Defaults ‘part of the risk’ for bond investors – Clyde Caruana

“It is important to note that defaults in capital markets form part of the general risk that investors accept when investing in bonds.” This was the message from Finance Minister Clyde Caruana in Parliament on Monday (yesterday), as questions were raised on the safeguards in place to protect investors and the economy from potential bond defaults.

Member of Parliament Edward Zammit Lewis had asked whether mechanisms exist to minimise the economic impact when a bond fails. Minister Caruana said the Malta Financial Services Authority (MFSA) requires and encourages transparency in the market, with listed companies obliged to inform investors of any financial difficulties and remedial measures being taken to mitigate the risk of default.

Companies with securities on a regulated market must also maintain a dedicated section on their website with accessible contact details for investors. “This transparency helps avoid misinformation and panic in the market,” Mr Caruana explained.

He noted that the MFSA ensures issuers abide by the provisions in their prospectus, which outline events of default and the rights of bondholders. Where bonds are secured, the Authority also supervises the appointed Security Trustee, typically a regulated entity, to ensure it fulfils its obligations under the Security Trust Deed.

However, Mr Caruana emphasised that defaults are an inherent part of investing in capital markets. He states that it is important to note that defaults in capital markets form part of the general risk that investors accept when investing in bonds.

In a follow-up question, Dr Zammit Lewis asked which authority is responsible for approving bond listings, and what criteria are applied. Mr Caruana confirmed that the MFSA is the regulator that authorises applications for admissibility to listing on a regulated market.

Applications are assessed against three main criteria:

1. Financial strength;
2. Corporate governance; and
3. Transparency.

The MFSA is also tasked with ensuring that listed entities comply with the Capital Markets Rules, which transpose various EU directives.