The much anticipated exposure draft of the Corporations Amendment (Simple Corporate Bonds and Other Measures) Regulation 2014 was released for public consultation on 21 October 2014.
The draft regulations, and accompanying pro forma prospectus, reveal the detail of Treasury’s strategy for radically simplifying disclosure for simple corporate bonds.
Now is the time to have your say - submissions on the draft regulations are due in to Treasury by 14 November 2014. You can find the consultation package at: http://treasury.gov.au/ConsultationsandReviews/Consultations/2014/Simple-Corporate-Bonds.
Background to the disclosure reforms
Amendments were passed in September 2014 to the Corporations Act, to provide a new framework for offers of simple corporate bonds (see our Alert from 1 September 2014: Retail Corporate bonds made simpler).
Those amendments introduced a new 2-part prospectus regime for simple corporate bonds, comprising:
- a base prospectus with a 3-year life (“Base”); and
- an “offer-specific” prospectus (“2ndPart”) – for each offer.
Content guidance is in the Regs
The regulations set out the content requirements for both documents. They are highly prescriptive to the point where all sections of each document (including the names of those sections) are mandated.
This is intended to produce a recognisable format and approach for simple corporate bonds prospectuses. The idea is it becomes familiar to the market, it is easy to compare offers, and the documents stay short and digestible.
These are minimum requirements – they do not prevent the documents containing other material or statements. However, the pro forma prospectus supplied with the consultative package is attempting to send a signal to the market that these offer documents really can be short.
Incorporation by reference and “sign-posting” other information can be used to direct readers to other useful sources of company information.
A great start – but is there room for improvement?
We’re impressed by the consultation materials:
- A prescriptive approach is helpful in this context. The “fuzzy law” approach of the general prospectus provisions in Chapter 6D of the Act is appropriate and adaptable for most purposes, but clearly something more targeted was needed to drive change for simple corporate bonds.
- The regulations do not drag issuers back to an “equity standard” for simple corporate bond issuance – the concept of what information is relevant to pure debt issuance is different to equity standard disclosure.
However, there are still a number of requirements which apply to both the Base and the 2nd Part. That’s a concern, because unnecessary repetition was one of the stumbling blocks for ASIC’s vanilla bonds class order, that drove lengthy disclosure and deterred issuers from using that framework.
The 2nd Part should supplement the information in the Base, or update it, but should avoid repeating content that is included in the Base. It should be more like a final term sheet or pricing supplement used in the wholesale debt capital markets.
Base Prospectus – content requirements
Based on the draft regulations, a Base will need to contain the following sections:
Section 1 - “What you need to know”
This must include some prescribed statements. These emphasise that the Base does not contain all of the information relevant to an offer of simple corporate bonds, and that there will be a separate 2nd Part for each issue of bonds during the 3-year life of the Base.
Section 2 - “About the bonds”
This must set out (or reference) the key features of the simple corporate bonds. That will include:
- The interaction between the coupon rate and yield.
- The interest rate and term of the bonds (although we would expect that would be better placed in the 2nd Part).
- The maturity and redemption of the bonds (with early redemption rights restricted, to qualify as “simple” corporate bonds).
- Events of default.
- Any guarantees (and information about the guarantors).
- The security and ranking of the bonds.
These are the “base” terms and conditions that would be common to all simple corporate bonds of the issuer. More specific terms for each tranche of bonds would be included in the 2nd Part for each offer.
This section must also contain information about the program of the bonds (if applicable), including any pre-planned future bond issues.
Section 3 - “About the issuer”
This must include brief information about the issuer’s business, strategy, management and governance arrangements, and the continuous and periodic disclosure regime. It should include sign-posts to where annual and half-yearly financial information and reports can be found.
It should also explain the key financial ratios relevant to the bonds and the issuer, including how a change in the ratios may affect the bonds. The 2nd Part prospectus will need to update this information and highlight changes.
Section 4 – “Risks”
This must set out the main risks associated with the bonds and the issuer’s business.
Section 5 – “Other information you should consider”
There is a shopping list of information that must be included in this section – including:
- An explanation of taxation consequences of investing in the bonds, and a prescribed sign-post to ATO information.
- Privacy information.
