Bond market comes back to life

Article #512 by Edward Rizzo - Published Weekly

In mid-July I had published an article explaining the expected bond issuance programme during the summer months after the Malta Stock Exchange had issued an indicative listing calendar.

In that article I had mentioned that two of the expected upcoming five bonds were already known to investors (the €6 million bond by Central Business Centres plc and the €15 million bond by Grand Harbour Marina plc) while the identity of the other three bond issues were still unknown.

These bonds have now all been issued and therefore the indicative calendar was honoured in full. The €20 million roll-over and new bond issue included in the indicative calendar was of Simonds Farsons Cisk plc while the €37.5 million bond mentioned in the calendar was increased to €45 million and was issued by Stivala Group Finance plc. This was the first time that this company tapped the bond market and the proceeds were mainly used for the acquisition and development of a number of properties.

Meanwhile, the €25 million bond mentioned in the calendar was somewhat delayed and a Prospectus dated 30 October 2017 was issued by Virtu Finance plc earlier this month. This is another new name for the bond market and the proceeds are being used to partially finance the acquisition of a new high speed ferry which will cost a total of €75 million and which will begin operations along the Malta-Sicily route in 2019.

The Virtu Finance bond also marks an important development as it is coming from a group of companies involved in the maritime sector. Most of the bonds listed on the MSE are exposed to the local property, financial and tourism sectors and it is important that the capital market attracts issuers from different economic sectors.

In addition to these three issues, another two bonds have since been announced which were not included in the indicative calendar.

On 30 October 2017, Bortex Group Finance plc published a prospectus in connection with a €12.75 million bond issue to fund a number of projects. The largest project involves the refurbishment and extension of the former Plevna hotel and beach club in Sliema.

Moreover, Mediterranean Bank plc published a Prospectus dated 25 September 2017 for the issuance of the equivalent of a maximum of €20 million in subordinated bonds available in two currencies, euro and Sterling. It is interesting to highlight that the sterling tranche was not very successful since only €1.2 million was eventually listed thereby rendering this bond extremely illiquid and the smallest in issue on the main market of the MSE.

Another important point to highlight is that this bond was the first callable bond to be issued in quite a while. The new Mediterranean Bank plc bonds were classified as complex financial instruments not only due to the early redemption feature (these may be redeemed on any interest payment date between 2022 and 2027) but also as a result of the bonds being subordinated and additionally subject to ‘BRRD’. This is the European Bank Recovery and Resolution Directive, effective as from 2 July 2014, which was enacted to ensure that governments will not use taxpayers’ money to ‘bail out’ any financial institution, as happened in various jurisdictions during the international financial crisis.

I had dealt with the differences between complex and non-complex financial instruments in another article published on 22 June 2017 wherein I also mentioned that in view of the additional obligations on financial intermediaries when assisting investors in transacting in complex financial instruments, all non-financial companies are now coming out with plain vanilla bonds so that they will be classified as non-complex securities.

Most investors would have also realised in recent months the method of distribution of the new bond issues which were not available across all financial intermediaries. As opposed to the practice in the past, nowadays issuers are selecting one or not more than a handful of financial intermediaries to assist them in distributing the bonds to a group of investors.

Since these new procedures are expected to continue to characterise the primary market in the months and years ahead, investors need to become accustomed to utilising the secondary market more often and gaining exposure to certain securities once trading commences. This is precisely the situation with many investors who invest in international bond markets.

As we are nearing the end of the year, it is fair to say that 2017 was a particularly busy year for the bond market. Five companies rolled over their maturing bonds while another six bonds were issued. Within this category, apart from the Mediterranean Bank bonds, the five other bonds came from new issuers to the market, namely SD Finance plc, Von der Heyden Group Finance plc, Stivala Group Finance plc, Virtu Finance plc and Bortex Group Finance plc.

So, what are the possibilities of a similar busy year also in 2018? It would be very hard to repeat the number of new bond issues as witnessed in 2017 especially since no roll-overs are due from non-financial companies during 2018. Following the series of early redemptions in recent years, the other remaining callable bonds still in issue are due for early redemption in 2019 (Gasan Finance Company plc and Corinthia Finance plc) and in 2020 (Medserv plc).

However, two other bonds are due to be redeemed in 2018 – the €55.4 million 4.8% Bank of Valletta plc bonds due on 27 August and the €30 million 5.9% HSBC Bank Malta plc bonds due on 7 October. It is too early to know whether both banks will be replacing these maturing bonds. On the one hand, one would need to consider whether BOV requires Tier 2 capital (subordinated bonds are classified as Tier 2 capital) assuming that the current €150 million rights issue will indeed be successful. Meanwhile, given the fact that bonds of financial institutions are ranked as complex financial instruments and investors need to undergo a ‘question and answer’ session before being allowed to carry out any transactions in complex financial instruments, it is also questionable whether HSBC Bank Malta would wish to proceed with such a bond issue to replace their maturing bonds.

Is it actually right that for investors wishing to buy plain vanilla bonds of some companies that may have weak credit metrics, the application procedure is relatively simple, while for reputable and strong banks, a ‘question and answer’ session needs to be carried out? This is putting off many investors as well as a number of intermediaries from participating in such issues. This is an area that needs to be debated in order to explain the rationale behind this to the many investors who are beginning to question these practices.

With respect to other 2018 potential bond issues, following the success seen in 2017, the conditions across the market continue to remain favourable. At the most recent meeting of the European Central Bank, although the level of asset purchases under the QE programme will decline by half as from January 2018, the ECB reiterated its forward guidance on interest rates by stating that interest rates will remain at their present levels until after the end of its asset purchase programme. In essence, this implies that interest rates in the eurozone are likely to stay on hold until at least March 2019. As such, given the strong indications that the low interest rate scenario will persist for many more months, this will continue to provide an ideal backdrop for corporate bond issuance by various companies seeking to diversify their sources of finance.

Meanwhile, following the success of the Von der Heyden Group at tapping the local corporate bond market, it is likely that other international companies may also utilise the Maltese capital market since it is somewhat difficult for small corporate bond issuers to be successful in raising finance across the larger financial centres worldwide. Although financial intermediaries and investors need to remain particularly vigilant on any new company coming to the market (possibly also some unknown international names), this may also be a positive feature since it could offer investors the possibility of diversifying out of Malta. In fact, many investors are beginning to mention that too many local bonds are exposed to the local property and tourism sectors. By way of example, the bond issue earlier this year of Von der Heyden Finance plc enabled investors to also gain exposure to the international real estate markets.

Market participants together with the MSE and the MFSA need to remain open to new possibilities for the local capital markets to ensure it continues to provide investment opportunities to the many retail as well as institutional investors seeking to expand their investment portfolios.

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Rizzo, Farrugia & Co. (Stockbrokers) Ltd, “RFC”, 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.

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