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Primary market activity in 2018

As the end of the year approaches, it is worth reviewing the amount of issuance across the primary market during 2018 and compare this to the activity of last year.

Few investors may recall that on February 1, the Malta Stock Exchange (MSE) had issued a notice to its members (i.e. stockbroking firms) in which it provided an indicative listing calendar for the first half of 2018 on the Regulated Main Market.

It was initially expected to be a highly promising year from a new issuance perspective as seven corporate bonds, two equities and one rights issue were earmarked to be approved during the first half of the year.

Unfortunately, not all of these issues materialised. Moreover, since no names of issuers were published in the indicative listing calendar at the start of the year it is impossible to conclude which of the issuers cancelled or postponed their fund-raise and the reasons for the delays or cancellations.

Barring any other new issues being approved by the MFSA in the coming weeks, a total of five new corporate bonds were approved during 2018 together with one new equity as well as a rights issue.

At the beginning of the year I had argued that it was going to be difficult to replicate the success of last year since many new issues in 2017 were roll-overs of maturing bonds into new bonds. In fact, out of the 12 new bond issues in 2017 there were five roll-overs.

As such, when assessing the amount of new issuance in 2018 to that of last year, it is important to observe that the five new corporate bonds issued this year compare well to the seven bonds issued last year.

However, when comparing the total amount of issuance there is a marked difference since over the past 12 months, the six new bond issuers raised a total of €101.25 million while during 2017, the six new bond issuers issued a total of €198.75 million apart from the fact that there were also additional amounts raised via each of the roll-overs. In fact, the total bond issuance in 2017 amounted to €338.6 million and the amount of new funds raised net of any redemptions was €286.3 million.

During 2018 there were no roll-overs from non-financial companies and the only two bonds that matured were not renewed. The €55.4 million 4.8 per cent Bank of Valletta plc bonds were redeemed on August 27 and the €30 million 5.9 per cent HSBC Bank Malta plc bonds matured on October 7 and neither of these banks resorted again to the bond market. This was possibly both as a result of the high levels of liquidity at both banks and also due to the increased complications when issuing complex financial instruments for subscription by retail investors.

In the context of these added procedures as a result of new regulations, it may therefore be surprising that the most recent bond issue approved by the MFSA a few weeks ago (the €25 million 4.15 per cent Phoenicia Finance Company plc) was in actual fact a complex financial instrument. This bond is classified as a complex financial instrument due to the possible early redemption as from 2023. On the other hand, in recent years, most of the companies opting for an early redemption as a result of the low interest rate environment, subsequently resorted to plain vanilla bonds with one final maturity date (normally with a term of 10 years) when the new bonds were issued in order to classify the new bonds as ‘non-complex’ instruments.

A total of five new corporate bonds were approved during 2018 together with one new equity as well as a rights issue

Another interesting aspect is that four of the five issuers (namely Hudson Malta plc, Exalco Finance plc, Melite Finance plc and Phoenicia Finance Company) are newcomers to the bond market showing the increasing popularity by several Maltese companies to resort to the bond market to diversify their sources of finance. This follows the equally positive trend of last year when another five new issuers tapped the bond market namely Von Der Heyden Group Finance plc, SD Finance plc, Stivala Group Finance plc, Virtu Finance plc and Bortex Group Finance plc.

There were two additions to the equity market although only one was the result of an Initial Public Offering (IPO), namely the €8.3 million offering in Main Street Complex plc. The other listing occurred on January 30 as a result of the spin-off of Trident Estates plc from its parent company Simonds Farsons Cisk plc. The new entrants to the equity market this year continued to add depth to the property sector on the MSE. There are now a reasonable number of companies mainly involved in commercial properties and other companies currently carrying out property development activities. This is important ahead of the new rules expected in the months ahead to regulate Real Estate Investment Trusts which can prove to be beneficial to these existing companies and also to many others that have so far not sought an equity listing on the MSE.

Another new equity is likely to be admitted to the Official List of the MSE early in 2019 following the approval by GO plc shareholders earlier this week for the offering of up to 49 per cent of the issued share capital of BMIT Technologies plc via an Initial Public Offering. The market capitalisation of BMIT based on the offer price of €0.49 per share is of just under €100 million which would represent a weighting of approximately 2.3 per cent of the equity market. This is an important development for the equity market on various fronts. It would be the largest equity offering ever to take place on the MSE and assuming this would be another popular investment proposition, it could pave the way for other large equity issues in the years ahead. Moreover, this new equity would be the second technology company on the MSE apart from RS2 Software plc and this helps to reduce the concentration on financial services and property companies. 

It is still too early to speculate on the extent of new issuance in 2019. Apart from the IPO of BMIT Technologies plc, another rights issue is expected during the course of the year as Trident Estates plc had already announced that it will be conducting a two-stage rights issue of €15 million in 2019 and 2020. With respect to the bond market, while it is hoped that the trend in recent years for a number of new issuers to seek financing via the capital markets will continue, there may be new issues also by some of the existing issuers. In fact, there are three redemptions due by two bond issuers (namely €90 million by Bank of Valletta plc across two bonds due in May and June as well as circa €20 million by MeDirect Bank plc) and the possibility of three early repayments. The possible early redemptions in 2019 are from MeDirect Bank plc, Gasan Finance Company plc and Corinthia Finance plc.

The publication of an indicative listing calendar could prove to be an important initiative for both the investing public as well as for investment advisors. The MSE as market operators and MFSA as regulators should co-ordinate accordingly to publish the indicative listing calendar on a regular basis since it can be of great help even to some of the new issuers planning their fundraising exercise on the Regulated Main Market.

Rizzo, Farrugia & Co. (Stockbrokers) Ltd, “Rizzo Farrugia”, 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 company/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. Rizzo Farrugia, its directors, the author of this report, other employees or Rizzo Farrugia 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, and may also have other business relationships with the company/s. Stock markets are volatile and subject to fluctuations which cannot be reasonably foreseen. Past performance is not necessarily indicative of future results. Neither Rizzo Farrugia, 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.

© 2018 Rizzo, Farrugia & Co. (Stockbrokers) Ltd. All rights reserved.

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