Curmi & Partners

Leveraging Capital Markets for Refinancing

By Beppe Jaccarini

Refinancing is a vital financial strategy that allows companies to optimize their capital structure, restructure debt, reduce financing costs, and enhance financial flexibility. In the Maltese context, corporate bonds, notwithstanding the current challenging interest rate environment characterised by elevated interest rates compared to recent years, could still play a pivotal role in helping companies achieve their refinancing goals. This article sheds light on how corporate bonds, amidst the existing situation surrounding interest rates, can serve as an avenue for refinancing in Malta.

Refinancing involves the process of replacing or restructuring existing debt with new financing to achieve improved terms, lower costs, and enhanced financial stability. The primary goals of refinancing typically include:

  • Reducing Interest Rates: Refinancing can allow companies to obtain loans or debt instruments with lower interest rates, leading to significant interest cost savings over time.
  • Extending Maturity: Companies may extend the maturity of their debt, which can provide breathing room for repayment of due obligations and reducing potential pressures.
  • Improving Debt Structure: Refinancing enables businesses to adjust their debt structure, ensuring that it aligns with their financial goals and long-term strategies.
  • Enhancing Financial Flexibility: Through refinancing, companies can access capital to fund growth initiatives, invest in new projects, or address urgent financial needs.

The Malta Stock Exchange (MSE) serves as a pivotal platform for companies in Malta looking to access the capital markets for refinancing purposes. The MSE offers the possibility to list various financial instruments and avenues that can be utilized for refinancing, with corporate bonds being the most typical for such needs. Companies can issue new bonds and use the proceeds to retire existing debt or invest in new projects.

The MSE facilitates the listing and trading of these bonds, providing access to a broader investor base. Moreover, the predictability associated with corporate bonds, thanks to fixed coupon rates, enables companies to manage their cash flows more effectively. In an environment of interest rate uncertainty, this predictability becomes a critical tool for financial planning and budgeting.

While corporate bonds are the primary means of refinancing in the Maltese context, it is worth briefly mentioning equity financing. This approach, though less common for refinancing, involves issuing new shares or conducting secondary offerings. Equity financing can significantly improve a company's balance sheet and financial flexibility, although it comes at the cost of diluting ownership control.

It is important to acknowledge the impact of the current interest rate environment on refinancing decisions. Over the last two years, interest rates have been on the rise, which has created significant challenges for companies seeking to refinance their debt. The increased cost of borrowing has prompted many businesses to explore alternative financing options or prolong plans which would require the raising of new capital.

Looking forward, it is worth noting that the trajectory of continuous rate hikes is not expected to persist. Most forecasts expect a stabilization of interest rates in the near future. This outlook is encouraging for companies contemplating refinancing because it suggests that interest rates should at least remain relatively stable, providing more certainty in the cost of debt and making corporate bonds an attractive option.

In the face of a challenging interest rate environment, refinancing remains a vital financial strategy for companies in Malta to optimize their capital structure and enhance their financial stability. Corporate bonds have emerged as a primary means of achieving these goals, possibly offering lower interest rates, extended maturities, predictability, and access to a diverse investor base. With the expectation of a stabilizing interest rate environment in the near future, corporate bonds are well-positioned to help companies navigate refinancing challenges and secure a more stable financial future.

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.