Almost 20 years ago, in September 1994, Gasan Finance Company plc launched the first private bond issue listed on the Malta Stock Exchange. It was a landmark issue in many ways, setting the pathway for a number of other issuers to follow, and at Lm3.5m (€8.15m) it was not a small issue either for the market. From those early days the market grew steadily as issuers and investors became comfortable with the structure and benefits of buying corporate debt. Today this market is made up of 38 different bond issues with a nominal value of around €850m. According to our research, the vast majority of these bonds – over 80 per cent – are in the hands of the retail investor, with the balance held by financial and other entities. This should come as no surprise as it merely reflects the normal preference of Maltese investors, as well as the preference of issuers to spread their allocation of bonds across a number of investors, thereby also spreading their funding risk across such investors – and at the same time lowering their cost of capital.

While it is encouraging that we do have 38 bond issues on the market, it is also true that there could be significantly more, since the issue of a bond is not an overtly complex project to undertake and, following the change of regulations earlier this year, brings real tangible cash benefits to issuers. From an investor’s perspective, these bond issues offer investors an opportunity to diversify their source of income at a time when income is hard to capture.

The 38 bond issues listed on the MSE are spread across 18 different issuers. Additionally there are three issuers in the market that dominate the corporate bond market. These are Bank of Valletta, HSBC and what I loosely refer to as the Corinthia group. Together these groups have €517m of bonds on the market at the present time. Therefore, it is also true that we do not have a wide mix of companies that issue bonds on the Malta Stock Exchange. In fact the industry focus is concentrated around the banking sector (€349m) and the hotel/leisure sector (€355m). The remaining balance is split across the following sectors: automobiles (€60m), food and beverage (€40m), insurance (€28m) and oil and gas (€13m).

Clearly from the investor’s perspective it is more attractive to diversify one’s investments across a variety of sectors as this mitigates their contagion risk. Perhaps 2014 may offer this necessary fillip.

In fact the new issue market is starting to look exciting for the next year, after one of the worst years on record for new corporate debt issues (see chart). Early indications suggest that there will be a variety of issuers approaching the market now that the listing policies have been adjusted. It remains to be seen whether there will be new issuers or whether the issuance will be largely made up of “roll overs”. Whichever it is, this will be not a moment too soon.

From an investor’s perspective, the onslaught of financial repression has left local investors scrambling in search of yield. And the problem is getting worse. While banks continue to reduce their rates on deposit, bond issuers have, over the past 12 months, been redeeming their bonds or buying them back to the tune of €111m (€98m redemptions, €13m buybacks) as at November 30, 2013. Against this, new issuance has mopped up only €28m of new money so far this year, leaving €83m in the hands of potential investors. Meanwhile deposits at banks in Malta continue to grow. At the end of November, deposits held by resident individuals, non-profit organisations and non-financial companies topped €10.3bn. That is up from €9.6bn at the end of 2012.

Clearly the dynamics needed for growth in the local corporate bond market are there. There is plenty of liquidity and it looks like issuers are willing to take the plunge, given the low interest rate environment in which we are operating. As issuers potentially start to clash on their fund raising timetable, the MFSA must ensure that the process towards obtaining a listing is smooth, clear and fast. Investors must also be more discerning about which bonds to commit to, thereby ensuring they understand and appreciate the risks they are taking when investing in such bonds.

Source: MSE Trading Statistics, Curmi & Partners Ltd. Figures stated as at December 17, 2013

This article is the objective and independent opinion of the author. The information contained in the article is based on public information.

Curmi and Partners Ltd is a member of the Malta Stock Exchange, and is licensed by the MFSA to conduct investment services business.

David Curmi is the managing director at Curmi & Partners Ltd.