Australian Retail Corporate Bonds to Become Competitive Source of Funding
26 November 2014
The retail corporate bond market in Australia is at a tipping point. Following changes to legislation it will soon be easier and more cost effective for companies to raise finance by listing Simple Corporate Bonds on the Australian Securities Exchange (ASX).
Until now, the corporate bond market in Australia has almost exclusively been for wholesale investors with the bonds traded over-the-counter as opposed to exchange-traded. This has made it difficult for retail investors to invest directly.
On the other side of the equation, corporate borrowers considering retail bonds as an alternative source of finance were deterred by the higher all-in borrowing costs and onerous disclosure processes.
According to Westpac Institutional Bank’s Director Debt Capital Markets, Syndicate Allan O’Sullivan, “we are now at a point where the stars have aligned in terms of a more streamlined disclosure regime, reduced director’s liability, and more attractive pricing levels for Simple Corporate Bonds in the retail market”.
“This has created an opportunity for corporates that didn’t exist three years ago when we started on this journey and corporates can now expect to more competitively issue debt to retail investors on ASX,” he said.
The recent legislative changes have the potential to appeal to all ASX-listed borrowers, frequent or infrequent, rated or unrated. However, in the short to medium term it is more likely that the more established, sophisticated borrowers will continue to execute under their existing Medium Term Note programmes into the domestic wholesale market and explore parallel trading opportunities on ASX.
Westpac this week has partnered with ASX and King&Wood Mallesons (KWM) to host a series of seminars around the country to help Australian listed corporates understand these changes and explore incremental and diversified Australian dollar funding opportunities.
According to KWM partner Shannon Finch, we’re finally at the start line. “There are three key developments in the legislation that corporates need to be aware of.”
- Streamlined disclosure rules: a specific disclosure framework tailored to Simple Corporate Bonds, to promote consistent and straightforward disclosure. It clarifies a debt-oriented disclosure standard, rather than trying to make equity rules apply to debt.
- Changes to directors’ liability: reduced civil liability for directors better reflects normal corporate delegation and oversight processes, and softens the “spectre” of prospectus liability while still maintaining accountability.
- Process to access: the disclosure and liability changes enable streamlined and flexible due diligence processes to be used, reducing cost and time burdens.
Benefits for investors
These developments also provide retail investors with the potential to diversify their portfolios away from shares and term deposits.
Australian investors have historically had limited investment options that offer a secure income stream. This could potentially present a problem as the first superannuation cohort moves from the accumulation phase where the emphasis is on capital growth and equities, to the de-accumulation phase where income and capital preservation are required.
According to ASX’s Head of Debt Capital Markets, Ken Chapman, Simple Corporate Bonds will trade on ASX just like shares. “This gives retail investors direct access to a specific corporate’s debt in a more familiar and transparent market, which we believe will support investor uptake.”
“In a low interest rate environment, cash balances are facing diminishing returns. With over A$800 billion in household deposits and a growing retirement demographic looking for secure returns, the demand from retail investors for ASX-listed corporate bonds looks very significant,” he said.
Key measures of the simple corporate bonds legislation include:
Two-part prospectus regime: streamlined disclosure regime for offers of Simple Corporate Bonds.
Directors’ liability: changes to directors civil liability provisions in which they will only be liable for any misstatements or omissions from the 2-part prospectus in which they were directly involved.
Laying the groundwork for the parallel trading of wholesale issued bonds which are held in Austraclear to also be traded as CHESS Depositary Interests (CDI) on ASX by retail investors.
Once all aspects of the simple corporate bonds legislation are approved, eligible issuers will be able to access the retail market by:
Direct issuance opportunities with less onerous directors’ liability regime; or
Transmutation of issuers’ existing (and future) OTC bonds via CDI which will be quoted and trade on ASX.
Corporates raising finance will have:
Competitive access to a new pool of liquidity - either directly or via CDI bridge.
Increased funding flexibility - reducing reliance on bank and equity funding, offshore bond markets and potential to add term to their debt funding profile.
Overview of fixed income
Fixed income is not a homogenous asset class. It includes everything from cash and term deposits through to government securities into investment grade credit and high yield corporate bonds, and the tiered capital universe of hybrids.
Fixed income investments play a critical role in a diversified portfolio.
Corporate bonds are a type of listed fixed income solution that is typically more vanilla style debt securities issued by companies (including financial institutions). Corporate bonds also provide investors with access to a company’s debt obligations and an opportunity to increase potential returns based on the credit quality of the particular issuer.