Unprecedented issuance in Q4

The Maltese capital market faces record issuance during the fourth quarter of the year at a time of numerous articles on the current state of the bond market with a specific contributor claiming last week that the “bond market is in trouble”.

In my own articles over recent weeks, I had opined that the difficulties being faced by a number of issuers ahead of their upcoming bond redemptions being mentioned in the widespread media did not take place due to some sudden recent developments as these tend to happen over a period of time. This would have been amply clear if one devotes time to analyse the periodic financial statements that are issued. Unfortunately, very few financial intermediaries or opinion writers invest their time in such important financial analysis. In fact, I had also stated that apart from those companies being mentioned, there are other issuers and guarantors that are clearly performing badly which the investing public may not be aware of since these are not being mentioned publicly. The financial difficulties of these other companies will undoubtedly emerge in due course once they are either in need of an equity injection to shore up their finances or they approach their maturity date and suddenly the market notices such problems.

However, I would not generalise that these financial difficulties are replicated across all issuers so as to define the entire local corporate bond market as being in trouble. There are a number of companies with very strong financial metrics and low levels of leverage providing a very safe place for investors to place their hard-earned savings to earn additional investment income.

With the information currently in hand via the company announcements issued to date, the largest upcoming issue will again be from Bank of Valletta plc with a bond offer of up to €125 million at a rate of five per cent. This would be the third issue of a similar nature by the bank in the past 12 months as it already raised a total of €250 million across two offerings in October 2024 and June 2025 also at an interest rate of five per cent. While it is true that these are subordinated bonds and subject to the ‘Bank Recovery and Resolution Directive’ (BRRD), it is fair to also highlight the robustness of BOV’s financial position, with very strong and sustainable profitability levels, a growing and dominant market share as well as very high capital ratios.

Although last week’s opinion writer aired his views on subordinated issues and proposed additional safeguards, one needs to clearly distinguish between the strength of banks issuing subordinated bonds. Not all banks are strong and contrary to popular belief, banks can also face difficulties. Given BOV’s current financial position, it could easily be classified as ‘best-in-class’ and investors should not be concerned about the credit risk of Malta’s largest bank. When contemplating an investment in these new bonds, as usual investors need to consider their overall exposures to the bank in view of it being the largest issuer in Malta.

An interesting dimension to highlight is the comparison of the interest rates being offered by other bond issuers versus the five per cent coupon of BOV. Clearly, the additional compensation being offered by most issuers is likely not sufficient in the context of the different credit risk between BOV and most of these issuers.

These arguments are rarely mentioned in the public domain but should be highlighted for the benefit of the numerous investors who simply subscribe to or purchase bonds without requesting or being given a summary of the information contained in the prospectus or financial statements to gauge the level of risk being taken.

Incidentally, an article on the Financial Times published over recent days regarding the high amount of issuance of ‘low-rated’ or ’junk bonds’ in Scandinavia brought to mind the correct pricing of bonds by issuers to compensate investors accordingly for the risk being taken. The article also mentioned a recent bond issue of €115 million by a Malta-based private jet charter company at an interest rate of 13 per cent for 3-year bonds apart from a USD-denominated issue last year by the luxury cruise line The Ritz-Carlton Yacht Collection also at an interest rate of above 10 per cent. These bonds are being met with strong demand by asset managers and family offices across Norway, Sweden and Denmark apart from hedge funds in the US and UK. These offerings taking place in more sophisticated markets give a clear indication of the correct interest rate for high yield or ‘junk’ bonds.

In essence, investors ought to demand sufficient compensation for the risk being involved including the risk of default. In an opinion piece published last week, reference was made to a ‘simplistic’ remark of mine about the possibility of eventual defaults also in the context of the recent statement made by the Minister of Finance that some defaults are truly inevitable. I agree with the Minister of Finance in this respect and I also believe that defaults are not only inevitable (similar to developments across overseas bond markets) but can also be beneficial to the Maltese market over time as investors will then possibly begin to be fully appreciate the risks involved in bonds and would start to request adequate compensation in additional interest when new offerings become available.

Apart from BOV, there are other issuers who have already launched or indicated their upcoming bond issues including HH Finance plc, Adventum Quartum Central Europe SICAV plc, Central Business Centres plc, SD Finance plc, Plan Group plc and MedservRegis plc. Rumours are rife that there are several others lining up to tap the bond market before the end of the year. Unfortunately, the MFSA and the MSE have not felt the need to reintroduce the publication of a tentative listing calendar to provide such knowledge not only to the investing public but also to the various issuers to be aware of the extent of bond issuance. Moreover, in the coming weeks, a fresh issue of Malta Government Stocks is also due given the planned issuance that had been published by the Treasury earlier this year apart from an important €45 million rights issue by APS Bank plc.

With the media spotlight firmly on the bond market, and with several comments from the public beneath these articles clearly showing the unsophisticated nature of many investors, it would be important to gauge the level of appetite for these numerous bond issues all happening almost concurrently. Although statistical information on corporate bonds is not readily available to analyse the take-up of such issues, it is already evident that a number of institutional investors are being very selective indeed and are not supporting many of the new offerings being made available.

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