€200 million raised in new corporate bond issues in first half of 2009

The bond market remained highly in focus during the first six months of 2009 with a total of €200 million raised through new corporate bond offerings on the primary market. This includes the latest successful issues by International Hotel Investments plc and Tumas Investments plc which attracted strong demand from investors. Although these two bonds were launched concurrently with a large Malta Government Stock issue and very shortly after the €50 million BOV bond, substantial demand for the IHI and Tumas bonds was again very evident.

The past six months have undoubtedly been the busiest period for the primary market since the launch of the Borża in 1992. With so many investors now participating in the primary market, the importance of liquidity in the secondary market has become an urgent matter. Unless this vital issue is resolved within a very short timeframe, it is likely that this new additional source of funding for companies will encounter difficulties at some point in time. Investors simply need to be able to sell any bonds should they require to do so before redemption date, and this can only be possible if "market makers" are allowed to officially operate in the market.

On the other hand, investors who missed out at the public offering stage of a bond should be able to buy some in the secondary market from a "market maker". This is an important ingredient for a liquid secondary market. In my view, this is one of the most crucial aspects necessary to allow the local stockmarket to grow and contribute to Malta's economy. Given the new issues lined up to tap the market before year-end (both through corporate bonds and equity issues), the official introduction of "market makers" must happen soonest.

With official interest rates within the eurozone region and hence also locally expected to remain at these historically low levels for some time, the demand for bonds is likely to remain buoyant in the coming months. This is good news for the various issuers who are preparing to tap the market in the coming months. Meanwhile those companies whose bonds are due for redemption in 2010 should also be considering tapping the market in buoyant times unless they intend to simply repay bondholders next year.

With investors shifting their focus to the new corporate bond offerings in the primary market, it comes as no surprise that trading activity in the equity market slid to very low levels during the last six months with only €13.8 million worth of trades transacted. This represents a significant decline compared to the €33 million equity market activity transacted in the first half of 2008.

The MSE Share Index recovered half of the losses incurred in the first quarter of the year but still lies 8.6% below the level at the start of 2009. This does not compare well to the performance of the main international equity markets, which saw a much stronger recovery in the second quarter of the year helping them to move into positive territory. The Chinese stock market and other emerging equity markets strongly outperformed the US and continental Europe.

The Chinese Shanghai Composite Index surged 62.5% in the first six months of 2009 with the MSCI Emerging Markets Index climbing by 35%. Meanwhile the US market as represented by the S&P 500 edged 1.8 per cent higher while the UK FTSE 100 Index shed 4.2 per cent. Back to the local market, almost all equities closed the first half of the year in negative territory with the exception of GO plc which was the sole gainer. After sliding by 17.2% in the first three months of the year touching fresh all-time lows, the equity staged a welcome 24.8% gain in the second quarter to close 3.3% higher in the first six months.

At the other end of the table, GlobalCapital was the worst performer as its equity shed 24.7%, closely followed by Middlesea Insurance (-21.6%), Crimsonwing (-21.5%) and MaltaPost (-20.4%). One equity, Grand Harbour Marina, failed to record any trades - the last transaction took place on December 11, 2008! GHM shareholders who needed to sell some of their shares even at below the last traded price of €1.98 (in fact offers are placed in the market at €1.842) were not satisfied. The only bid in the market is for a mere 150 shares at €1.70.

Malta Government Stock prices closed sharply lower during the first half of 2009. Secondary market yields of government bonds in Malta as well as sovereign bond yields in most developed markets surged despite the historically low interest rate environment.

Malta Government Stock prices lost a large part of the gains accumulated in the final months of 2008, with the longest-dated 5.5% MGS 2023 sliding by 467 basis points as its price fell from 109.75% in December 2008 to 105.08%. Likewise, the 5% MGS 2021 slid by 412 basis points in the first half of the year to 101.90% and almost eight percentage points below its all-time high of 109.14% in December 2008. While many investors might have expected their Malta Government Stock holdings to continue to appreciate in value as a result of the low interest rate scenario, yields on European government paper and US Treasuries advanced (with bond prices falling) mainly in response to the significant amounts of new borrowings by governments to finance their growing deficits.

Currency markets were also volatile during the first half of 2009 with sterling staging a remarkable recovery against both the euro and US dollar following very steep declines seen in the latter part of 2008. The US dollar weakened against the euro, possibly as a result of international media comments including the risk of hyperinflation, the potential downgrade of the US credit rating and the possibility of the US dollar losing its status as a global reserve currency.

However, with increasing signs that the US economy is past its worst phase and increased speculation that the Fed could start raising rates by the end of this year, many international analysts are anticipating that the US dollar may recover by over 14% against the euro from current levels to $1.20 per euro by the end of 2009.

Back to the local market, the large amount of deposits in the local banking system as well as evident signs of money being repatriated by investors from overseas jurisdictions should continue to lend support to the bond primary market in the months ahead. The MSE anticipates five other bond issues as well as two large Malta Government Stock issues before year-end. Could some of the huge amounts of investible moneys find their way into some of the equities currently listed on the secondary market? Those companies offering attractive dividends and potential for improved financial results as signs of the global economic recovery become clearer are likely to be the first beneficiaries.

Mr Rizzo is director of Rizzo, Farrugia & Co. (Stockbrokers) Ltd.

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 issuer/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. 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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