Added transparency in financial communications

Article #645 by Edward Rizzo - Published Weekly

On 20 May, the European Securities and Markets Authority (ESMA) published a Public Statement on the implications of the COVID-19 pandemic on the half-year financial reports of companies whose bonds and shares are listed on stockmarkets around Europe. On the same day, the Malta Financial Services Authority (MFSA) issued a circular to all issuers and market participants highlighting the main recommendations included in the Public Statement with the main aim being increased transparency and consistency when publishing the half-year financial reports which are due in the months ahead.

The annual reporting season in Malta for the 2019 financial year is now almost over with the exception of International Hotel Investments plc who availed itself of the extension permitted by the MFSA and as such, IHI’s 2019 Annual Report will be published by the end of June 2020.

Issuers of shares and bonds in Malta will soon start publishing their interim financial statements (due by the end of August since the large majority have a December year-end) while most bond issuers and their guarantors will also publish their Financial Analysis Summary including the 2020 financial projections. The market will therefore be in receipt of a significant amount of data with respect to most companies in the weeks and months ahead.

In the introduction to the Public Statement, ESMA explains that “the COVID-19 outbreak has posed significant challenges to business activities and introduced a high degree of uncertainty on the expected development of the pandemic and the associated knock-on effects on the economic and financial system”. Due to the exceptional circumstances faced by many companies across Europe and also worldwide, ESMA expects that for the upcoming half-yearly financial statements, companies provide an “extensive” update on “activities, events and circumstances” since the impact of the COVID-19 outbreak became evident in the first half of 2020.

ESMA’s Public Statement highlights the need for issuers to provide updated information that is useful to investors to adequately reflect the current and expected impact of the COVID-19 situation on their financial position, performance and cash flows.

The authority also indicates that the executive management and any internal committees within an organisation must be aware of the contents of the recommendations within the Public Statement “to ensure that they provide comparable, relevant and reliable information and an adequate level of disclosure and transparency to market participants”. ESMA also highlighted that given the complexities of the current environment, audit committees must “enhance their oversight role which is key to contribute to high-quality half-yearly financial reports”.

The authority also highlighted the importance of providing information on the identification of the principal risks and uncertainties to which issuers are exposed, any impairments to non-financial assets and other disclosure requirements.

One example cited by ESMA refers to the conditions attached to any government relief and support measures availed of by any issuer. In this case, the authority “recommends that issuers provide transparency regarding the application of these measures in terms of eligibility, conditions and consequences”.

With respect to the timing of the publication of the 2020 interim financial statements, ESMA does not allow any delay in the issuance of these reports so as to provide “timely, relevant and reliable information” to the financial community.

Since the COVID-19 outbreak led to a significant risk of material adjustment to the carrying amounts of assets and liabilities, ESMA is also urging issuers to update the assessment made at the financial year-end about the assumptions regarding future years as well as other major sources of uncertainty of other estimates used.

Since in Malta’s case most bonds are issued via special purchase finance vehicles and subsequently guaranteed by the parent company of the group, in my view the added disclosures included within the ESMA Public Statement should also be applicable for the guarantors and not only the issuing company. Financial analysts and investors must focus on the financial performance of the guarantors in order to gauge the robustness of a company to honour its debt obligations rather than the financial vehicle which would generally be a very simply structure. Since the bond proceeds are on-lent by the issuer to the guarantor or other group companies thereby representing an asset in the financial statements of the bond issuer, the financial statements of the issuer do not reveal the extent of the overall indebtedness and performance of the guarantor. It would therefore be best practice for the guarantors to any bonds on the Regulated Main Market of the MSE to also publish the information recommended by ESMA in the months ahead.

Following the publication of the June 2020 interim financial statements in August, the next set of reportable figures for companies listed on the Regulated Main Market of the MSE would be in April 2021 with the 2020 annual financial statements. In view of the fluidity of the situation and the high degree of uncertainty among the financial and investing community, in my view companies should additionally also be requested by the authorities to publish the Q3 figures by the end of November and the preliminary 2020 full-year KPI’s by the end of February. This would help to provide an overview of the trends being experienced and whether any kind of recovery is being registered during the second half of 2020. This should be applicable to the equity issuers and also bond issuers and guarantors for the investing community to get as much information as possible.

Failure to do so will create too much of an information lag between the end of August (when the interim financial statements are published) and the end of April (when the annual financial statements are published). Although issuers and guarantors are undoubtedly tremendously busy at dealing with the impact of COVID-19 on their businesses and possibly adjusting their business models accordingly, as issuers of financial instruments to the investing community, they must also appreciate the importance of transparency and disclosures to all market participants as well as to the institutional and retail investing community.

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This article was produced by Edward Rizzo, Director at Rizzo Farrugia, which is a company licensed to undertake investment services in Malta by the MFSA under the Investment Services Act, Cap. 370 of the Laws of Malta and a member of the Malta Stock Exchange. The company’s registered address is at Airways House, Fourth Floor, High Street, Sliema SLM 1551, Malta.