Issuance of the Malta Government Bonds
Earlier last month, the Government of Malta issued its annual borrowing plan whereby it indicated that it would issue up to €1.7bn in new Malta Government Stocks throughout the year. This is a gross issuance amount as there are €489m of existing bonds that are redeeming throughout 2024. Net issuance is expected to be €1.2bn.
The first of the planned five or six fundraising exercises that the government is expected to undertake throughout 2024 took place two weeks ago. In this round, the Treasury launched two issues of Malta Government bonds. One a 3.15% MGS maturing in 2027 and another 3.35% maturing in 2029. The choice of tenors makes for some interesting reading.
I suspect that when selecting the 2027 and 2029 tenors, the Treasury was sensitive mostly to the type of interest rate that it would be required to pay, choosing a part of the yield curve that ostensibly, and understandably, would allow them to keep the interest cost manageable. The actual nature, and source of demand for these bonds, once they were issued however, challenged this objective.
In total, the Treasury received bids/applications for €511m whereas it issued €399.2m, giving it a healthy bid-to-cover ratio of 1.89 times (pre-overallotment option) and 1.28 times on a post-overallotment offer basis. Encouragingly, this is on the higher end of the more recent demand patterns that have been prevalent over the last few years.
The MGS offer was structured in the usual format – aimed at retail and wholesale clients. Here in Malta, we continue to have strong interest in government bond issues directly from the retail market.
This is critical as it gives the government a strong pool of local savings to continuously tap into when required. This part of the market is very interest-rate (read coupon) sensitive, assuming issuance at par, less so on the term of the bond.
Hence, in a traditional upward sloping yield curve, these investors would usually be less interested in shorter-dated bonds. In the recent 2027 and 2029 government bond issue, however, retail investors applied for just under €108m. This is in line with the patterns seen in recent government bond issues and could reflect the lack of attractive interest rates that the major local banks are offering on their equivalent deposits.
On the other hand, the wholesale market, predominantly made up of banks, insurance companies and local funds, bid somewhat aggressively for these same government bonds, bidding for just under €403m. The interesting part here is that the bidding took place at prices well below par, with the Treasury accepting bids in the 2029 bond (where over €353m was bid for), all the way down to €96.94.
The weighted average price of bids accepted came in at €98.04 translating into a yield of 3.73 per cent. The message from institutions was clear, “we are comfortable with the credit risk, but we want a higher return to be enticed to part with our money”. Perhaps their expectations on interest rate cuts are indicating that rates are not going to be cut as fast as the market was indicating! Or they were being opportunistic in their approach.
The issuance of 2027 and 2029 paper also raised some interesting thoughts. A look at the maturity profile of Malta Government debt indicates that over the next five years, approximately €3.5bn of debt is up for maturity, out of a total government debt of €8.6bn. This may create some pressure on government finances given normal refinancing risks that any issuer faces.
The logic behind adding to this cohort of maturities is a mystery as, from 2026 onwards, the government is going to have to refinance approximately €900m a year of maturing debt which, when added to the budget deficits the country continues to run, together with other financing requirements, point towards the possibility of issuance surpassing the €2.0bn in government bonds per annum.
One can argue that ‘only’ half of this is new money that will be raised; however, this presupposes that the other half will automatically roll over. A look at the government debt metrics indicates that the local government continues to have a strong profile.
Debt to GDP remains at a reasonable 55 per cent and the major credit rating agencies indicate strong and, in some cases, improving credit profiles, thereby providing a supportive refinancing environment; but I remain cautious about the size of the refinancing wall that is inching its way towards us.
David Curmi is chief officer, business development and clients relationships, at Curmi & Partners Ltd.
The information presented in this commentary is solely provided for informational purposes and is not to be interpreted as investment advice, or to be used or considered as an offer or a solicitation to sell/buy or subscribe for any financial instruments, nor to constitute any advice or recommendation with respect to such financial instruments. Curmi & Partners Ltd is a member of the Malta Stock Exchange and is licensed by the MFSA to conduct investment services business.