Nice yield, if you can get it
Talk of Treasurer Joe Hockey considering issuing debt to fund infrastructure projects won't benefit yield-hungry self-managed super fund (SMSF) investors, who would lap up such offerings if given the chance.
In the current market, infrastructure bonds might be issued around 2 per cent over the 90 day Bank Bill Swap Rate (BBSY), offering a running yield of around 4.5 per cent based on current rates. This easily beats the rate offered on two and three year term deposits.
The Reserve Bank of Australia’s recent Financial Stability Review shows over 30 per cent of SMSF portfolios are invested in cash. This cash needs to go somewhere and could easily mop up any demand for a government-initiated infrastructure bond.
The difficulty with the government, or indeed corporates, approaching the retail market as potential investors in bond issues lies in arduous legal restrictions. Current legislation demands that debt offerings meet strict criteria if offered to retail investors.
It is much simpler and cost effective for corporates and government looking to raise funds to go straight to institutional investors, who are equally as cashed up as their retail counterparts.
In addition to this, depending on the disclosures in the bond offering, directors can be up for civil liability for the issuance of bonds to retail investors. There was a bill in the Senate, the Simple Corporate Bonds and Other Measures Bill currently in to reduce the burden on directors when issuing corporate bonds, but it lapsed with the change of government and will need to be reintroduced.
If getting the private sector involved in infrastructure investments is something the government is seriously considering, listing any such bonds on the Australian Stock Exchange (ASX) would be ideal. This would facilitate liquidity and make the process of buying and holding such bonds as straightforward as possible.
Continuing to target the wholesale market adds little value for the government, particularly as these players are already tripping over each other to get their hands on corporate debt and infrastructure bonds.
If Hockey and the government want to diversify the bond-holder base, they will need to make sure bonds issued allow retail investment. Now is the time to solve this dilemma and make this type of investment work for SMSF investors.