‘Relaxed’ listing rules encourage issue of new bonds

The cautious Maltese savers are hungry for good investments, and not just property, but the millions in private bonds being issued by established PLCs.

But observers know that the surprising uptake of €20 million in Medserv bonds – the successful oil logistics firm with its grand Mediterranean network – and another €40 million in bonds from entrepreneur Anglu Xuereb’s AX Investments this year, have now encouraged two major companies to take advantage of the massive liquidity in the market.

MaltaToday has been told that behind the easy access to the abundant liquidity on the market is the significant relaxation in the rules for the issuing bond issues. 

The Malta Financial Services Authority chose to eliminate the strict rule obliging corporate issues to have a sinking fund.

The new rules do away with the requirement for the sinking fund for many companies irrespective of the minimum subscription level and the term of the bond.

This led investors in bonds to be at a distinct disadvantage compared to depositors in a bank, who have a depositor compensation scheme, mandated by EU law, even though is limited to €100,000 per depositor, per bank.

The 2013 relaxation in rules, which does away with the need to have a sinking fund – a sort of ‘depositor compensation’ fund as guarantee – mean that companies could seek financing from the public, rather than go to banks.

Under new Basel III rules, banks have been adopting more conservative lending rules and restricting credit to faltering markets such as the construction business: it was obvious that banks were unwilling to finance certain corporate projects, especially when new bond issues were being created to actually fund previous bond issues.

“It is also clear that retail investors are being safeguarded far less by the regulator with the new regime of rules for bond issues,” one financial services practitioner told MaltaToday, on condition of anonymity.

“In 2010 listing policies, there was an obligation to have a sinking fund custodian. The custodian was entrusted to manage third-party property and release it only for what it was intended. But these rules discouraged companies from seeking bond issues.”

The original listing policies had also introduced the requirement to publish a financial soundness report, so that normal investors – so called “retail investors” – could inform themselves of the issuers’ financial track record.

The financial soundness report, which is composed of a due diligence report, remains a requirement under the new policy. However, only the financial analysis summary prepared by an independent stockbroker will be published as an annex to the prospectus, having to be updated annually.

“Instead of a financial soundness report, investors have a summary of the analysis – as a compromise it is updated annually, but some investors might wish to know far more about the corporate bond issuer’s financial stability, especially when they are not experienced investors,” the expert told MaltaToday.