Last week, the Treasury of Malta returned to the market to raise funds through Malta Government Stock (MGS) with three different maturities – 2017, 2022 and 2029. This is the second time this year that the government tapped the bond market following the successful February issue.
A staggering 97.5% of all MGS bond holders are Malta residents- Vincent Micallef
This latest issue attracted applications for a total of €191.6 million nominal, of which €179.7 million were accepted. The government’s intention was to issue €120 million with the customary over-allotment policy for a further €60 million; hence the bid-to-cover ratio (Nominal amount applied versus the €120 million) reached 1.6x. This ratio was lower than in recent auctions. Last February, the bid-to-cover was 1.83x on an issue of €150 million (over-allotment for a further €150 million); in November 2011, the bid-to-cover was 2.74x (issue split €100m + €40m over-allotment and €24m floating rate notes); and in May 2011, bid to cover was 1.98x (issue split €100m + €50m over-allotment and €52m floating rate notes). In February 2011 this ratio was 2.72x.
Local private investors continue to show strong support to the sovereign issuer, taking up just over €71 million, circa 40 per cent of the total. Sixty per cent of these applications were for the 2029 issue, undoubtedly attracted by the higher interest coupon this bond provided (5.1 per cent versus 4.3 per cent and 3.75 per cent in the 2022 and 2017 bonds respectively).
Local credit institutions had bids for €40 million accepted. Relative to the February issue, this latter figure is lower in both absolute terms (February: €104m) and in relative terms (June: 22.2 per cent of total accepted; February: 38 per cent). Comparisons with November 2011 are not of much use, given the high demand for MGS by retail investors – retail took €134.1m out of €144m of fixed rate bonds on issue). The Treasury would generally accept all retail applications in full prior to entertaining bids in the auction process.
I am not particularly surprised by the lower take-up. The Central Bank of Malta broker issues indicative prices at levels it is willing to purchase bonds in any given trading day, and the market uses these prices as guidance to trade its MGS – even when the CBM is not counterparty to the trade. Banks might have their reasons to invest their funds in other financial instruments. However, in its attempt to keep their MGS holdings at manageable levels, the CBM broker has been dropping bid prices for large trades such that it is now scaring major players from holding MGS. Liquidity is top on the agenda for institutions when purchasing sovereign issues – taking this away from them (by reducing prices, hence liquidity) would scare major players away from that market.
As at the end of May 2012, the Treasury has €4.25 billion nominal Malta Government bonds outstanding. This figure excludes treasury bills – government IOUs with maturities ranging between 28 and 364 days.
Private Maltese resident individuals hold around 29 per cent of the total, a slight increase since the end of 2010. Together with individuals, local credit institutions remain the main holders of MGS with holdings equivalent to 37 per cent as at end May 2012, holding a combined two-thirds of total nominal issued.
Since the end of 2010, resident collective investment schemes insurance companies reduced their holdings from a combined 20.8 per cent to the current 16.3 per cent, the CBM market maker taking some of the slack.
For the past three months, the latter institution has been offering stock for sale, however there has not been any major take-up. The fact that investors wait for new issues to invest in MGS, rather than purchase their bonds immediately on the secondary market might sound a bit surprising. One explanation might be that investors are not willing to pay broker fees; another possible reason might be the slight discount at which new bonds are sold compared to current prices – however one must also keep in mind the opportunity cost of keeping funds not invested until the next government bond issue.
A staggering 97.5 per cent of all MGS bond holders are Malta residents. How would this compare to other euro sovereigns? Using data from the end of 2011, beginning of 2012, Spain is considered to have one of the biggest home biases – with 67 per cent. Italian and Belgian residents held 55 per cent and 46 per cent respectively of their countries’ bonds. At the other end of the spectrum, just 23 per cent and 22 per cent of Austrian and Irish government bonds are held by their countries’ citizens.
Long may the home bias remain!
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. Curmi and Partners Ltd. is a member of the Malta Stock Exchange and is licensed by the MFSA to conduct investment services business. Should you wish to discuss this article in further detail, feel free to contact the author on 2342 6116.
www.curmiandpartners.com
Mr Micallef is an executive director at Curmi and Partners Ltd.