Surge in year-end debt issuance

Article #777 by Edward Rizzo - Published Weekly

The strong and consistent pace of issuance of fixed income securities seen across the Malta Stock Exchange throughout most of the year gathered further momentum during the final few weeks of 2022. A number of existing and new issuers tapped the bond market in recent weeks making this a record year of issuance across Malta’s corporate bond market.

Today’s article will not provide highlights of these various issues that became available for investors in recent weeks. However, two other important developments across the fixed income market warrant some coverage for the investing public.

As highlighted in my article of 3 November providing information on the expected high levels of debt issuance by the Government of Malta in the coming years, the Financial Estimates tabled in Parliament by the Ministry of Finance at the end of October together with the Budget Speech indicated that an issue of €370 million in Malta Government Stocks was due by the end of 2022. On 15 November, the Treasury announced the offer of €200 million across two new MGS subject to an over-allotment option of up to a further €150 million. However, despite the large amount on offer totalling €350 million, the final MGS issue of the year was surprisingly restricted to institutional investors only who had to tender for a minimum of €500,000 when only a few weeks earlier, there was significant demand by the retail investors for the 10-year MGS at 4%. In view of the large amount on offer that was needed by the Treasury by the end of the year coupled with the tepid demand by the institutional investors during the prior MGS issue via auction in July 2022, it would have been ideal for this offering to be available to both retail as well as institutional investors. Such a formula should be explored in the future by for example capping the amount available to retail investors to ensure a good size is still available for the institutional category.

The results published on 25 November of the auction that took place on the same day revealed that the Treasury allocated an amount of €215.4 million from the 59 bids received totalling €217.5 million. This implies a shortfall of €134.6 million from the maximum amount of €350 million available for investors and anticipated to be issued by the Ministry of Finance. A total of €75.5 million was allotted in the 5-year bond which is a fungible issue of the 3.40% MGS 2027 (VI) that was available to retail investors in the October issue at a fixed price of 101.25%. During the November auction, the weighted average price of the accepted bids of the 5-year bond was 101.42% (YTM: 3.08%). The balance of €139.9 million was allotted in the new 8-year bond, the 3.70% MGS 2030 (II), at a weighted average price of 101.75% (YTM: 3.45%).

The other material development is the inaugural issue of Bank of Valetta plc across the international bond market. During the course of the year, the bank had made repeated reference for the need to raise a sizeable amount of senior bonds in the international market specifically in order to meet its MREL (minimum requirement for own funds and eligible liabilities) regulatory targets.

On 16 September BOV confirmed that it was granted regulatory approval in respect of a Base Prospectus for the issuance of a medium-term Programme of Notes of up to a maximum aggregate principal amount of €500 million. On 6 December, the bank announced that it successfully issued €350 million in callable senior non-preferred notes at a coupon of 10% which were offered both locally and internationally.

In their announcement, BOV made specific reference to the target market of this sizeable bond issue by explaining that given their complexity, these were not available to the retail market, but could only be subscribed for by professional investors and eligible counterparties for a minimum of €100,000 (nominal).

As expected, this announcement generated an elevated amount of calls from investors and followers across the Maltese capital market not only due to the coupon established at 10% per annum but also at the distribution method chosen.

Apart from the fact that the minimum investment is €100,000, only investors that can be classified as elective professionals may have the possibility of considering these in their investment portfolio. Investors found it rather surprising that the international regulations stipulate that in order to change one’s status from a retail investor to an elective professional, one must demonstrate that they satisfy two of the following criteria: namely (i) they have carried out financial transactions, in significant size, on the relevant market at an average frequency of 10 per quarter of the previous four quarters; (ii) they hold an investment portfolio (including cash deposits and financial instruments) exceeding €500,000; (iii) they work or have worked in the financial sector for at least one year in a professional position.

It was indeed disappointing and hard for investors to understand that very few investors whose main objective is to have a diversified portfolio of fixed-income instruments are eligible to participate even though some of these investors have large portfolios and are also in a position to sustain potential losses in extreme circumstances.

Many investors remarked that while there are these stringent restrictions in place to participate in the issue of Malta’s largest bank, on the other hand, no such restrictions are in force for investors to acquire bonds either on the main market of the Malta Stock Exchange or the Prospects MTF market when it is evident to all that there are a number of companies whose fundamental strength surely cannot be compared to that of BOV.

This is indeed a very valid point. It makes investors and market participants realise that regulations at times really do not achieve the ultimate desired objective.

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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.