The extraordinary demand for the recent Medserv plc bond issue – amounting to over €55 million across more than 3,800 applicants during the public offering – is once again indicative of the excess liquidity within the local financial market.
Unfortunately, the first tranche of the debt issuance programme by Medserv plc was limited to €13 million leaving all applicants very disappointed with the number of bonds allotted to them and the resultant refunds.
Although the amount raised by Medserv was well above anyone’s expectations and possibly among the highest ever recorded for a new local corporate bond issue, in hindsight, the strong demand for a local debt instrument is not surprising given that this was the first offering of a non-bank issue for a number of years.
The bond market was brought to an almost complete standstill when Listing Policies came into force in August 2010. Unfortunately, despite regular representations made from various players across the industry to amend some of the new regulations, suitable revisions to the new requirements imposed by the regulator were only made official over two years later - in March 2013. The significant length of time during which the new regulations were being reviewed created a slowdown in the new issuance bond market at a time when demand was growing for fixed interest securities. Although the policies were finally amended seven months ago, companies need time to launch a new issue given the lengthy procedures for structuring an issue and the preparation required to have all documentation approved by the regulatory authorities.
Thankfully, there is expected to be a gradual pick-up in new corporate bond issuance during the final two months of 2013 and during the course of next year. This was initially evident from the publication of the indicative listing calendar by the MSE some months ago. In more recent weeks there were consistent rumours within the business community about potential new issues in the pipeline and these have partly been confirmed by last Friday’s Gasan Finance Company’s announcement.
However, it is very doubtful whether the new bond issues to be launched by the end of this year will be sufficient to soak up the excess liquidity in the market waiting for suitable fixed interest investment opportunities.
The problem of excess liquidity will be amplified by the additional funds that will become available in the coming weeks from FIMBank plc. The bank announced on September 27 that it will be redeeming its seven per cent subordinated bonds on October 30, 2013. Moreover, FIMBank have another listed bond carrying a coupon of 4.25 per cent that is due to mature on the November 30, 2013. The combined equivalent value of €62 million flowing through the local financial market will thus also be seeking alternative investment opportunities. Given the decision by the bank to opt for an early redemption which is so close to the final maturity date also of their 4.25 per cent short-term bonds, coupled with the funding available from the new strategic shareholders, it is highly unlikely that FIMBank will be offering investors the possibility of investing in a new bond any time soon.
The excess liquidity and lack of diverse investment opportunities is a challenge not only for investors but also for members of the financial community who are asked for regular advice to fulfil their client’s investment objectives. This becomes more problematic at a time of record-low interest rates.
Given the situation of the high levels of liquidity in the market, players across the financial sector should do their utmost to make such opportunities available to investors. Otherwise, a sizeable part of these investible funds will find their way out of Malta into the international financial markets.
Companies should therefore seek to take advantage of the situation to tap the local bond market and partially diversify away from traditional sources of funding.
Funding required for projects of a national importance could also be considered to help alleviate this outstanding demand should debt securities for such projects be structured in a way that would provide an adequate risk/return trade-off for investors.
The strong demand for a local debt instrument is not surprising given that this was the first offering of a non-bank issue for a number of years
The present interest rate scenario could make this more enticing for companies to secure borrowing at a fixed interest rate for a specific period of time before interest rates eventually start edging upwards.
The Malta Stock Exchange and other market participants should also seek to encourage some reputable international companies to also consider the use of the local financial market for their funding needs. This could prove to be an interesting new dimension given the higher costs incurred by small to medium-sized international companies when offering relatively small bond issues in the larger markets.
As such, 2014 could prove to be a busy year for the local market as a number of companies have bond issues maturing during the year. Such companies may therefore also seek to offer investors the opportunity of new securities. International Hotel Investments plc have already indicated their intention of doing so and will be offering a new bond ahead of the redemption of the €12.5 million 6.5 per cent bonds due on March 27, 2014. Additionally, in view of the current circumstances, some other companies may also avail themselves of their early redemption option and seek to refinance their borrowing requirements through the issuance of new debt instruments. Here again, last Friday, Gasan Finance Company plc announced that it is seeking approval for the issue of €25 million in bonds maturing between November 30, 2019 and 2021. Presumably, bondholders of the present six per cent bonds will be given preferential allocation if they surrender their old bonds which can be redeemed on May 31, 2014 at the earliest. Other companies that may seek such early repayments include GlobalCapital plc, United Finance plc, Tumas Investments plc, AX Investments plc as well as two issuers with bonds listed on the second tier market, i.e. Melita Capital plc and Pavi Shopping Complex plc.
Acquiring adequate amounts of suitable bonds may become increasingly challenging in the months ahead if new opportunities do not become available from various issuers. This could also lead to some investors considering a small allocation to equities offering attractive and sustainable dividends. A possible spill-over of interest into the equity market is internationally referred to as the “great rotation” and this was the topic of my article a few weeks ago. A number of local companies offer attractive dividends and this may be an option that some may be worth exploring in the months ahead.
A small allocation to equities given their superior performance to bonds over the long-term is recommendable in all portfolios even for those investors mainly seeking the generation of regular income. An equity allocation may provide some capital growth to offset the negative impact from inflation on fixed rate securities as well as a gradually rising dividend income especially from companies growing their business.
The need for more equity and debt issuance is also exacerbated by the Government’s intention to introduce the long-overdue third-pillar pension system. The excess liquidity currently in the market and the increasing amounts of investible funds expected once the private pension system is introduced in the coming years requires urgent attention by all members of the financial community to hasten the development of a more liquid local financial market.
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.