The demise of the ACL bond market

On August 29, Melita Capital plc announced that it will be opting for an early redemption of its €25.9 million 7.15% bonds on September 30. Two months earlier, Pavi Shopping Complex plc announced that it will be redeeming its €9.5 million 7% bonds on the first optional redemption date falling on October 26. In both instances, these companies will not be issuing fresh bonds to finance their redemptions and therefore bondholders will be receiving their capital back and would need to seek alternative investment options.

Melita Capital plc and Pavi Shopping Complex plc are the only bond issuers that currently feature on the Alternative Companies List. Previously, Mediterranean Investments Holding plc also had two bonds on the ACL but these had been upgraded to the Official List in 2010 when the company issued another bond and by that time it had the required track record to qualify for the main market. In earlier years, there were another four issuers that utilised the ACL bond market, namely Hotel San Antonio plc, Bay Street Finance plc, Big Bon Finance plc and GAP Developments plc.

The demise of the ACL bond market should reignite the thought process behind the relaunch of another junior market

Therefore, as a result of the repayments of the Melita and Pavi bonds, the ACL bond market will cease to exist in the coming months.

The ACL had been launched in October 1999 as a junior market to promote listings of smaller companies which do not qualify for listing on the Official List of the Malta Stock Exchange.

Like all junior markets in overseas jurisdictions, the listing obligations were naturally less onerous. As an example, an issuer required a three-year track to qualify for the Official List while a start-up company could obtain a listing on the ACL.

Moreover, while the size of a bond issue to qualify for admittance to the Official List was of a minimum of €1 million, the minimum bond issue for a company being admitted to the ACL was only €200,000. Essentially, the ACL was promoted as a second-tier market primarily for companies to which a higher investment risk than that associated with established companies tends to be attached.

Unfortunately, over the past 15 years, the ACL market only attracted one equity listing (Loqus Holdings plc previously Datatrak) and six bond issuers. Probably in view of the lack of success achieved by the ACL market, it was publicly documented between 2006 and 2008 that the Malta Stock Exchange intended relaunching the ACL market as an Exchange-regulated market (XRM). The chairman of the MSE at the time had explained to the media that the XRM rules were being based on the highly successful AIM market in London. However, these plans never materialised and in recent years no further information was provided by the MSE in this respect.

A more proactive stance by the Malta Stock Exchange management to attract more bond and equity listings would seem in place

While the junior market did not reach the desired objectives and market participants as well as investors still remain in the dark on any fresh plans in this respect as a result of the imminent demise of the ACL bond market, on the other hand, the main bond market has seen a resurgence in listings in recent months following the amendments to the Listing Policies in March 2013. It is worth noting that so far in 2014, six corporate bond issuers tapped the market, offering investors a total of €196 million.

The large majority of the issues were heavily oversubscribed and the most interesting statistic is the significant increase in the number of investors participating in this year’s bond issues. While in the previous wave of bond market issues, the average investor base was in the region of 3,000 applicants, a number of the corporate bond issues that took place earlier this year saw the number of applicants rise to over 5,000.

One must also mention that apart from the €196 million in corporate bond issuance, the Maltese government tapped the market on three occasions this year and what was surprising was that the large majority of the new Malta Government Stocks were taken up by retail investors and not by banks or other institutional investors as some observers generally assume. In fact, in the latest MGS issue during the last three days of July, retail investors crowded out the institutions with the latter not being able to participate at all.

Although the July issue took place only a few weeks following the previous MGS offering, there were 5,654 retail investors who applied for over €193 million worth of MGS, mainly the 20-year bonds. In fact, for the first time in many years, the Treasury had to scale down a number of applications and refunded a total of €13 million to the retail market since the maximum amount that could have been accepted in terms of the Prospectus was €180 million. The huge demand evident for the new corporate bond issues and MGS offerings this year had never been experienced in the past. This growing investor base is essentially a result of the historic low interest rate environment and the wider acceptance by the general public of the need to invest in other financial instruments rather than traditional bank deposits.

In view of the significant increase in investor participation in the bond market which is likely to be maintained given the fact that interest rates in the eurozone have dropped again last week and are expected to remain very low for an extended period of time, it is necessary for the MSE to promote its services more widely and encourage more companies to offer debt instruments to the public.

Although the recent momentum of offerings on the Official List could persist in the coming months with a few other issues expected by the end of the year, the demise of the ACL bond market should reignite the thought process behind the relaunch of another junior market to encourage a growing wave of younger companies to consider the use of the exchange to finance their operations.

A more proactive stance by the Malta Stock Exchange management to attract more bond and equity listings to satisfy the growing investor appetite for such investment opportunities would seem in place. Although the Exchange has been in operation for over 20 years, the success in bringing companies to the market has been lukewarm. As an example, many family-owned companies moving into their third or fourth generation probably view the public route with some scepticism.

The benefits of listing a company’s shares on a public exchange need to be explained to such companies in greater detail since there are many advantages that may not be evident at first glance and could be the key to survival for some companies when dealing with succession planning.

The MSE would do well to take a more business-oriented approach. In this respect, many overseas stock exchanges had indeed been privatised to facilitate this process. The present administration has yet to air its views in this respect despite its willingness to privatise other sectors of the economy. As such, there should be no major opposition in attracting the involvement of a strategic partner (such as a foreign stock exchange) to expedite the development of the local capital market.

Edward Rizzo is a director at Rizzo, Farrugia & Co (Stockbrokers) Limited.

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 company/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, and may also have other business relationships with the company/s. 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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