Many investors would have noticed an increase in local bond issues with a smaller total amount issued (typically in the region of €5 million) and with higher coupon interest rates compared to other regular market listings. These smaller issues are part of the what is called the Prospects MTF and are not subject to the main listing rules and regulations. There exist certain differences to having a main market listing and having a prospects’ listing and these differences are important for investors to understand before investing their money.

What is the Prospects MTF?

“The Prospects MTF is a multilateral trading facility (MTF) operated by the Malta Stock Exchange (MSE). It provides a cost-effective opportunity for small and medium-sized enterprises (SMEs) to raise capital by issuing bonds or equity.” – Malta Stock Exchange website. As such, a Prospects issue is not subject to the Listing Rules issued by the Malta Financial Services Authority and are not required to be compliant with the Prospectus Directive of the European Union.

Does this mean that Prospects issues are not regulated? No, although they are subject to less stringent requirements, the issues on the Prospects MTF must still abide by the Prospects MTF Rules and must still issue an admission document which in many aspects is similar to a main market prospectus. Furthermore, the Prospects issuer needs to appoint a Corporate Advisor which acts as a guide to the issuer and consistently ensure adherence to the companies’ continuing obligations as laid down in the Prospects MTF Rules. Moreover, an issuer has to submit supporting documentation and be approved to be admitted on the Prospects Market.

In a nutshell, the Prospects market is aimed at issuers who have a smaller amount of capital to raise and/or do not have a track record that would make them eligible to issue a main listing bond. So does this necessarily make them riskier?

Risks of Investing in Prospects Issues vs Main Listing Issues

Due to the smaller size of the issues and typical lack of trading record of the companies issuing on the prospects market these issues are inherently riskier. The size factor is quite important since it affects the opportunity to trade the issue after the initial offering. Since a Prospects issue is typically small, once these issues are admitted to the market there are typically much less trades executed compared to a main market listing of a larger size. The typical local investor would want to buy and hold, and thus secondary market trading is already quite limited, even for main market listings. Having a smaller issue will exacerbate this. Moreover, funds that invest into local market instruments would also have a problem with investing into Prospect MTF issues due to the illiquidity of these issues. This in itself eliminates a chunk of the market which adds further to the liquidity issue.

Although not necessarily the case, a Prospects Issuer would typically be a smaller company which could also still be in its start-up phase. This would make it riskier than a business that has a long track record due to the fact that it is untested. Although it is important to have capable people within the business and an amount of weighting should be placed on the level of knowledge and experience of the directors and management of the company, one must still factor in the untested nature of the business.

Should Retail Investors Disregard Prospects Issues and stick only to Main market Issues?

Definitely not. I have reviewed an amount of both regular market and Prospects issues and I would definitely not simply draw a line and disregard all Prospects issues. I have analysed Prospects issues that I have preferred over other regular market issues – so simply being a prospects issue does not automatically make me disregard the issue. As with any investment, each issue needs to be considered on an individual basis. The liquidity issue is definitely a factor one has to consider. Keeping in mind that interest rates are at rock bottom and that typical issues are for a maturity of 10 years one must not over invest into such issues. On the other hand, having an exposure to different market segments through prospects bonds whose issuers operate in different areas could add to the diversification of one’s portfolio.   

The Bottom Line

Like with any investment each issue should be considered on its own merits. Although securities that are issued on the prospects market are generally less liquid and generally riskier, not all issuers are the same. As part of diversified portfolio even these issues could be a good investment for clients. However, one should always seek professional investment advice when investing into these issues in order to better understand their specific characteristics and be able to assess better the specific risks involved.

KD