Last week and earlier this week, the government of Malta tapped the bond market for the first time this year out of a planned four to five issues in 2014. In so doing, the sovereign raised just under €160 million via three different maturities – 2019, 2024 and 2032.
This brings the aggregate total of outstanding govern-ment borrowing through the markets to €5,134.5 million: €4,770.78 million through Malta Government Stock and a further €363.7 million through the issuance of treasury bills.
The Treasury is expected to raise a further €490 million through the course of the year (i.e., €650 million in total). Funds will be used to redeem €361.3 million of MGS maturing this year, to finance government borrowing requirements – including an estimated €136.3 million to fund the budget deficit – and other changes in the government’s debt portfolio.
The issue attracted applications for a total of €232.7 million nominal. The prospectus listed a nominal requirement for €100 million with an over-allotment policy for a further €60 million; hence the bid-to-cover ratio (nominal amount applied versus the minimum required amount of €100 million) reached 2.33x. Comparing this figure to issues last year, the ratio is higher than last November’s 1.91x (€120 million + €60m over-allotment), and lower than May’s 2.83x (€100m + €70m) and 2.44x last March (€120m + €80m).
This amount could have been higher had the issue not clashed with the AX Investments new bond issue in the same period.
Apart from drawing liquidity from the market, cash for unsuccessful applications for the AX bond was not returned in time for the MGS offer period.
Retail applications (maximum application of €100,000) accounted for €151.4 million, or 94.7 per cent of the total allotted, crowding out larger investors to bid for just €8.5 million in the auction process held last Monday. Relative to MGS issued in 2013, this latter figure is lower in both absolute terms and in relative terms. Note that the Treasury accepts all applications from retail investors prior to determining amounts available for auction – November 2010 being a case in point when retail investors took up the whole issue.
Local investors continue to show strong support to the sovereign issuer, taking up almost the entire issue – non-resident investors accounting for just €84,000 nominal. Just over 80 per cent of applications were for the 2032 issue, undoubtedly attracted by the higher interest coupon this bond provided – 4.45 per cent versus 3.3 per cent and 3.2 per cent in the 2024 and 2019 (retailing at 105.50) bonds respectively.
Local investors continue to show strong support to the sovereign issuer
The chart illustrates bond yield curves for the Maltese and German sovereign bonds. Yield curves plot the yield to maturity bonds pay at different maturities. Ten-year bunds are currently priced to yield 1.57 per cent*. The current MGS 2024 was priced the week before last to yield 3.29 per cent.
Trading in this bond has not commenced yet, and hence a market price does not yet exist, however by simple extrapolation of the curve above – and with the recent bond market rally, this should be yielding circa 3.07 per cent.
How does this compare with other “A-” rated issues denominated in euro? In terms of sovereign issuers, the Slovak (9-year) sovereign pays 2.29 per cent, and Israel pays 2.73 per cent.
Compared to corporate issuers up to 5-year maturities (across all industries, via the B of A Merrill Lynch “A” rated euro corporate index) Malta pays approximately the same interest: about 0.2 per cent more between 5-7 years and circa 0.25 per cent more for maturities of 7 to 10 years.
* prices used: 3/3/2014
info@curmiandpartners.com
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.
Vincent Micallef is an executive director at Curmi and Partners Ltd.