Plan to boost local bond market

BLUE-CHIP companies would find it easier to sell "IOUs" to retail investors, under a government plan to boost the range of lower-risk assets available to investors.

By InvestSMART · 13 Dec 2011

By InvestSMART ·
13 Dec 2011

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BLUE-CHIP companies would find it easier to sell "IOUs" to retail investors, under a government plan to boost the range of lower-risk assets available to investors.

Federal Treasurer Wayne Swan will unveil plans today to bolster the domestic corporate bond market, which has long been neglected by many companies because of the expense of issuing debt to retail investors.

In a bid to cut some of the red tape that raises the cost of issuing bonds, a discussion paper released by Mr Swan will suggest the government allow companies to issue shorter prospectus documents when selling bonds. The paper will also propose watering down director liability laws, saying today's rules require extensive oversight of bond issues by directors, raising their cost.

Highly rated bonds which pay investors interest and are considered fairly secure have enjoyed a rise in popularity since the global financial crisis, helped by investors who are seeking greater safety.

The discussion paper also says a bigger bond market may allow investors to diversify into assets that provide a steady income stream before and during retirement.

Mr Swan will float the proposals at a meeting of regulators and market participants in Sydney.

"The government considers the development of a deeper and more liquid corporate bond market an important issue for the broader development of our financial sector and more importantly our economy," speaking notes for Mr Swan say. "This is increasingly important at a time when international debt markets are facing such difficult headwinds."

Analysts say the retail corporate bond market is underdeveloped because it is more expensive for companies than simply borrowing from banks or tapping wholesale markets.

But the chief executive of Australia Ratings, Chris Dalton, said there was growing demand for safer assets such as bonds.

"There's a lack of fixed income products available to investors, and I think the volatility in the equity markets over the past few years has caused people to rebalance their risk appetite."

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Frequently Asked Questions about this Article…

What is the Australian government proposing to boost the domestic corporate bond market?

Treasurer Wayne Swan has released a discussion paper proposing reforms to bolster the domestic corporate bond market. The paper suggests allowing shorter prospectus documents for bond sales and easing some director liability rules to reduce the red tape and cost companies face when issuing bonds to retail investors.

How would shorter prospectus documents make it easier for companies to sell bonds to retail investors?

Shorter prospectus documents would cut compliance complexity and issuance costs, making it cheaper for companies — including blue‑chip firms — to offer bonds directly to retail investors. That could increase the supply of lower‑risk assets available to everyday investors.

What does the discussion paper mean by watering down director liability laws for bond issues?

The paper proposes reducing the extensive oversight and liability obligations directors currently face when bonds are issued. The aim is to lower the legal and administrative costs that deter companies from issuing retail corporate bonds, while still maintaining appropriate protections for investors.

Why are highly rated corporate bonds gaining popularity since the global financial crisis?

Highly rated bonds have become more popular because they pay interest and are viewed as relatively secure. After the global financial crisis, many investors shifted toward safer assets to reduce volatility and protect capital.

How could a deeper corporate bond market help everyday investors and retirees?

A bigger, more liquid corporate bond market would give investors more fixed‑income options to diversify their portfolios. That can provide steadier income streams before and during retirement, helping investors manage risk and income needs.

Why is the retail corporate bond market underdeveloped in Australia?

Analysts say the retail corporate bond market is underdeveloped because it is often more expensive for companies to issue bonds to retail investors than to borrow from banks or tap wholesale debt markets. Compliance costs and director oversight are key factors.

What did Chris Dalton from Australia Ratings say about demand for bonds and fixed‑income products?

Chris Dalton, chief executive of Australia Ratings, said there is growing demand for safer assets like bonds and that a lack of fixed‑income products has left many investors wanting alternatives. He also noted equity market volatility has prompted people to rebalance their risk appetite.

How does the government link a stronger corporate bond market to the wider economy?

The government says developing a deeper, more liquid corporate bond market is important for the broader growth of the financial sector and the economy. It argues this is especially important while international debt markets face difficult headwinds.