The Financial Analysis Summary – Market information as a driver for visibility, volume and clarity

The domestic capital market, through the Malta Stock Exchange (MSE) company announcement portal, has been inundated with the publication of a number of reports referred to as the Financial Analysis Summary (FAS) in recent weeks pertaining to issuers of bonds aimed at the retail market and listed on Malta’s regulated main market.

The FAS is in adherence with the Listing Policies issued by the Listing Authority of the Malta Financial Services Authority (MFSA) in March 2013. Simply put, these policies require issuers of bonds targeted at the retail investor market to engage a stockbroker to prepare a FAS on an annual basis. The FAS seeks to provide an overview of the issuer, its history, structure and business model as well as a review of three-year historical financial information. The initial FAS, which is published by the issuer as an appendix to the prospectus, would include a set of projections, which are re-assessed the following year through a variance analysis.  The variance analysis, as its name implies, provides an overview and an explanation of the variances between those forecasts presented in the prior year’s FAS with the actual figures achieved by the issuer (or guarantor, as applicable) during the period under review. As the issuer is expected to produce forecasts on an annual basis within the FAS, this variance analysis is undertaken throughout the lifetime of the bonds in issue. Through the FAS, readers of the reports (who as a minimum are expected to include bondholders) therefore have the benefit of following the issuer’s  (and guarantor’s, if applicable) progress, or lack thereof, throughout the bond’s term while also using the latest information to assess the issuers credibility (in so far as the attainment of financial objectives are concerned) as well as the ongoing appropriateness of the investment from a credit risk perspective compared to market alternatives at the time.

Over the past couple of years, the number of bond issues increased materially although an increasing number of these issues were not admitted to listing on the regulated main market but were admissible for trading on the alternative Multilateral Trading Facility (MTF), operated by the MSE and branded as ‘Prospects’. In respect of Prospects, the MSE advises that “Securities admitted to the Prospects MTF are issued by small and medium sized enterprises (SMEs). Investment in smaller companies can involve greater risk than is generally associated with investment in larger more established companies and can result in significant capital losses. Securities issued by SMEs tend to be illiquid and investors should therefore seek appropriate advice before making any investment”.

By no means should readers assume that I am highlighting this point in respect of Prospects because there is no risk with investing in bonds listed on the regulated main market. Far from it. Every investment, irrespective of whether it is listed or otherwise and irrespective of which market it is listed on, has its own risks and existing or potential investors should learn how to appreciate this fundamental fact perhaps even more than they already do today.

The requirement for issuers on the regulated main market to publish this report has, to my mind, provided investors with much needed visibility and clarity to enable them to make informed decisions prior to trading in the bonds. The key term here is ‘informed decisions’. While there are regulatory requirements for transparency, information asymmetry can be detrimental in the efficiency of a capital market.  The FAS, through its various disclosures, aims to address the issue of information asymmetry by giving its readers an insight into what management aims to achieve during the forthcoming financial year and how it performed against its forecasts that had been disclosed in the prior year. What is unfortunate however is why this information, which is so important, is not being made available by all issuers of securities irrespective of the listing venue or the type of instrument in issue.

Information generally flows to the market in a statutory fashion via earnings announcements either half yearly in terms of regulatory obligations imposed by Listing Rules or in certain instances quarterly, if voluntarily so adopted by the issuers. Investors use this source of important information to assess the investment (shares or bonds or both) in the context of the information and this in turn, drives demand and supply and therefore creates movement and volume. The overall efficiency of a capital market depends on its operational efficiency but also on its informational efficiency. Operational efficiency focuses on bringing buyers and sellers together to the market and efficiency increases as more and more relevant information about the securities is published to the market periodically.

Readers should now be understanding the link between the value that the FAS has provided over these years through the increased activity that we have witnessed in the market both in terms of new issues but also in terms of trading activity in corporate bonds. Few appreciate that activity is now rather widespread in bonds and most bonds listed on the regulated main market do trade almost daily contrary to popular perception.

I firmly believe that the introduction of this policy in 2013 has been extremely positive, beneficial and much needed. Over time, the market has increasingly warmed up to this policy and I have no doubt that investors and analysts in particular look forward to the publication of these reports annually. If we are to aim for quality as opposed to quantity, I believe that it is high time that this policy is also introduced on all issuers of bonds, the Prospects MTF included. Should this also include shares? Perhaps worth debating this further. Could this be a first step in bridging the informational gap between local equity issuers and companies whose shares are listed on overseas markets?

Undoubtedly, over time, investors will appreciate the value of these reports perhaps much more than they do today as we are living in a particularly unreal situation where an investor in both the regulated main market as well as the Prospects MTF does not have access to the same quality and important information in equal measure. Unfortunately, with the way bonds are snapped up probably irrespective of a proper assessment of their quality (or lack of), the need to provide more information to the market for better comparability between the various issuers increases drastically and becomes an urgent requirement.

Coupled with this, perhaps the time has also come for the market and the regulator to assess whether any adjustments to the content of the updates provided annually may be necessary to make their preparation and eventual publication more efficient. In this regard, more concise reports may also be something worth considering where the value added will increase if the content is restricted to material updates in the business of the issuer, a concise variance analysis and the forecasts including the underlying assumptions. As I mentioned earlier, these are the parts which add most value to investors and the market as most other information provided (such as structure, board composition, history, major assets etc) would have already been made available nonetheless by the company via the Annual Report.

Let us collectively aim to improve on what has been done so far. Given its sensitivity and importance in view of the increasing numbers of borrowers and investors, we should hopefully all be pulling the same rope and aim for quality as opposed to quantity. More information of the proper type can only be beneficial as long as the obligation is made on all as opposed to some.

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