers and advisers to such transactions. The listing policies that had been in place since August 2010 dealt with the parameters for setting up a sinking fund and introduced a new requirement for prospective bond issuers (excluding banks and the government) to draw up a financial soundness report when applying for a listing of corporate bonds aimed at local retail investors. The sinking fund had become a common feature in the many bond issues that had also come to the market in 2009 and the first half of 2010, but the policies enacted in August 2010 introduced more stringent uses of the sinking fund assets and also imposed a number of obligations on the sinking fund custodian.
In a further revision to the listing policies in December 2011, a distinction on the requirements for the sinking fund and the financial soundness report was made between bond issues with a minimum subscription of either €50,000, €10,000, or less than €10,000. However, despite the changes made to issues with a minimum subscription of at least €10,000, the requirements for retail bond issues (i.e. those with a minimum subscription of less than €10,000) remained onerous and therefore there was little reaction to the sweeteners introduced in December 2011 in the new issuance bond market.
It is not a coincidence that only two non-financial companies tapped the bond market since the listing policies were enacted in August 2010 and these were issued to finance redemptions due by both companies. Moreover, other companies decided to issue bonds to the public without seeking a listing, hence bypassing the listing rules and the listing policies. Such unlisted bonds are not ideal instruments for retail investors. Although investors are very much dependent on regular income streams, a security listed on an official market mechanism is a very much sought after characteristic among the large majority of investors.
The new listing policies that have since come into force on March 5 should once again kickstart the listed corporate bond issuance market. The feedback provided to the MFSA over the past two years by prospective bond issuers, stockbrokers, legal advisors and financial consultants seems to have been taken on board as the new listing policies do away with the requirement for the sinking fund for many companies irrespective of the minimum subscription level and the term of the bond. This is a very positive development.
The MFSA, however, has continued to reiterate that the sinking fund is a requirement when the source of eventual repayment of the bond issue is to come mainly from the sale of the asset acquired through the funds raised by the bond issue at the outset. This is understandable and mainly relates to those property development companies that require to sell the property asset to fund the bond repayment.
It is also worth highlighting that while the original listing policies had very stringent parameters related to the build up of the sinking fund, the use of the assets and the duties of a custodian, the new policies give greater flexibility to the issuer for the operation of the sinking fund. The MFSA explained that it would be up to each issuer to propose how it intends to provide for a sinking fund to allow issuers to present realistic and feasible projections depending on envisaged circumstances and cash flow during the lifetime of the bond.
More importantly, those predominantly family-owned conglomerates operating in diverse sectors that had tapped the bond market to diversify their funding requirements will now be exempt from the creation of a sinking fund, rendering a bond issue more feasible.
Such companies can once again consider issuing bonds as opposed to relying solely on bank funding. It is also worth clarifying that the listing policies do not apply retroactively and all bond issues that have taken place to date must comply with their original obligations contained in the prospectus published at the time of the issue. Therefore, an existing sinking fund must continue to be operated by the various companies that launched new issues in 2009 and 2010.
The original listing policies had also introduced a requirement for the publication of a financial soundness report with the main objective being that of assisting retail investors to obtain information on the financial track record of the issuer. The financial soundness report, which is composed of a due diligence report prepared by an independent accountant and a financial analysis summary compiled by an independent stockbroker, remains a requirement under the new policies irrespective of the minimum level of subscription for investors.
However, only the financial analysis summary prepared by the stockbroker will be published as an annex to the prospectus and this would need to be updated annually. While some prospective issuers may feel that this will entail additional work as well as annual costs for the company, the latest revised listing policies have addressed the major concerns of all parties and the requirement to publish just a financial analysis summary annually is a fair compromise given the controversial original policies introduced in August 2010 which had stalled the market.
The updated policies adopted by the MFSA should lead to a number of issuers tapping the market again. However, this may not take place immediately due to the time lag required for companies to seek approval from the MFSA and the work involved to launch a bond issue for public subscription. The amendments should be a step in the right direction providing various companies with the required alternatives to bank funding in terms of overall long-term financial planning.
The likely revival of new listed bond issuance is important since it provides local investors with much-needed alternatives for investing their savings in a diversified manner. The large majority of local investors seek a stable income from their investments since this assists them in meeting their ever-increasing living expenses and nursing home expenses when such care becomes a necessity.
Unfortunately, due to the lack of new bonds becoming available on the local market since 2010, many investors have had to accept higher risks in certain financial products through local and overseas investment services providers. As such, it is in the interest of all concerned for the locally-listed new issuance market to come to life again.
On its part, the Malta Stock Exchange should actively promote the debt financing route by raising awareness of the advantages and the process involved to tap the market in order to instigate existing issuers and also new companies which are considering such funding options. A more active new issuance market will provide investors with a greater and safer choice of investments to consider when deliberating where to invest their hard-earned savings.
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 from 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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Edward Rizzo is a director at Rizzo, Farrugia & Co. (Stockbrokers) Ltd.