Amid the ongoing uncertainties related to the COVID-19 pandemic and the war in Ukraine, there has been a surge in issuance of new corporate bonds in the Maltese capital market. Since the start of the year, a total of €239 million in bonds have been listed or are in the process of being listed on the regulated main market of the Malta Stock Exchange.
To place this in perspective, the level of issuance in 2022’s first few months is almost equivalent to the amount issued throughout 2021 at €242m. Should the elevated issuance persist in the months ahead, we could reach the record issuance levels seen in 2019 at €358 million and in 2017 at €338 million.
From an issuers’ perspective, it is evident that companies are appreciating the benefits of diversifying sources of borrowings and not be entirely dependent on the banks, especially given the increasing interest rate scenario on the horizon. In fact, while the Bank of England, and the US Federal Reserve have already started tightening their respective monetary policies, it is widely anticipated that the European Central Bank will announce at least one interest rate hike during the fourth quarter of 2022.
The increased issuance over the past few months by Maltese private companies could also be a result of delays in capital expenditure plans during the peak of the COVID crisis between early 2020 and mid-2021. The lifting of the remaining restrictions across Europe and in Malta is expected to translate into a healthy recovery in the hospitality sector and related industries over the summer months and, as such, companies may have a clearer and more positive outlook ahead.
From retail investors’ perspective, two factors may contribute to their increased appetite for Maltese corporate bonds. With retail investors realising that idle deposits in banks do not generate any meaningful investment income despite the changing interest rate environment and with inflation rising sharply, investors are increasingly mobilising idle liquidity held with banks.
Investors are increasingly mobilising idle liquidity held with banks
From recent financial statements published by the three largest retail banks in Malta there are over €7.4 billion worth of idle deposits in the banking system – more than half the size of Malta’s entire GDP. As such, the issuance in recent months of over €200 million represents a tiny fraction of what is still a large wall of money seeking positive investment returns. This augurs well should more companies plan to tap the bond markets in the months ahead.
The other factor that may be contributing to the growing appetite for the new bonds being issued is the sharp decline in the prices of Malta Government Stocks in recent months. Since the start of the year, the RF MGS Index has slumped 6.5 per cent, with prices of the medium and long-term sovereign bonds sliding by over nine percentage points. In view of the very weak performance of the MGS market and the very low yields on offer by Maltese sovereign bonds, retail investors may be crystallising their gains before further declines in prices materialise and reinvesting in the corporate bond market, offering higher yields depicting the additional credit risk. The rotation out of the very low-yielding MGS market into the higher yields offered by corporate bonds is also evident in the secondary market as several corporate bonds are registering meaningful trading activity on a daily basis. The sharp improvement in the liquidity of the corporate bond market is also fuelling investors’ growing appetite to participate in corporate bonds as opposed to remaining over-exposed to the MGS market given the elevated price risk due to the inflationary environment. Moreover, the increased liquidity in the corporate bond market is surely also contributing to the mobilisation of idle deposits in banks into capital market instruments.
Bond buybacks by a few companies are also helping the corporate bond market to be a more liquid venue for the investing public. In fact, throughout 2021, a total of €4.78 million (nominal) in corporate bonds were bought back, principally by Gap Group plc (€1.78m), Best Deal Properties Holding plc (€1.73m), Pendergardens Developments plc (€0.7m), Plaza Centres plc (€0.47m) and Mediterranean Investments Holding plc (€0.05m).
A further €8.36 million (nominal) in corporate bonds were repurchased and cancelled so far this year, driven mainly by Together Gaming Solutions plc (€5.24m) and Plaza Centres plc (€1.41m – as part of its €2m bond repurchase programme rolled out in September 2020).
Following the recent new bond issuance, the size of the bond market has now surpassed €2.2 billion. The Corinthia Group (represented by International Hotel Investments plc, Corinthia Finance plc and Mediterranean Investments Holding plc) remains the single largest issuer at €385 million (accounting for 17.2 per cent of the overall bond market), followed by Hili Ventures Group (represented by Hili Finance Company plc, Premier Capital plc, Hili Properties plc and 1923 Investments plc) at €308m (accounting for 13.7 per cent of the bond market).
Incidentally, following the start of the Ukraine invasion on February 24, the prices of most of the bonds by the two largest issuers in Malta eased in price. The Corinthia Group has direct exposure to Russia in view of its sizeable hotel and investment property in St Petersburg, as well as the upcoming investment in Moscow through a small minority stake. While the Hili Ventures Group does not have direct exposure to the Russian Federation, it generates a sizeable portion of its overall revenue from neighbouring countries, including Romania, Poland and the Baltic states.
Among the eight new issuers so far this year, there are four newcomers to the Maltese capital market, namely St Anthony Company plc (operating in the nursing and residential retirement home sector), G3 Finance plc (a hospitality company with two hotels in Mellieħa), Ferratum Bank plc (a mobile-lending specialist) and IZI Finance plc (the new operator of the national lottery). The
latter operates in the land-based gaming sector and is the second issuer in the gaming industry to use the bond market following the issue by Together Gaming Solutions plc in 2019.
Last week, GAP Group plc redeemed its €29 million bond issue. When such redemptions take place in cash, most investors quickly reinvest these funds in new or existing securities in the capital market. The other redemptions due this year are both taking place in July.
On July 6, a €40m bond by Mediterranean Investments Holding plc is due to mature, and on July 31, a Pendergardens Developments plc bond of over €21m is also due for redemption. These companies have not yet announced whether investors of these bonds will be receiving their capital in cash or whether new bonds are being issued to refinance all or part of the upcoming redemptions.
The growing size of the corporate bond market is a positive development not only for the capital market but especially for the entire Maltese economy.
The proper functioning of a capital market is necessary to support economic growth and financial stability through the transfer of liquidity from investors holding surplus funds to companies that require funding to grow their businesses. For this reason, further initiatives are needed to take the local capital market to its next stage of development, including a new strategic plan in line with Malta’s economic objectives for the future.
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