Ignoring the fine print in bond issues

Paul Bonello

Although truth is often obvious, those with the responsibility to react to the truth – in this case the Malta Financial Services Authority, appointed for the purposes of the Financial Markets Act to approve selected bond securities to be listed on the Malta Stock Exchange –somehow fail to look in the face at the elephant in the room.

The latest case is that of PTL plc’s 5.1% €36 million Unsecured Bond 2024 which, although bolder than ever, is not a solitary case. So I shall be making some observations arising from the published prospectus of the proposed security that should be very obvious to the trained eye.

The Listing Authority’s primary socio-economic function in terms of law is the consideration of suitability for listing in the interest of the general investing public, indeed whether “an authorisation for Admissibility to Listing of the Securities would be detrimental to the interests of Investors”.

The approach taken by the Listing Authority is to over-emphasise the adherence to formalities in the application process in what is in practical terms a tick-of-the-box exercise, often leaving gaping holes in matters of substance.

The MFSA knew full well that this bond, notwithstanding the €25,000 minimum threshold at pre-placement stage, will still be bought, indeed oversubscribed, by the general investing public, which is not sophisticated enough to appreciate the implications of what is stated in the prospectus and often decides merely on the premise that the issue has been approved by the MFSA.

I fail to understand how such a bond issue could be approved when, for the second time this year, no audited consolidated financial statements of the issuer are attached to the prospectus.

If one were to deduct the intangible assets consisting of goodwill made up of excess price paid on acquisitions of subsidiaries, one would get a restated net asset deficit of €37.21 million

Indeed, the prospectus includes unaudited, pro forma consolidated financial statements for the year ended 31 December, 2013 and six-month financial statements for the period ended 30 June, 2014, both of which are declared to be “for illustrative purposes only… addressing a hypothetical situation only and therefore does not represent the Group’s actual financial position or results”.

Since when is the MFSA supposed to approve bond issues based on hypothetical financial statements?

The use of bond proceeds of €35 million was largely meant to repay HSBC bank finance, with HSBC itself rubbing its hands with the processing of each bond application in its role of bond manager and registrar (but not as underwriter), and which proceeds will go in reduction of its lending.

The largest chunk of remaining proceeds use was to repay indebtedness to a group company of the issuer.

Indeed it would have been useful if the prospectus had informed potential investors what interest rate was payable to HSBC, which rate, I strongly suspect, was higher than the 5.1% proposed in the bond issue, and this in spite of the bank borrowing being secured and of a short-term nature rather than for a 10-year term bond issue that is unsecured and with no effective negative pledge.

But the apex of the myopic vision of the Listing Authority must be the consideration that out of the issuer’s “hypothetical” total assets of €66 million as at 30 June, 2014, “€41 million consists of goodwill and intangibles arising on the acquisition” of subsidiaries.

The issuer’s capital and reserves at the same date are stated at a mere €3.79 million, manifestly already a situation of financial gearing going over the roof!

If one were to deduct the intangible assets consisting of goodwill made up of excess price paid on acquisitions of subsidiaries – an exercise invariably made by all diligent lenders including the local banks when lending their own money – one would get a restated net asset deficit of €37.21 million.

Is this yet another case of bad judgement? My advice to the board of governors of the MFSA is that if they cannot stand the heat, they should get out of the kitchen.

Paul Bonello is managing partner at Finco Treasury Management