The Treasury of Malta last week successfully raised €100 million from the local investing public. This achievement was even more significant as the issue was oversubscribed prior to last Friday’s auction, which in the main, typically comprises bidding by credit institutions. By Wednesday afternoon, the Treasury had received applications for a total value of €216.15 million.
Of these, €152.65 million were from members of the public - €6.2million for the five year (2015) issue and €146.45million for the 20 year (2030) issue. On Tuesday the Treasury announced that the 2015 bond applications were fully allocated, while for the 2030 issue, the first €20,000 of each application was satisfied in full and any remaining balances receiving 36 per cent allocation.
This level of interest hasn’t been seen since 2004. A number of reasons that could have contributed to this success, including, €35million MGS maturing tomorrow, a number of maturing local corporate bond issues, or perhaps the price rallies of the 2030 bonds issued in May 2010 (up from 99.50 to 104.45 by first week July) and August 2010 (from 100.00 to 104.61 by the end August).
In light of this event, this article aims to inform investors on the mechanics of trading in Malta Government Stock. The government of Malta, through the Treasury, uses the bond market for a number of long-term budgeting purposes. Bonds issued by the Maltese sovereign are known as Malta Government Stock, or by their acronym, MGS. Fixed coupon MGS pay interest on a semi-annual basis. Selling MGS between coupon payment dates still provides the holder with pro-rata interest.
The day count convention for the purpose of computing accrued interest between coupon periods is based on the actual number of days between the last coupon date and settlement date, divided by the actual number of days between the last coupon date and the next coupon date (that is, Actual/Actual).
Floating Rate MGS also pay interest on a semi-annual basis, but are linked to six month Euribor (Euro Interbank Offered Rate) plus a fixed spread until maturity. The interest rate is reset semi-annually with the six month Euribor rate in effect three business days prior to relative coupon period each year. Interest is calculated on an actual/360 day basis.
Malta Government bonds trade with an ex-dividend period of 21 days, i.e. should an investor purchase MGS in a period up to 21 days prior to coupon payments, he will not receive a interest payment, however he is entitled to a discount equivalent to the interest which would have accrued from settlement date of the bond, to the date interest is due.
Coupon and principal payments are payable by direct credit to any branch of any local credit institution to the registered holder as appearing at the Central Securities Depository operated by the Malta Stock Exchange (MSE). Payment will be made as advised on the application form (for new issues) or by way of a letter covering all MGS in the holder’s MSE account (in the case of secondary market acquisitions). Bondholders can elect to receive interest gross or net of tax.
MGS issuance is published by way of a directive issued by the Ministry of Finance. The directive details the aggregate amount of new stock to be issued, the coupon rates, coupon frequency and maturity dates. It is now common for the government to issue stock which is fungible with existing issues. Fungible bonds make for larger bond issues and provide better pricing guidance. The bond prospectus is published in the Government Gazette shortly after.
Bonds are normally priced two business days prior to application period opening. Applications for amounts up to €100,000 take priority over larger amounts in the allotment process. Larger applications go through an auction process.
Although the government does announce its budgetary requirements at the beginning of the year (in terms of bond issues), there is no set calendar when these are issued or spread over a particular year.
After issuance, MGS is listed on the MSE where it can be traded on the secondary market. The Central Bank of Malta (CBM), through its Money and Capital Markets Office, acts as market-maker for MGS on the secondary market. Daily bid prices and yields are published for all outstanding MGS on a T+3 basis (settlement takes place three business days after trade occurs) in respect of deals traded on-exchange, and on a same day value (T+0) basis, for deals effected off-exchange.
Prices are available before trading opens on the MSE from the Central Bank’s website. The Bank’s broker only provides a bid price as it cannot guarantee adequate balances on its books, mainly due to the buy-and-hold (or held to maturity) nature of MGS investors. The CBM broker guarantees a market, however it reserves the right to lower the bid depending on volumes available on the sell-side.
The bid price calculated by the CBM also acts as guidance for third parties to trade upon. In the event that the Bank acquires significant amounts of any given bond issue in the secondary market, the Bank’s Broker would be prepared to quote indicative offer prices for such stock only.
This article has been prepared by Vincent Micallef of Curmi and Partners Ltd, and is the objective and independent opinion of the author. The information contained in the article is based on public information. 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.
www.curmiandpartners.com
Mr Micallef works with Curmi and Partners Ltd.