During 2015, there were relatively few opportunities for bond investors as most of the new corporate bonds listed on the Malta Stock Exchange were all targeted at existing bondholders or shareholders of the respective companies, namely International Hotel Investments plc, Mediterranean Investments Holding plc and 6pm Holdings plc.
Furthermore, the bond issue of Izola Bank plc was placed with a few financial intermediaries and the subordinated bond issue by Bank of Valletta plc in November was not easily available to the public at large since it was classified as a complex financial instrument and the application process for investors wishing to apply for less than €25,000 was more cumbersome than usual and included a question and answer section to test the knowledge of applicants on these riskier instruments.
It is therefore not surprising that the only new corporate bond available to the public at large was met with elevated enthusiasm. In fact, the €37 million bond issue of Hili Properties at a rate of 4.5 per cent per annum attracted over 9,000 investors who applied for over €230 million worth of bonds. There was never such a high level of demand for a corporate bond issue in Malta.
Moreover, the lack of opportunities on the primary market resulted in a surge in trading activity on the secondary market. Over the past 12 months, a record €59.8 million worth of corporate bonds traded on the secondary market, representing an increase of 38 per cent over the previous year. Prices of most corporate bonds surged, reflecting the decline in yields across sovereign bonds. Despite the increased activity across the secondary market, most retail investors are still generally averse to buying bonds at a price above 100 per cent and they are therefore constantly seeking new opportunities on the primary market at par value.
The difficulty for retail investors to obtain access to the corporate bond market was once again evident in the most recent offering by Medserv plc. Their bond was structured as a ‘non-retail’ issue with minimum subscriptions of €50,000 and/or $55,000. Additionally, if a bondholder wishes to dispose of any bonds once these are admitted to the Official List of the Malta Stock Exchange, they will need to retain a minimum holding of $55,000 or €50,000 unless as a result of the sale of bonds, the bondholder would have disposed of his/her entire holding.
Although the €30 million Medserv bond issue was also oversubscribed as disclosed by the company last Friday, the wider retail investor base that may not have the liquidity to invest a minimum of €50,000 is still in dire need of new investment opportunities.
Will some become available throughout the course of 2016?
On January 7, the Treasury published its 2016 indicative issuance calendar for Malta Government Stocks. The Treasury announced that this year total issuance will not exceed €600 million and these will be utilised to finance: (i) the government’s budget deficit estimated at €196 million; (ii) the redemption of four MGS issues amounting to €417.77 million; and (iii) the repayment of a bank loan of €56.38 million.
Similar to previous years, the Treasury will be issuing two different types of securities – the conventional fixed rate MGSs as well as floating rate MGSs linked to the six-month Euribor, which are primarily aimed at institutional investors. The first MGS issue is expected to take place next month. It is worth highlighting that the total issuance for 2016 at €600 million is €100 million above the total amount issued in 2015. However, it is still below the €650 million issued in each of the two previous years.
Nonetheless, given the sharp decline in yields during the past 18 months (despite the wide degree of volatility from May 2015 onwards), investors cannot expect the interest rate of the new MGS being issued in the coming weeks to be higher than three per cent unless the Treasury opts to issue a new 30-year bond (i.e. maturing in 2046).
The lack of opportunities on the primary market resulted in a surge in trading on the secondary market
Retail investors must understand that the interest rate and corresponding yield to maturity of new MGSs need to be in line with the yields on other MGS at the time of issuance. As such, for example, if the Treasury opts to issue a 15-year bond (i.e a bond with a maturity in 2031), the yield to maturity has to be in the region of 2.05 per cent, which is equivalent to the present yield on the 5.2 per cent MGS 2031. In theory, investors should be indifferent in investing in the 5.2 per cent MGS 2031 at a price of say 142 per cent which gives a yield to maturity of 2.05 per cent per annum or say a new issuance of 2.05 per cent MGS 2031 at par (100 per cent).
Naturally, investors would prefer investing at par rather than at a 40 per cent premium to par value. However, it is important for retail investors to understand that as the price of the 5.2 per cent MGS 2031 may fall below 142 per cent if yields across Europe rise, so can a hypothetical new bond issued at 100 per cent fall below par. This has in fact been the case for a brief period at the end of June 2015 in the 2.3 per cent MGS 2029 following the institutional offering on the primary market.
So if yields on MGSs are expected to remain low, what about new opportunities in the corporate bond market?
The Malta Stock Exchange has not yet issued an indicative listing calendar this year showing possible corporate bond issues that may take place in the months ahead. In February 2015, the MSE indicated that up to €172 million in new corporate bonds had been expected during the first six months of 2015.
However, these did not materialise and some may have spilled over into the second half of the year, such as the bond issue of Hili Properties and of Bank of Valletta. Disappointingly, following the publication of the indicative calendar in February 2015, no further update has since been issued by the MSE.
After the recent bond issue by Medserv, the next bond issuer could very well be Bank of Valletta with the second tranche of its €150 million debt issuance programme. The ex-CEO of BOV had indicated last October that the bank’s intention was to conclude their debt issuance programme by the first quarter of 2016 and the focus will then shift to the issuance of Tier 1 capital, i.e. equity.
Furthermore, a number of bond issuers may opt for an early redemption this year and given the prevailing low interest rate environment, such issuers may either decide to carry out a full repayment to bondholders or seek re]financing via a new bond issue.
Corinthia Finance plc has a €40 million bond which may be redeemed as from September 23, Mizzi Organisation Finance plc has a €30 million bond which may be redeemed as from November 30 and Midi plc has two bonds in issue totalling around €40 million which may be redeemed as from December 15.
Moreover, Mediterranean Investments Holding plc has three bonds in issue totalling circa €40 million which, since July last year, may be redeemed at any time prior to July 2017 when full redemption must take place.
Although these may all be likely contenders to hit the bond market in the months ahead, should any of these companies refinance via a new bond issue, these will presumably be structured as a bond exchange offer, giving preference to existing holders to roll over their existing bonds. Therefore, such issues will not offer any sizeable new opportunities for retail investors waiting to invest their idle investible funds.
Hopefully, other new issuers are considering the use of the bond market to raise the necessary funds for their respective needs. As an example, a number of the upcoming sizable property projects could also seek to use the bond market as a way of diversifying their debt-funding alternatives.
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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Edward Rizzo is a director at Rizzo,