Bond market back in the limelight

As the Maltese economy grounded to an almost abrupt halt in mid-March as a result of the severe restrictions due to COVID-19, I had written an article towards the end of the month analysing the manner in which several prices of local corporate bonds suffered double-digit declines and quite a few of them also dropped below their par value.

There was an evident sense of uneasiness from various retail investors in the height of the pandemic which led to a marked decline in several bond prices. However, following the sharp sell-off, investor sentiment improved somewhat from mid-April possibly as a result of the success of Malta in containing the pandemic and also following the various initiatives taken by the Government of Malta with different economic stimulus packages to safeguard employment and businesses. Many corporate bond prices experienced a strong recovery with some bonds also trading back up above their par value. Nonetheless, some bonds are still trading below par value such as the 5% Mediterranean Investment Holdings plc 2022, the 5.1% 1923 Investments plc 2024, the 4.5% Medserv plc 2026, the 4.15% Phoenicia Finance Company plc 2023/28 and the 3.8% Hili Finance Company plc 2029 to name just a few among the largest bonds.

In recent months, announcements were published by various companies providing details on measures being taken to mitigate the impact of the pandemic. More recently, a number of companies (and in some cases guarantors of bonds) began to publish their annual financial statements with more detailed commentary on their expectations for 2020 and how the pandemic is impacting their operational performance.

Some bond issuers also published their 2020 financial projections within the annual Financial Analysis Summary while many companies availed themselves of the extension permitted by the MFSA to delay the issuance of projections by up to a maximum of two months due to the high level of uncertainty on business operations especially those within the hospitality sector and those that are also heavily dependent on the tourism market (such as Simonds Farsons Cisk plc).

As one would expect given the very difficult circumstances seen in recent months, no new corporate bond issues were launched in Malta. The last primary market issue was that of AX Group plc in November 2019 when a total of €25 million was successfully raised across two different bonds.

After a long period of inactivity on the primary market, during the first week of June, GO plc announced that its 60.26% owned telecoms subsidiary operating in Cyprus – namely Cablenet Communication Systems Limited – was in advanced preparations in respect of a proposed public issue in Malta of €40 million unsecured bonds at a coupon of 4% maturing in 2030. The proposed issuance of bonds is still subject to a number of conditions, including but not limited to the conversion of Cablenet to a public limited liability company.

In a presentation published online providing details on the historic financial performance of Cablenet as well as selected financial projections for 2020, it was also stated that the proceeds from the bonds are largely earmarked for financing capital expenditure (€14.6 million) to support the continued growth of Cablenet particularly in the mobile segment as well as refinance existing debt (€21.7 million). The announcement had also indicated that an application will be submitted to the Listing Authority requesting the admissibility to listing of the bonds on the Official List of the Malta Stock Exchange. Should this issue be approved by the Listing Authority, it would be the first time that a company registered overseas is tapping the local market. This is an interesting development for the continued progression of the Maltese capital markets.

Meanwhile, Shoreline Mall plc published a Prospectus dated 18 June in respect of the issuance of a total of €40 million secured bonds spread across two maturities: €14 million bonds for a 6-year term carrying a coupon of 4% and (ii) €26 million bonds maturing in 2032 with a coupon of 4.5%. The proceeds will be used for the construction of the Shoreline Mall project comprising a retail mall of a total gross area of approximately 25,000 square metres spread on two floors with circa 44 outlets for lease as well as a food court. The Shoreline Mall project also includes the construction of seven high-end residential units and a sizeable car park complex. The offer period runs from 6 July until 31 July unless the issue is over-subscribed in which case, it will close earlier. Of particular importance, the Prospectus indicates that applications for the two bonds being issued by Shoreline Mall plc can only take place subject to advice being obtained from an authorised financial intermediary. In terms of MiFID II regulations, a Suitability Test must be conducted by the financial advisor and based on the results of the test, the financial advisor must be satisfied that an investment in the bonds may be considered suitable for the applicant in question. This is the first time that plain-vanilla non-complex bonds may not be acquired by retail investors on a non-advisory (i.e. execution-only) basis.

Moreover, on 22 June 2020, Mediterranean Investments Holding plc announced that it filed an application with the Listing Authority requesting admissibility to listing of €20 million 5.5% unsecured bonds redeemable in 2023 guaranteed by Corinthia Palace Hotel Company Limited. The proceeds from the issuance of the new bonds are being used to redeem the 5.5% unsecured bonds which are due to mature on 31 July 2020.

It will be interesting to analyse the response from retail and institutional investors to each of these new bonds given the prevailing economic conditions. All three companies have very different characteristics apart from operating in different sectors and in different geographical areas. A good take-up by the investing public may encourage other issuers to tap the corporate bond market and possibly the equity market in the months ahead.

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