- Selling restrictions that apply to the bonds.
- A list of material referred to, but not set out in full, in the Base.
Incorporation by reference
Information which is required to be set out in the Base may instead be incorporated by reference, if the information is contained in a document lodged with ASIC. This mechanism exists for “regular” prospectuses, and has the potential to reduce the length of the Base, but (as with other prospectuses) it’s not clear whether issuers find it useful.
2nd Part – the Offer-Specific Prospectus – content requirements
The 2nd Part of the 2-part prospectus is anticipated to be a shorter document than the Base.
Like the Base, it has prescribed sections and content.
Section 1 – “What you need to know”
This is not “what you need to know about the bonds” – it’s what you need to know about the documentation.
This section must contain prescribed statements making it clear that the 2nd Part prospectus:
- Does not contain all relevant information in relation to investing in the bonds.
- Is not a summary of the base.
- Relates only to the particular offer of bonds.
Section 2 - Key dates and offer details
This section must contain a termsheet for the bonds, with a prescribed list of key information.
Interestingly – it repeats terms that would be set out in the Base, not just the terms that are specific to the particular offer (eg term / maturity date, interest rate / base rate and margin):
- Issuer’s name
- Size of Series / Tranche
- Face Value
- Term & Maturity Date
- Guarantees and guarantor information
- Interest Rate / Market Rate and Margin
- Interest payment dates
- Events of default
- Existing secured debt
- Structure of the offer
- Minimum application size
- Early redemption events
- Fees and costs of the Offer
- Selling restrictions
- Relevant listed market
Investors must also be warned about obtaining professional advice.
While information can be incorporated by reference – the prescriptive list is likely to encourage some repetition between the Base and the 2nd Part, so there is some room for feedback to Treasury on streamlining this section. As noted above – the list of early redemption events must be limited to the events permitted for a simple corporate bond under the Corporations Act.
Section 3 - Offer-specific information you should consider
This section performs several key functions:
- It updates any information in the Base, since it was lodged with ASIC.
- It provides some key financial metrics.
- It provides important information about the effect and purpose of the particular offer.
That information must include:
- The key financial ratios relevant to the bonds and the issuer, and changes to those ratios since the last offer or since the Base.
- Use of proceeds.
- A summary of the effect of the offer on the issuer.
- The ranking of the bonds.
- The main risks affecting the bonds or the issuer, repeating information from the Base.
- How to obtain a copy of the Offer Management Agreement.
How this all comes together
The pro forma prospectus provided with the consultation package demonstrates how this 2 part disclosure might look. It is a useful guide, and - given the regulations are highly prescriptive – it would almost allow issuers to “fill in the blanks”. We think it’s a great start.
There are a few aspects that would benefit from some discussion during the consultation process.
The pro-forma prospectus includes 3 years of historical key ratios plus a pro-forma – that is fairly straightforward, but does not seem to reflect the regulations which require key ratios to be updated at the time of lodgement of each part of the prospectus. We can understand going through that process for each offer specific prospectus – but can’t see the rationale for requiring ratios to be updated at the time of lodging the Base.
The pro-forma also includes details about existing debt and equity that go beyond the requirements of the regulations, but we think it is helpful information for investors.
Too much repetition?
There is a little more repetition in the 2nd Part than we would prefer, but not by much. We’d suggest that sign-posts to the Base, rather than repetition, would be a better approach for highlighting risks and the availability of other documents.
As a practical matter, the sort of information contained in the Base should not be susceptible to significant change. If the Base needs significant updates, it may be preferable to re-lodge a refreshed Base.
Incorporation by reference
It is novel to require a company to offer investors direct access to documentation like offer management agreements, and we can’t see the need for that. However, the approach of incorporating by reference summaries of that sort of information is a good suggestion.
The Base and 2nd Part will be required to be created and maintained as 2 separate documents. The jury is still out on that requirement – perhaps it’s a choice which would be better left in the hands of issuers. We suspect that will end up being more of a nuisance, for printing and despatch logistics purposes.
There is a short window for submissions on the consultative drafts, until 14 November 2014. We encourage issuers and market participants to have their say. This new disclosure format is a big step by Treasury – and it will be interesting to see the market reaction to the proposal.