The Malta Financial Services Authority fails to inform us of the risks involved, if any, in investing in bonds.
As an authority, it fails to ensure that the bonds are rated; yet it allows the issuer of the bonds to use the name of the authority, so when the issuer states that the bond issue has been approved by the Malta Financial Services Authority, the man in street, on seeing that the MFSA gave its approval, is misguided into thinking that his money is secured.
The buzz phrase in these bond issues is the following: “the bonds shall be issued at par and constitute the general, direct, unconditional, unsubordinated and unsecured obligations of the issuer and shall at all times rank pari passu with other outstanding unsecured obligations”. In other words, you could end up with nothing. But for the MFSA, this is not something that the public should be made aware of. So it continues to allow its name to be used by the issuers, giving the public the perception that once the bonds are approved by MFSA, they are guaranteed.
Most of the time, bonds are issued because the issuer does not have enough security to give to the bank when he asks for a bank loan. Bonds in Malta are nearly always unsecured and unsubordinated so that the investor is not guaranteed his money back. The MFSA, as the regulatory authority, tells us to consult the prospectus of the bond issue and the financial advisers; but the financial advisers are more often concerned with the profits they make from the investments; and the wording of the prospectus, as approved by the Authority, uses phrases which are beyond the public’s comprehension.
We had the case of Fort Cambridge, where bonds were authorised by MFSA on a mere outline permit. Recently, we had the Gasan Finance company plc 6% bond issue, which are unsecured and unsubordinated, and will rank after other outstanding, unsubordinated and unsecured obligations of the issuer, present and future. The Authority does not oblige the issuer to limit these obligations in any way.
As to credit rating, the Issuer states that it has not sought the credit rating of an independent rating agency; and rightly, so because the Authority does not think that this should be made a mandatory requisite.
We had the bond issue by Tumas Group, secured only by Spinola Development Company. Again, these are unsecured, unconditional and unsubordinated, and will rank pari passu without any priority or preference with all other present and future unsecured and unsubordinated obligations of the. Likewise, the Corinthia Group bonds are secured by the parent company Corinthia Palace Hotel Company Limited; and Melita bonds are also unsecured. And we can carry on with many other examples.
Notwithstanding all these risks, these bonds were all over-subscribed.
Oddly enough, the only bonds that are secured (that is, the Government Bonds) attracted a lower than expected demand when issued last August. The Minister for Tourism blamed the timing, as well as the fact that the private sector offers better rates. Prof. Edward Scicluna was quoted as saying these relatively disappointing results must have accrued due to a misreading of market sentiment on behalf of the Treasury, and that the market seems to be expecting wider spreads or risk premiums than the one judged adequate by the Treasury.
But none of them came up with a satisfactory answer.
The public is not stupid and knows that much of the money invested in bonds is money which the Treasury ought not to know about. If people are ready to invest in unsecured bonds rather than secured bonds, then they must not have worked hard for that money... and are afraid that the Commissioner of Inland Revenue will get to know about it.
We had the case of Bank of Valletta and Middlesea, both of whom suffered write-downs in their investment portfolio.
The Bank of Valletta invested with the Lehman Brothers without anyone’s knowledge, only issuing a company announcement on the evening of 15 September 2008 informing the market that it held a position in senior bonds of Lehman Brothers as part of its overseas investment portfolio. But it keeps the value of this loss tightly under wraps and it was only on October 31 2008 that the total amount invested by BOV in Lehman Bonds was made known announcing that it had recognised a loss of €12.7million from this holding.
But this €12.7 million investment actually cost the BOV a further €41million as a result of the fall in value of its other bonds in its portfolio. And in April 30 2009, a further €31.8 million write-down on its international investment portfolio was recognised by BOV in the first half of the 2009 financial year to March 31, 2009.
But for the MFSA there is no obligation for the banks, who are paid to keep the people’s money, to go public or to inform their clients when they make these investments. Nor is there any law which obliges banks to inform the MFSA and their clients as to how much, if any, they have invested in the unsecured and unsubordinated bonds issued in Malta.
No wonder the Malta Financial Services Authority is continually asked to order the issuers to have their bonds rated by a recognised rating agency, and to inform the Authority of the names of the investors whose investment go beyond a certain threshold. After all, the MFSA is there to prevent the laundering of dirty money, and to safeguard the consumer from junk bonds.
Bond ratings help the consumer know the level of risk involved in that particular bond issue: the lower the raing, the higher the cost of borrowing, thus the lower the company’s value. The top four quality categories are Standard & Poor’s AAA, AA, A, BBB or Moody’s Aaa, Aa, A, Baa.
Those lower than this grade, like BB, B and lower are all considered as junk bond ratings. The investor is free to invest in junk bonds because he is enticed by the high interest; but the MFSA must be more investor-friendly and stop with the attitude that this is the role of a financial advisor, and not of the Authority.
I am not saying that we should adopt the mechanism of Standard & Poor’s or of Moody’s; but what I am saying that the MFSA must not bless the issue of any bonds which are not rated by a recognized rating agency.
Let us hope that there will be no Lehman Brothers in Malta in the near future!
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