Maltese investors have long favoured corporate bonds. It’s practically part of the local financial culture. Data from the Malta Stock Exchange confirms this trend. In the first seven months of this year alone, trading in corporate bonds on the main regulated market exceeded €74 million, while nearly €360 million worth of new issues were listed. At the time of writing, the size of the Maltese corporate bond market exceeded €3 billion.

It’s easy to understand their appeal. Corporate bonds provide a steady income, typically offer higher yields than bank deposits or Malta Government Stocks, are freely tradeable on a regulated exchange, and can be purchased in relatively small minimum amounts. Moreover, the Maltese market has no precedent of large-scale default events where many bondholders lost significant capital.

However, recent months have seen a handful of cases where issuers are struggling to meet their obligations. These events underline that credit selection is a far more complex exercise than simply opting for familiar names, steering clear of subordinated issues, favouring secured debt, or chasing the highest coupon rates. In this article, we will outline some key considerations retail investors should keep in mind before investing in corporate bonds.

Understand What You Are Buying

A corporate bond is essentially a loan from the investor to the issuing company. In return, the investor earns coupon income and may benefit from capital gains, but also assumes risk, with the most significant being credit risk. This refers to the possibility that the issuer will be unable to meet its obligations, either by missing interest payments or by failing to repay the principal at maturity.

Maltese corporate bonds are typically not rated by established credit rating agencies. Credit ratings are useful because they provide an independent opinion on an issuer’s creditworthiness. In their absence, investors need to carry out their own careful assessment of each issuer’s financial strength and potential business vulnerabilities.

Assessing the Issuer’s Ability to Pay Interest

A practical starting point is understanding how the company generates income. Key considerations include:

  • What products or services does the company offer?
  • Are revenues stable, cyclical, or project-based?
  • Are income streams diversified across business lines or concentrated in one area?
  • Are revenues generated locally, or also from international markets?

Investors should remember that income statements are prepared on an accrual basis. This means that revenue is recorded when earned, not when cash is received. This matters for bondholders because unpaid invoices, no matter how large, won’t help a company meet interest payments or repay principal.

One widely used metric that can be extracted from the income statement is the Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA). Comparing EBITDA to interest expense provides a measure of the company’s capacity to pay interest. The higher the ratio, the greater the cushion protecting bondholders from the risk of missed interest payments.

Consider the Capital Structure

Credit risk is closely linked to a company’s financial leverage. Higher debt relative to equity increases fixed obligations in interest and principal repayments, reducing protection for bondholders. Companies with lower leverage are generally better positioned to withstand temporary downturns without jeopardising their ability to pay back debt.

By reading a bond’s prospectus before investing, investors can extract key ratios such as

  • Debt to total capital, which indicates how much of the company is financed by debt; and
  • Debt to EBITDA, which shows how many years of operating profit would be needed to repay debt.

Companies with weak cash generation or high leverage should offer a higher yield to compensate bondholders for the additional risk. Thus, the key question before investing is whether the return on offer sufficiently compensates investors for the risks being taken.

The Bigger Picture

This article has focused on introductory aspects of credit analysis, highlighting only the basic key concepts. However, many other factors can be equally critical. For example, the quality of governance and management, the payment rank, and the expected level of liquidity in the secondary market can matter as much as an issuer’s financial health.

Ultimately, investors should always consider how a bond fits within their broader portfolio, both in terms of risk and diversification, before making any commitment. Corporate bonds can provide attractive income, but selecting the right corporate bonds and avoiding the pitfalls requires diligence and experience. For those who prefer professional oversight, ReAPS Asset Management offers products providing access to the Maltese market, combining local expertise with active risk management.

Written by

David Lanzon, CFA

Senior Portfolio Manager – ReAPS Asset Management Ltd

The information contained in this article represents the opinion of the contributor and is solely provided for information purposes. It 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.

This article was approved and issued by ReAPS Asset Management Limited, a subsidiary of APS Bank plc. ReAPS Asset Management Limited (C77747) with registered address at APS Centre, Tower Street, Birkirkara BKR 4012 is regulated by the Malta Financial Services Authority as a UCITS Management Company and to carry out Investment Services activities under the Investment Services Act 1994 and is registered as an Investment Manager under the Retirement Pensions Act (Chapter 514 of the Laws of Malta).