A serving of plain vanilla

Australia's "vanilla" retail bond market needs some regulatory help to get off the ground. Rules encouraging shorter prospectuses for bond issues could be the answer.

The permanently embryonic Australian retail bond market has had a mixed run lately. For starters, Belinda Gibson, ASIC Commissioner, made some interesting observations at the Corporate Finance World Conference last week.

She confirmed that, among other processes being reviewed, ASIC is looking at new ways to encourage retail bond issuance. One of the measures under heavy consideration seems to be shorter prospectuses – seen as an essential in kicking off a true retail bond market in Australia. A further announcement from ASIC on this increasingly hot topic is expected before the end of the year.

Market reaction was as swift as it was upbeat. Paul Jenkins, partner and head of the debt capital markets team at Blake Dawson, says: "Whilst ASIC is yet to provide any detail of its proposed reforms, it appears from these recent comments that it might be looking to recommend a shorter form of prospectus for vanilla retail bond issues for ASX listed corporates."

He reckons that any companies that issue retail bonds are, of course, already subject to the existing ASX continuous disclosure requirements, so ASIC can take information already being made available to the market into account.

"A shorter form of disclosure document would be a positive development for the vanilla retail bond market – a kick-start is much needed particularly given the reported steps this week of two of the rating agencies not applying for a licence to rate retail instruments in Australia,” Jenkins says.

Blake Dawson has a busy debt issuance team, and has a tack record in trying to promote the development of a Australian vanilla bond market. A number of our clients have remarked that one of the main impediments to the evolution of the vanilla market is the time and cost involved in meeting the current disclosure requirements.

James Morris, senior associate at Blake Dawson, says: "In terms of vanilla retail debt issues by corporates during the year, there was really just the transaction by Tabcorp in April. There were also other more structured retail issues, for example from AMP and Brookfield, but these should not be considered plain vanilla bonds (the AMP bonds being subordinated instruments and the Brookfield bonds being secured limited recourse mortgage debentures).

He notes that legal costs for Tabcorp in preparing for the prospectus and offer were over $600,000 - an amount that is arguably prohibitive for many issuers when the other costs for due diligence, the trustee and management time are added in. The attractiveness of the wholesale market, with its associated short-form information memorandums is, in contrast, re-emerging from the GFC with lower pricing.

One alternative is to follow the New Zealand approach, as their documents have been road-tested over many years on a thriving retail bond market.

Looking at the prospectus for Fonterra’s NZD retail bonds in March this year, Morris notes: "The Investment Statement is certainly shorter than the Tabcorp prospectus which came in at 100 pages. Interestingly, once you take away the pictures, marketing blurb and application form at the back of the Fonterra Investment Statement, it comes in at about 40 pages.”

The page count, of itself though, is not necessarily reflective as to the time and cost involved in its preparation, as this will ultimately depend on the type of content that ASIC requires.

Jean-Luc Petit from the giant fund manager BTIM says a modification for short form prospectuses should include the extra phase "if the bond have a rating”.

In this regard, it will be interesting to see what ASIC ultimately does, if it is serious about the development of the retail bond market in Australia, in light of the news this week that ratings agencies Standard & Poor's and Moody's will be withdrawing their respective applications to supply ratings of corporate bonds to retail investors. This came about as a result of new rules announced by – that regulator again – ASIC.

This direct approach has some in the market scratching their heads. BT’s Petit said he was surprised the agencies published their views, rather than trying to work behind the scenes.

The withdrawal of such ratings, particularly if Fitch also follows suit, is a set-back for the retail bond market and it is clearly in need of a substantial regulatory boost to get it started.


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