Rizzo Farrugia launches corporate bond index (2023)

In December 2010, we launched the Rizzo Farrugia MGS Index to help market professionals and investors track price trends in Maltese government stocks. In the absence of a corporate bond index and the growing popularity of the local corporate bond market, we are now launching the Rizzo Farrugia Malta Corporate Bond Index.

While the Rizzo Farrugia MGS Index is based on the indicative bid prices quoted daily by the Central Bank of Malta, due to the lack of a market making mechanism for corporate bonds, the Rizzo Farrugia Malta Corporate Bond Index is based on the closing market prices of each of the Malta Stock Exchange listed bonds.

Unfortunately, due to the lack of market makers in corporate bonds, as well as the general "buy to hold" strategy of many local retail and institutional investors, many securities are not traded on a daily basis and therefore limit movement in the index.

Furthermore, since the Rizzo Farrugia MGS Index is based on daily purchase prices quoted by the central bank, and these prices in turn depend on movements in eurozone bond market yields, the MGS Index is particularly volatile from day to day, which has been highlighted in recent weeks by the renewed turbulence on the world markets, the "flight to safety" and concerns about certain peripheral countries became very clear again.

The Rizzo Farrugia Malta Corporate Bond Index is weighted by the market capitalization of each bond and hence the largest bonds issued (i.e. Bank of Valletta 2020 subordinated bonds of 70 million euros at 4.8% and HSBC Bank Malta 2017 subordinated bonds of 58 .2 million euros at 4.6%)). Subordinated bonds) have a higher weight in the index than smaller bonds, such as the two recently issued €3m Central Business Centers bonds and the £1.4m 6% Mediterranean Bank 2019-2024 bonds.

The Rizzo Farrugia Malta Corporate Bond Index has a retrospective date of 31 December 2008 to measure the performance of the corporate bond market over the past seven years. Despite the flaws in the local corporate bond market, year-to-date historical performance is a strong indicator of specific individual events and broader market movements.

The most vivid example is the sharp drop in the corporate bond index in 2011. In fact, between February 4, 2011 and March 23, 2011, the Rizzo Farrugia Malta Corporate Bond Index fell by 4.6 percent. This was entirely due to the sharp decline in the value of Grupo Corinthia's bonds (issued by Corinthia Finance, International Hotel Investments and Mediterranean Investments Holding) as a result of the Libyan revolution.

IHI, MIH and Corinthia bonds accounted for about 26 percent of the overall index in 2011, and the sharp fall in prices due to increased credit risk resulting from the Libyan revolution had a negative impact on the overall corporate bond index. During this six-week period, the prices of the various bonds issued by these three companies fell from above par to below 75% for the 2015/17 MIH bonds at 7.15%. Prices then recovered to parity in October 2011.

It is worth noting that given the growth in the local corporate bond market in general, Corinthia Group's bond weighting was reduced to around 22 percent in early February 2016, even after considering the acquisition of Island Hotels Group Holdings last year, has outstanding bonds with a market capitalization of just over 52 million euros.

Another very interesting observation is the good performance of the corporate bond index since the summer of 2014, when the President of the European Central Bank, Mario Draghi, twice announced a rate cut from 0.25% to 0.05% and indicated that the ECB might initiate a program of quantitative easing (QE).

In the 12 months from August 2014 to the corporate bond index's all-time high of 1,097.73 points on August 4, 2015, the index was up 5.5%.

Larger issued bonds have a higher weight in the index than smaller bonds.

Government bond markets rallied on the back of the fall in official interest rates in the summer of 2014 and signs that further monetary stimulus might be introduced in early 2015, and likewise the Maltese corporate bond market moved broadly in sync, as evidenced by the strong upward movement various corporate bond prices between mid-2014 and the first half of 2015. Indeed, many of the longer-dated corporate bonds issued earlier in the year, such as AX Investments' 6 percent bond 2024 and Mariner's 5.3 percent bond Finance 2024 Bond, rallied to new highs of more than 109 percent. The increased responsiveness of the corporate bond market was a healthy development, and the 'yield hunt' phenomenon also seeped through the stock market as investors turned to equities for better yields.

