Small and medium sized enterprises (SMEs) have been described as the backbone of the Maltese economy and have been a major contributor to the expansion of the nation’s wealth. Due to their importance to our economy, it is crucial that these organisations are provided with the best resources to enable further development and growth. Back in 2016, the Malta Stock Exchange (MSE) introduced a multilateral trading platform for SMEs known as Prospects MTF. This platform was created by the MSE to enable SMEs to raise finance in a cost-effective manner via the capital markets.
Prospects provide an SME with a number of advantages. The fees payable by an issuer are lower than those applicable under the Listing Rules. The admission process for any securities to be admitted to listing on Prospects is usually shorter than the process for securities to be listed on the main market. In addition, the required documentation is less complex than that under the Listing Rules; however, it should still be sufficient for an investor to make an informed decision.
An approved corporate adviser needs to be appointed by the issuer to carry out due diligence, and to draft and submit all the documentation required for admission to trading. Bonds issued on Prospects have to be either issued by an applicant that can demonstrate financial soundness, or be fully secured and backed by tangible assets, or guaranteed by a guarantor that should be able to demonstrate financial soundness. The acceptability or otherwise for securities to be listed on Prospects remains at the discretion of the MSE.
Following its launch in February 2016, Prospects remained inactive for over a year. However, the following years were relatively successful, as a number of SMEs utilised this market to issue securities and raise capital. Furthermore, the increase in number of issuers on the MTF has continued to generate higher amounts of volume and value traded, as evident in the accompanying Table 1. It should be noted that there was only one equity issuer in 2017 and 2018, and two equity issuers in 2019.
In general, investors perceive Prospects to be riskier than the main market given that the issuers are smaller companies and usually have a shorter track record. This may be one of the reasons why Prospects has been considered to be a relatively illiquid market. The maximum amount that can be issued on Prospects is €8 million over a 12-month period, and this limits the flexibility of active traders on the market.
Over the past three years, Prospects has seen more SMEs using capital markets as a source of funding
Having said this, it should be noted that the volume traded in bonds on Prospects has increased considerably, and this was not only due to the larger amount of issuers. The volume traded in 2017 suggests that had there been 21 issuers in 2017, liquidity would have been 154 per cent less than what it was in November 2019.
Investors are usually concerned about the smaller size and lack of liquidity on Prospects, which further increases the level of risk that such investments provide to a portfolio of investments. Apart from the screening carried out by the MSE at the initial stages of the issue, the issuers on Prospects have tried to repay investors for this additional risk in two ways. Firstly, the coupon offered on bonds issued on Prospects is generally higher than those issued on the main market. Table 2 looks at the average new issue spread between coupons of issues listed on Prospects and those on the main market between 2017 and October 2019.
Additionally, most of the issuers on Prospects are structured in such a manner that provides additional security to investors which is not always provided for on the main market. For example, most issuers on Prospects have restrictive covenants such as restrictions on dividends or further indebtedness stated in the company admission document.
Table 2 shows that investors have been rewarded with an average of 75 basis points (bps) for investing into Prospects over the main market. More generally, it is also noted that corporate spreads increased across both markets. This is driven by a proportionately larger decline in benchmark yields compared to the decrease in corporate bond yields.
Over the past three years, Prospects has seen more SMEs using capital markets as a source of funding. The changes in global interest rates and increased regulation in the banking sector may indicate that this trend will continue in the foreseeable future. Recognisable names such as Busy Bee and The Convenience Shop have both issued bonds on the MTF.
Prospects is a strong alternative for SMEs who wish to raise finance on the MSE. Investors are showing increased interest in these investments, as their risk-return trade-off may be regarded as being more attractive in the current yield environment. All of these are reasons indicating that there is a great opportunity for this market to continue flourishing in the future.
The information presented in this commentary is solely provided for informational purposes and is not to be interpreted as investment advice, or to be used or considered as an offer or a solicitation to sell/buy or subscribe for any financial instruments, nor to constitute any advice or recommendation with respect to such financial instruments. Curmi and Partners Ltd is a member of the Malta Stock Exchange, and is licensed by the MFSA to conduct investment services business.
|Total Number of Bond Issuers||Amount outstanding (€)||Volume Traded||Value Traded (€)|
Table 1: Developments in Bonds issued on the Prospects MTF
Source: MSE Statistics, Curmi & Partners Ltd
|Main Market||Prospects MTF|
|2017||327.5 bps||404.3 bps|
|2018||281.7 bps||381.9 bps|
|2019 (October)||361.8 bps||411.9 bps|
Table 2: Average New Issue Spread from MGS equivalent rate – Main Market vs Prospects MTF
Source: Central Bank of Malta, Curmi & Partners Ltd
Noelle Cauchi is a capital markets and research analyst at Curmi and Partners.