- Australian Retail Corporate Bonds - Simpler, Or Will the Devil Be In the Detail?
- February 4, 2013
- Law Firm: Norton Rose Canada LLP - Montreal Office
Long foreshadowed, on 11 January 2013, an exposure draft of the Corporations Amendment (Simple Corporate Bonds and Other Measures) Bill 2013 (Bill) was released for comment by the Federal Government.
The stated aim of this reform is to increase the supply of corporate bonds in the Australian retail market and so to encourage the creation of a deeper and more liquid Australian bond market. This legislation will only modify the disclosure requirements for bonds that fall within the definition of “simple corporate bonds”.
The proposed simplification of the issuance process and disclosure requirements for “simple corporate bonds”, and changes in the criminal and civil penalties for directors of issuers, could facilitate that growth. But will those changes have that effect if the detailed regulations create a different set of complex requirements for “simple corporate bonds”?
Changes from the current position
The Bill would alter the current legislative and regulatory position in four key respects:
1. Disclosure - removal of the need for a full prospectus for “simple corporate bonds”. This embodies the basic principle of ASIC’s existing relief for “vanilla bonds” under ASIC Class Order [10/321] (Class Order), but arguably expands the range of instruments to which the proposed new two-part prospectus approach will apply. The proposed streamlined disclosure regime is aimed at reducing the administrative costs to issuers without decreasing the quality of information provided to the market. For offers of simple corporate bonds, the disclosure will consist of:
a. a base prospectus - this document must state that it is the base prospectus for all offers of simple corporate bonds made by the issuer during the specified period, and that there will also be an offer-specific prospectus for each offer of simple corporate bonds. It must also include information prescribed by the regulations, which the explanatory memorandum to the Bill describes as “general” information about the issuer. However, the exact nature of the information will not be known until the regulations are released. This document will have a three year life and must be lodged with ASIC. Material information already lodged with ASIC can be incorporated by reference; and
b. an offer-specific prospectus - this additional document must be issued each time the issuer wishes to make an offer of simple corporate bonds. This document needs to contain any information that would be material for disclosure to a retail investor that has not already been disclosed in the base prospectus. It will have a maximum 13 month life from the date of lodgement with ASIC and must be read in conjunction with the base prospectus. Like the base prospectus, specific disclosure requirements will be set out in the regulations.
2. Process - amendments consistent with the current Class Order regarding exposure periods are proposed. Accordingly, after lodgement of the initial base prospectus and an offer-specific prospectus, there will be no exposure period for subsequent offer-specific prospectuses so long as subsequent issues are of the same class of simple corporate bonds as those currently on issue. The only permitted differences between the new bonds and those on issue will be in relation to the term, the interest rate and the interest payment dates.
3. Liability (civil) - directors who were not personally involved in making an alleged misleading statement contained in a simple corporate bond disclosure document (either a base prospectus or an offer-specific prospectus) will not be presumed to have civil liability for that statement. This is a reversal of the usual burden of proof and may reduce personal liability concerns for directors of issuers.
4. Liability (criminal) - directors of issuers will be able to avail themselves of a defence to criminal liability if the directors made “all reasonable inquiries” and believed “on reasonable grounds” that a statement was not misleading. Directors will still be criminally liable for any statement they authorise where they have knowledge that the statement is misleading or deceptive.
What is a “simple corporate bond”?
“Simple corporate bonds” will need to have the following features and characteristics:
1. they must be debentures (as defined in section nine of the Corporations Act 2001 (Cth))
2. they must be admitted to, or an application for admission must have been made for admission to, a prescribed financial market, such as the Australian Securities Exchange
3. they must be denominated in Australian dollars
4. the minimum total issue amount must be at least A$50 million
5. they must be issued for a fixed term not exceeding 10 years, with principal to be repaid at the end of that fixed term
6. the interest rate on the bonds must be either a fixed rate or a floating rate, which is comprised of a variable reference rate and a fixed margin. Interest must be paid periodically and no later than the end of the fixed term. A fixed rate of interest can not decrease during the term of the bond. Interest cannot be deferred or capitalised (other than where payment of interest is made at the end of the fixed term)
7. the subscription price for each bond must not be more than A$1,000
8. They must not be redeemable before the end of the fixed term, other than:
a. at the option of the holder;
b. as a result of the acceptance of an offer by the issuer to buy back the bonds;
c. where there is a change in control of the issuer;
d. where there is a change to the law, or the application or interpretation of the law, with the effect that the interest payable on the bond is not, or may not be, deductible by the issuer for the purposes of calculating its tax liability; or
e. if fewer than 10 per cent of the bonds issued under the offer remain on issue (in which event the redemption will not take effect until all bonds issued under the offer are redeemed).
9. they must not be convertible into another class of securities
10. they must rank higher than unsecured creditors on a winding up of the issuer
11. the issuer must have continuously quoted securities on a prescribed financial market. Consistent with the cleansing notice regime for rights issues and placements, the issuer’s securities must not have been suspended from trading for more than five days in a 12 month period, and its auditors’ reports must not have been modified or qualified.
What could this mean for issuers?
The Bill is targeted at making the fundraising process easier for issuers. The simplified prospectus requirements are aimed at lowering the direct cost of raising simple corporate bonds. Until the regulations are published, whether or not this will be achieved is uncertain.
The differences between the Bill and the current Class Order can only be properly evaluated once draft regulations under the Bill are released. If the regulations are as prescriptive as the current Class Order, the stated aim of this reform may not be realised, as there may be no significant reduction in the cost and barriers for fundraising in the corporate bond market.
Notably, the A$50 million minimum subscription amount is unchanged from the current Class Order. This threshold will continue to exclude many smaller issuers from accessing funds in the corporate bond market.
What could this means for investors?
The desired outcome of a less onerous issuing regime is that retail investors will have a greater variety of fixed income securities in which to invest, allowing investors to diversify their portfolios away from equities. Corporate bonds of this type could provide a product that, in a falling interest rate environment, provides a higher yield than a bank deposit, with potentially less risk than equities.
The road ahead
Whether retail investors respond to any growth in the corporate bond market is yet to be seen.
A simplification of the legal framework for simple corporate bonds, by itself, may not achieve that growth, unless a greater number of issuers embrace this product, the A$50 million minimum subscription requirement is reduced and any differential tax treatment between interest on bonds and dividends is removed. If, in addition, the regulations are complex, then the journey for simple corporate bonds may not be as productive as intended.
The draft legislation is open for submissions until Friday 15 February 2013.