The QE program, also known as the Public Sector Purchase Program (PSPP), was first announced to the market by the ECB on January 22, 2015. The program started on March 9, and until the beginning of May 2015, MGS prices rose in line with the strong upward movement in eurozone government bond prices. Many local corporate bonds also performed positively, reflecting falling yields in the local government bond market and in the European government and corporate bond markets. Because of the inverse relationship between prices and returns, an increase in the index means a decrease in returns and vice versa. Indeed, several corporate bond prices continued to make new highs as trading activity on some of the longer dated corporate bonds was relatively encouraging.

2015 was the best year for the Rizzo Farrugia Corporate Bond Index, up 2.5 percent. In the previous six years, the positive results were more moderate. The only exception was in 2011, when the corporate bond index fell 1.5 percent for the reasons outlined above. It is interesting to note that the 2.5 percent rise in the corporate bond index in 2015 corresponds very closely to the performance of the MGS index (+2.7 percent), showing that bond prices have trended towards of the couple have moved. However, the corporate bond index was much less volatile between May and December 2015 compared to the strong moves in MGS prices.

On the other hand, the corporate bond index underperformed the MGS index in 2014. This reflects in part the lack of responsiveness and infrequent trading activity that characterized the corporate bond market through early 2015.

With regard to the group weights, companies of the Corinthia Group were named with a total weight of 22 percent, but the largest single issuer is the Bank of Valletta with 23.3 percent. This may be further increased when the second tranche of subordinated notes is issued shortly as part of the overall debt issuance program. The group's third-largest individual exposure comes from the three companies that are part of Hili Ventures (namely Premier Capital, PTL Holdings and Hili Properties) at eight percent.

At over 35 percent, the banking sector has the greatest weight in the Corporate Bond Index. That's down from a peak of just over 42 percent in 2012, which reflects various non-bank bond issuances in recent years.

Since the beginning of 2016, local bond markets have moved in opposite directions, with the corporate bond index falling 0.3 percent and the MGS index rising 0.3 percent. This could be due to a number of corporate callable bonds falling in price as they approach their potential prepayment dates.

Although the size of the corporate bond market has grown steadily over the past seven years (market capitalization has increased from €536 million to €1.3 billion), the local financial system remains awash with liquidity and many new issuers can be expected the market will benefit from this in order to create new investment opportunities for private and institutional investors. Many investors tend to prefer exposure to local companies, particularly given the renewed turmoil in international markets.

Rizzo, Farrugia & Co. (Stockbrokers) Ltd (RFC) is a member of the Malta Stock Exchange and licensed by the Malta Financial Services Authority. This report was prepared in accordance with legal requirements. It was not communicated to the companies named here prior to its publication. It is based solely on public information and is published for informational purposes only and should not be construed as a solicitation or offer to buy or sell any security or related financial instrument. The author and other relevant persons may not trade in the securities to which this report relates (except to fill unsolicited client orders) until the recipients of this report have had a reasonable opportunity to respond. RFC, its directors, the author of this report, other employees or RFC on behalf of its clients have interests in the securities mentioned herein and may at any time make purchases and/or sales of them as principal or agent and may also have other dealings with the company(ies). converse. Stock markets are volatile and subject to fluctuations that cannot reasonably be predicted. Past performance is not necessarily indicative of future results. Neither RFC nor any of its directors or employees accepts any responsibility for any loss or damage arising out of the use of all or any part of it, and no representation or warranty is made as to the reliability of the information contained in this report.

© 2016 Rizzo, Farrugia & Co. (stockbrokers) Ltd. All rights reserved.

Edward Rizzo is a Director of Rizzo, Farrugia & Co. (Stockbrokers) Ltd.

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