RETAIL investors could deliver as much as $40 billion in additional funding to corporate Australia if the nation's stunted corporate bond market was given the room to grow, according to new estimates by ANZ.
The figures were provided to a Treasury review aimed at developing a deep and liquid retail corporate bond market.
Among options being reviewed is to allow retail investors to trade in Commonwealth government bonds on the Australian Securities Exchange and watering down directors' liability when it comes to issuing corporate bonds.
Although Australia's equity market has grown fast, it has substantially lagged behind other major centres with regard to selling bonds. In addition, sales of corporate bonds to retail investors so-called "mums and dads" is almost non-existent.
Demand for corporate bonds is expected to escalate as the baby boomer generation moves into retirement and switches investments away from equities towards less volatile fixed-income products.
ANZ's head of structured products Adam Vise said retail investors would help deepen the corporate bond market, which will provide a new source of funding business, while improving liquidity.
"We believe up to $40 billion is readily accessible from the retail market, allowing corporates to diversify and expand their funding base," Mr Vise said.
ANZ urged the government to allow a base or a shelf prospectus, which allows issuers to go back to the market to raise additional funds through the publication of a simple term sheet. Mr Vise also warned the lack of a deep domestic bond market left Australian companies vulnerable when it came to tapping offshore investors for funds.
"The freezing of global liquidity in September 2008 and the subsequent difficulty experienced by Australian corporates in refinancing debt gives rise to questions about the depth of the domestic capital markets and in particular Australian corporates' dependence on foreign debt capital," he said.
Potential issuers often blame the expense of issuing bonds in Australia, particularly given demands to prepare an equity-style prospectus. Many issuers also worry about the lack of liquidity in the market.
National Australia Bank's head of wholesale banking, Rick Sawers, urged the government to allow ASX-listed companies issuing standard corporate bonds through a two-page term sheet, supported by information already available under continuous disclosure rules for equities.
The development of a corporate bond market would help free up crucial bank funding for small and mid-sized businesses that traditionally do not have the same level of access to capital markets, Mr Sawers said.
The string of recent hybrid share issues demonstrated there was strong retail investor demand for debt, he added.
Frequently Asked Questions about this Article…
What does the claim that retail investors could deliver up to $40 billion to corporate Australia mean?
ANZ estimates that if Australia’s retail corporate bond market were allowed to grow, retail investors could provide as much as $40 billion in additional funding to corporate Australia. That figure reflects potential new retail demand being channelled into corporate bonds, which would broaden companies’ funding sources and improve market liquidity.
Why are sales of corporate bonds to retail investors almost non-existent in Australia?
The article says Australia’s bond market has lagged other major centres, and potential issuers cite the high expense of issuing bonds — in particular the need to prepare equity-style prospectuses — plus limited market liquidity. Those barriers make retail corporate bond sales rare.
What policy changes are being reviewed to give retail investors more access to corporate bonds?
Options under review include allowing retail trading of Commonwealth government bonds on the ASX, softening directors’ liability for issuing corporate bonds, and changing prospectus rules. ANZ has urged permitting a base or shelf prospectus for simpler follow-on raises, while NAB has suggested a two-page term sheet for ASX-listed companies backed by existing continuous disclosure information.
How would a deeper retail corporate bond market benefit everyday investors?
A deeper market would give retail investors more access to less volatile fixed-income products, which many expect to demand more of as baby boomers move into retirement and shift away from equities. Increased retail participation could also boost liquidity and provide investors with more income-oriented options.
How does a shallow domestic bond market hurt Australian companies?
The article notes that a shallow bond market leaves Australian corporates reliant on offshore debt capital. ANZ highlighted how the global liquidity freeze in September 2008 made refinancing difficult for Australian firms, underscoring their vulnerability when domestic bond markets aren’t deep.
Would simplifying prospectus rules make issuing corporate bonds cheaper and easier?
According to the article, many issuers blame the cost of issuing bonds on requirements to prepare equity-style prospectuses. Proposals such as a base/shelf prospectus or a short two-page term sheet for ASX-listed issuers are intended to lower issuance costs and streamline returning to the market for additional funding.
Could developing a corporate bond market free up bank funding for small and mid-sized businesses?
Yes. NAB’s head of wholesale banking, Rick Sawers, said that developing a corporate bond market would help free up crucial bank funding for small and mid-sized businesses that typically have less access to capital markets.
Is there evidence of retail investor appetite for debt products in Australia?
The article points to a string of recent hybrid share issues as evidence that there is strong retail investor demand for debt-like products, suggesting potential appetite for corporate bonds if access and structures improve.
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