This article first appeared in the October issue of Boardroom magazine.
The work of the Australian Financial System Inquiry is yielding some interesting insights into the similarities – and differences - in the New Zealand and Australian capital markets. Most intriguing is the relative strength of our respective corporate bond markets.
New Zealand has a long history of direct fixed income investment, something that has just never fired in Australia. This is beginning to present a problem for Australia as the first superannuation cohort moves from the capital growth (equities) phase to the capital protection (bond) phase, especially since much of the current bond supply is of quasi-equity hybrids.
Of course the New Zealand road has not been without its bumps – particularly the multi-billion dollar failure of numerous debenture-issuing finance companies. This produced a licensing regime for financial advisers and a prudential supervision regime for non-bank deposit takers. So far, so understandable.
The more refreshing regulatory response developed out of the recognition that if you make the retail bond format unappealing for investment grade companies, which have literally a world of funding choices, then the retail investor will be stuck with whatever is left.
Under the old Securities Act with its extensive disclosure requirements, regardless of whether it was your first or your 21st issue, its strict criminal liability on directors for misstatements by the issuer, and its layers of needless bureaucracy and restrictions, retail bond formats looked deeply unattractive - expensive, risky and slow.
The Financial Markets Conduct Act 2013 (FMCA) has fixed most of these problems. Criminal liability is now preserved for deliberate breaches, the disclosure requirements in the proposed product disclosure statement make a lot more sense, advertising has been liberalised, and the red tape is largely gone.
More significant than that, however, are the radical changes to the exclusions regime, which have effectively deregulated ongoing offers by high quality issuers who are prepared to list their debt.
Since 1 April 2014, issuers have been able to offer to retail investors quoted financial products of the same class as existing quoted securities on the back of a brief cleansing notice, confirming that the issuer is current with its periodic financial reporting and continuing disclosure obligations.
- There is no mandatory disclosure document at all. Any terms sheets, investor updates or other material the issuer chooses to employ will be driven by investor relations considerations as opposed to the dictates of securities law.
- The offer is not a “regulated offer”, minimising the already reduced red tape and liabilities.
- Directors have no ‘deemed liability’ for misstatements or other defects. As a result, depending on the issuer’s own governance processes, the offer and due diligence process could be performed primarily by treasury and investor relations personnel.
Overall, this will result in a package that is more appealing both to the issuer and its directors. It can be expected to dramatically reduce the time to market and to mitigate at least some of the costs of issuance. It will also tend to encourage disclosures that are ‘issuer led’ and made against the backdrop of the issuer’s ongoing disclosure programme.
The same class requirement won’t normally pose a problem for equity. For debt, the meaning is expanded to include securities having a different redemption date or interest rate, or both. This can include moving from a fixed to a floating basis, or vice versa.
The Regulations governing the first phase of FMCA implementation had initially placed an unexpected restriction on using the same class exclusion for offers involving a different tenor than an existing tranche. The Government has since announced that different tenors will be permissible so long as some risk/return guidance is provided, most likely to be in the form of a ‘comparable pricing graph’ that will show how the yields on both the offered debt and the issuer’s existing debt securities compare to benchmark yields.
And so to Australia, which for some time prior to the Financial System Inquiry (FSI) has been tussling with the problem of how to spur development of its retail bond market. In December 2010, measures were announced to give effect to a simplified regime for retail corporate bond offers. These have now landed, in the form of the Corporations Amendment (Simple Corporate Bonds and Other Measures) Bill 2014, which has passed both Houses and received Royal assent on 11 September.
In brief, the new regime will allow listed companies to issue simple corporate bonds to retail investors without the full rigours of a prospectus under Part 6D of the Corporations Act 2001. As in New Zealand, the ‘deemed liability’ of directors will be dis-applied.
But there are a number of differences to the same class proposals.
- “Simple” corporate bonds are defined as A$-denominated, unsubordinated, listed bonds with a set term of not more than 15 years, which may have fixed or floating interest that cannot be deferred or capitalised. The bonds cannot be convertible and are subject to call restrictions. While it is probable that in New Zealand same class bonds will mostly also be ‘vanilla’ in this respect, there is no explicit attempt to define their characteristics in this way.
- Australian offers still require prescribed offer documents, in the form of a base prospectus with a three-year life (akin to a U.S. shelf prospectus) and an offer-specific prospectus containing the commercial terms of the bonds. This represents a continuation of elevated requirements by comparison to the wholesale format, in spite of the rigorous periodic and continuous disclosure regime.
For the moment, the balance between reform and control has been struck more cautiously in Australia. Submissions to the FSI have also questioned how much of an impact regulatory settings have in holding back the direct retail market, compared with market forces and tax barriers.
So, while the simpler corporate bond regime has been welcomed by commentators, it is not expected to change things overnight.