Share buybacks and issuer market making

In last week’s article I gave prominence to the important announcement by Malta International Airport plc of 16th January in which they disclosed that during its upcoming Annual General Meeting in May, it will be proposing a share buyback programme of 1.353 million shares (equivalent to one per cent of the total issued share capital) effective as from 1st June 2025 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 about the state of the local equity market characterised by weak sentiment and low trading volumes and proposed a number of initiatives that ought to be considered by equity issuers and also the authorities in order to stimulate activity across the Maltese equity market.

I had clearly highlighted that across 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 across the Maltese equity market brought about by the impact of COVID-19, an evident share overhang was clear across various companies which is resulting in share prices of certain companies not reacting to evident progress of improved financial performances.

Following these series of 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 also 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 the primary concern for investors 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 buy-back programme in place (assuming their cash flow and capital structure can permit this), then 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 coincidentally 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, 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. Dr 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 being 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 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. Dr 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, the Chairman of the MSE 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.

Mr Portelli also announced that the MSE have already spoken to a company interested in becoming a market maker in its own shares and he stressed on the importance that the issuer has an arm’s length agreement with a stockbroker to conduct this activity. He also 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 M&A activity and to also reward senior management with share ownership schemes.

Moreover, the Chairman of the MSE also indicated that they are 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 IPO’s wherein those investors who acquired shares on the primary market are having great difficulty trying to dispose of any shares.

Another idea being contemplated by the MSE 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 commencement of a share buyback programme by MIA 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 due 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.

Read more of Mr Rizzo’s insights at Rizzo Farrugia (Stockbrokers).

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