The Government of Malta through the Treasury Department will next week be raising finance via the debt market for the second time in 2011. There will be two fungible issues adding to the existing €115.1 million of the 4.25 per cent MGS 2017 issue, and €380.3 million of the 5.25 per cent MGS 2030 issue. The Treasury will also issue a floating coupon bond linked to six month Euribor.
In aggregate, €100-€150 million will be raised in fixed-coupon bonds and €52 million in the variable coupon issue. If one had to exclude the latter bond, the Treasury would have collected 61 per cent of the government’s €570 million target for 2011 should it raise €150 million. Total MGS listed on the Malta Stock Exchange prior to these issues now stands at €3,718 million.
Earlier this year, the Treasury issued €115 million 2017 bonds at a retail price of €101.25 and €85 million of the 2030 bond at €101.50. Both fixed-coupon bonds being issued will be integrated into these same bonds on their first interest payment date, i.e. November 6, 2011 and June 23, 2011 for the 2017 and 2030 issues respectively. The offer period for retail clients investing up to €100,000 nominal opens on May 9, and closes on May 11 or earlier should the Treasury’s funding targets be met.
This will be the fourth time since 2009 that the government will be issuing a floating rate bond. This bond is being issued pursuant to Act XVIII of 2010 released in November 2010, whereby the government can borrow up to €52 million to re-lend to Air Malta plc for purposes of rescuing and restructuring the company in compliance with a communication released by the European Commission in October 2004 entitled “Guidelines on State Aid for Rescuing and Restructuring Firms in Difficulty”.
Interest on this issue is calculated every six months; the initial coupon will be announced to the MSE two days prior to its settlement date and will be six month Euribor on that day, plus a spread of 0.45 per cent. Currently six month Euribor stands at 1.682 per cent, hence if the floater had to be priced today, interest over the next six months would be at an annualised rate of 2.132 per cent. Six month Euribor increased steadily since the beginning of this year when it stood at 1.22 per cent; however, it is still some way below the high of 5.44 per cent of October 2008. The minimum investment in the floating rate bond is €250,000, with multiples of €50,000 thereafter.
At the time of writing the government has not yet informed the market the price at which these bonds will be issued – prices will be communicated this afternoon. Consequently, trading on the MSE in the following bonds will be suspended as from tomorrow until further notice: 4.25 per cent MGS 2017 III, 5.25 per cent MGS 2030 I and 5.25 per cent MGS 2030 I (Feb 2011) – hence today is the last day of trading.
The price quoted by the Central Bank broker for the existing 2017 bond at time of writing was 101.20* (yield 4.04 per cent); the existing 2030 bonds were priced at 101.95*, yielding 5.09 per cent. Judging from recent MGS issues, we would expect pricing to deviate by €0.25-€0.50 from Thursday’s Central Bank bid price.
Six year (2017) German bund yields ranged between 2.32 per cent and 3.07 per cent since the beginning of the year (currently 2.85 per cent), while the 20-year euro benchmark (maturing in 2028) traded at yields ranging between 3.40 per cent and 3.98 per cent (currently 3.74 per cent). This means that Malta Government bonds, rated A by Standard & Poors, yield around 1.4 per cent over bunds.
Last month, the European Central Bank increased the main refinancing rate by 0.25 per cent, up from the historically low of one per cent in place since May 2009; a number of financial reports suggest the possibility of another two 0.25 per cent rate increases this year and an aggregate increase of 0.5 per cent to one per cent in 2012 as the ECB combats inflation.
Inflation is expected to continue trickling in as the eurozone economy passes through its initial stages of economic recovery. Higher inflation means higher interest rates – generally harmful to bond prices (as interest rates rise, bond prices fall).
Longer-dated bonds tend to lose more in value compared to the short end of the yield curve. Although some of this inflation has already been built into bond prices, we expect longer-dated bond prices to underperform shorter-dated bonds over the next 12-24 months. For this reason, bar any major price changes announced this afternoon we prefer the 2017 issue over the 2030 bond.
This article is the objective and independent opinion of the author. The information contained in the article is based on public information. Some of the opinions expressed here above are of a forward looking nature and should not be interpreted as investment advice, nor should it be considered as an offer to sell or buy or subscribe to any investment vehicles or strategies that might have been mentioned in the article. The company and/or the author may hold positions in any securities that might have been mentioned in this report. Curmi and Partners Ltd. is a member of the Malta Stock Exchange, and is licensed by the MFSA to conduct investment services business.
Mr Micallef is an investment executive at Curmi and Partners Ltd.