In last week’s article, I gave prominence to Malta International Airport plc’s important announcement of January 16 that at its upcoming AGM in May, it will propose a share buyback programme of 1.353 million shares (equivalent to 1% of the total issued share capital) effective as from June 1, at a minimum purchase price per share of €3.00 and a maximum of €7.38.
In the first few months of 2024, I had written regularly that the local equity market was characterised by weak sentiment and low trading volumes and proposed initiatives that ought to be considered by equity issuers and the authorities to stimulate activity in the Maltese equity market.
I had highlighted that in international markets, institutional investors, together with company insiders (directors, senior management, etc), as well as companies performing share buybacks account for a high proportion of activity on the secondary market.
Moreover, I had stated that in view of the low activity in the Maltese equity market brought about by the impact of COVID-19, an evident share overhang was clear across various companies, resulting in certain companies’ share prices not reacting to evident progress of improved financial performances.
Following these articles, in which I also advocated for the government to consider fiscal incentives for savings products similar to those prevalent in the UK, the US, Sweden and Australia, the Malta Stock Exchange organised a Capital Markets Roundtable in June 2024.
During this event, I had delivered a keynote speech in which I again articulated that investors’ primary concern is having a possible exit route to enable them to liquidate part or all of their investment if circumstances so require.
I had also added that the main initiative to increase trading participation and market liquidity is to have a ‘buyer of last resort’ in place wherever possible. In this respect, I had stated that if several companies whose shares are listed on the MSE (especially the larger ones) have an annual share buyback programme in place (assuming their cash flow and capital structure can permit this), such a programme should be sufficient to begin to encourage various types of investors to participate in the market once again.
A follow-up event was organised by the MSE last Wednesday. dealing with share buybacks and market making, which took place only a few days after the confirmation of MIA’s planned share buyback programme.
In a keynote speech delivered by Nicola Buhagiar from Camilleri Preziosi Advocates, it was argued that while share buybacks can have a positive impact on liquidity in a market with low trading volumes such as Malta’s, this can be detrimental in the long term as a result of the lower number of shares in public hands (free float) on the assumption that the share buyback is successful over a number of years.
Buhagiar also explained that share buybacks are not a primary solution to enhance the liquidity concerns across the entire market and she referred to the liquidity provider programme launched by the MSE during the first roundtable event in June 2024.
In essence, liquidity providers, which are very common across several European capital markets, aim to minimise the difference between purchasing and selling prices by constantly adjusting bid and ask prices in response to changing market conditions. This normally leads to improved market efficiency and a lowering of transaction costs for investors. Liquidity providers are generally regarded as essential players in absorbing excess supply or demand that is inevitable in securities over time.
The other keynote speech was delivered by Nick Curmi from Ganado Advocates on the subject of ‘issuer market making’. This would entail an issuer to initially start a share buyback programme, but rather than cancelling those shares (as is being contemplated by MIA and which is a very common occurrence among the very large companies listed in the US, the UK and Europe), these would be kept in treasury to then offer these shares for sale in due course via an appointed stockbroker.
The agreement between an issuer and a stockbroker is in the form of a so-called ‘liquidity contract’, which is a common practice in a number of European bourses. Curmi recommended that the Maltese legal and financial community discuss having a standard form liquidity contract to ensure that such a new scheme would follow the same procedure for all companies contemplating such an important programme.
On his part, MSE chair Joseph Portelli referred to some of the initiatives launched during the first roundtable event in June 2024, and with respect to the programme for liquidity providers, he indicated that discussions are taking place with the tax authorities to consider tax benefits for liquidity providers and issuer market makers.
Portelli also announced that the MSE has already spoken to a company interested in becoming a market maker in its own shares and he stressed the importance that the issuer has an arm’s length agreement with a stockbroker to conduct this activity. He explained that apart from holding the shares (and not cancelling them) for eventual resale in the market, such shares can also be used to fund mergers and acquisition activity and to also reward senior management with share ownership schemes.
Portelli also indicated that the MSE is studying the possibility of requiring new companies admitted to the equity market to immediately become market makers in their own shares. This should avoid the problem with all recent new IPOs wherein those investors who acquired shares on the primary market are having great difficult to try to dispose of any shares.
Another idea the MSE is contemplating is that of introducing another segregated list from the Main Market (or Official List) to distinguish those equities that have a liquidity mechanism in place from all the others. This would be an important feature and it will likely help to encourage institutional investors and high net worth investors to focus purely on these companies while the appetite by the investing public for the other companies could continue to diminish materially.
The start of MIA’s share buyback programme in the coming months, together with BOV’s consideration of a share buyback and other ways of improving the liquidity of the bank’s shares to be announced in the coming months, will likely lead to other companies replicating these schemes. These could prove to be potential game changers for the Maltese equity market following a prolonged period of subdued returns and weak trading volumes.
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