The amount invested in local bonds is €4,000 million: corporate and government. To gauge the relative magnitude of this amount, suffice it to say that it is about 40 per cent of all deposits with local banks.

Reading through the prospectuses one finds that corporate bonds are generally issued to finance new projects and/or repay bank borrowings (overdue ones probably) or for the “general funding requirements” of the issuer. Another not uncommon, yet indicative, reason is to enable the issuer to raise cash by rolling over the maturing bond into a new bond, enabling the issuer to find the cash to redeem the first bond punctually on maturity. The cash is presumably not available for the purpose.

Rollovers have worked well, oiled by the propensity of local investors to go for a high coupon and by their readiness and ability to gobble up all offers within a few hours from issue date.

All well and good. But there is a lingering doubt at the back of all this. Had the need for rollovers been resorted to in isolated cases it would have been quite understandable. The incidence of rollovers is not an attractive aspect of the local bond market. For one thing, the readiness of investors to continue to come forward cannot be taken for granted. There could be a change in sentiment among investors some years down the road. As we know from recent history, the contagion of doubt, however illogical and ill-based, spreads quickly when investors’ money is at stake. One presumes that financial institutions and other parties may come forward to offer solutions. But this is not guaranteed to happen all the time.

Given the growing size and trading patterns of the bond market and the fact that on average about €400 million worth of bonds will mature annually in the next five years (government and corporate) apart from any new issue that might be offered in this period, it seems desirable to have some form of credit rating mechanism however basic this may have to be at this stage in local circumstances. The problem here is that any local body that could do the job would probably have been involved in one way or another in the market as a seller, advisor, beneficiary, intermediary or otherwise.

An independent credit rating agency would, on the other hand, be unshackled by possible connections or interests to assess the figures, assumptions and the feasibility of projections in the prospectus and be more free to express a clear opinion.

This should be obligatory due diligence, especially when the bond is unsecured. Admittedly this is not an easy task, but the small investor who does not have the know-how to assess risks deserves it. The cost of such an exercise can be absorbed by the funds generated by the bond itself when the issuer is in the money. It is also opportune to have another look at sinking funds. The bond holder has the comfort of a sinking fund. However some issuers that commit themselves to build a sinking fund declare in the prospectus itself that they will do so not from profits, but from cash surplus i.e. what would be left from profits after the issuer makes further investments, after replenishing working capital shortfalls and/or after deducting net cash used in financing activities and in some cases after repayment of intra-group loans, etc.

It can be argued that a percentage of profits generated by the bond in all equity belongs to the bondholders before, and not after, the payments.

Additionally, in some cases, sinking funds can be pledged to a third party, albeit subject to conditions should the issuer find himself short of liquidity. Sinking funds so accumulated could be pledged and placed out of reach of the bond holder at a time when the latter needs them most to put his mind at rest. Again, why undertake to provide a sinking fund equal to 50 per cent and not 100 per cent of the value of the fund? These provisos in the prospectus, lopsided in favour of the issuer, would be better avoided.

The counter argument could be that the issuer is giving all the information in the prospectus and it is up to the investor to weigh the risks involved. The issuer is only asking whether the investor is willing to take up his offer on the conditions in the prospectus. True. But the issuer is also making another solemn request and that is to be admitted to trade on the Malta Stock Exchange. Therefore he is presumed to be prepared to conform with all regulatory requirements. It is up to the authorities to lay down the rules.

The need to consider the setting up of a credit agency and to review the conditions of sinking funds gains priority when one keeps in mind that some bonds are unsecured, and by security I mean tangible, not nominal, collateral. There is a lot to say about the security aspect of bond issues, but that is another matter.

Raising finance through bond issues has become a preferred method and it is prudent to analyse some aspects of this market. The authority concerned will not be behindhand to take steps to protect the investor. Indeed, it has shown in recent weeks that it is vigilant and willing to do so.