Shoulders to the wheel on corporate bond market

TREASURY officials are due to meet some of the biggest bond investors and bank finance executives this morning amid frustration about the slow pace of development of Australia's blue-chip corporate bond market.

By InvestSMART · 7 Aug 2012

By InvestSMART ·
7 Aug 2012

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The meeting is backed by the Australian Securitisation Forum and will include some of the country's largest superannuation funds. It comes as big-name corporations have opted against so-called vanilla-style corporate bonds to raise funds. Instead, companies including Westpac and ANZ have issued billions of dollars' worth of higher risk hybrid-style shares.

Last week, Caltex launched a $300 million hybrid note. APA Group and Crown have both said they are considering large issues.

Developing the corporate bond market was a key recommendation of a report, in 2010, by the Australian Financial Centre Forum, chaired by Mark Johnson. The focus to date has been on stimulating retail investment interest in bonds.

Big business has blamed an underdeveloped corporate bond market for its decision to raise funds offshore. Meanwhile, bond investors have pointed to a lack of quality offerings for their low exposure to bonds.

Australian super funds have less than 15 per cent of their portfolios tied up in corporate bonds, about half the percentage of their global counterparts.

Analysts have argued that a deeper corporate bond market would offer a new source of funding for corporations, and increase liquidity in the market.

ANZ estimates show that as much as $40 billion is readily accessible from retail investors, allowing corporations to diversify and expand their funding base.

The bond market meetings are taking place as the federal government continues to aim for government bonds being traded on the ASX by the end of the year, opening potentially billions of dollars' worth of new investments to retail investors.

Negotiations between the ASX and the government's funding arm, the Australian Office of Financial Management, are reaching the final stages to allow the listing of government bonds. Market rules are being thrashed out and operational procedures are being finalised. The move has been promised for years but has failed to get off the ground because of regulatory complexities.

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Frequently Asked Questions about this Article…

What was the recent Treasury meeting about and who attended?

Treasury officials met with some of Australia’s biggest bond investors, bank finance executives and large superannuation funds to discuss frustration about the slow development of Australia’s blue‑chip corporate bond market. The meeting was backed by the Australian Securitisation Forum and aimed to address why the market hasn’t grown as expected.

Why are big companies choosing hybrid-style instruments over vanilla corporate bonds?

The article notes many large corporations have preferred higher‑risk hybrid‑style shares and notes instead of traditional (vanilla) corporate bonds. Examples include Westpac and ANZ issuing hybrid instruments, Caltex launching a $300 million hybrid note, and APA Group and Crown considering large issues. Companies cite funding preferences and market conditions for these choices.

How much of Australian superannuation funds' portfolios are invested in corporate bonds?

According to the article, Australian super funds have less than 15% of their portfolios in corporate bonds — roughly half the percentage held by their global counterparts.

What are the potential benefits of a deeper corporate bond market for everyday investors?

A deeper corporate bond market could increase liquidity and provide an additional source of investment opportunities and corporate funding. Analysts say it would help diversify the market and offer retail investors more ways to invest in blue‑chip corporate debt.

How much retail money could be available for corporate bonds in Australia?

The article cites ANZ estimates that as much as $40 billion could be readily accessible from retail investors, which could help corporations diversify and expand their funding base if the market develops.

What progress is being made to get government bonds traded on the ASX and why does it matter?

Negotiations between the ASX and the Australian Office of Financial Management are in their final stages to allow listing of government bonds. If successful — with the government aiming for government bonds to be traded on the ASX by the end of the year — it could open up potentially billions of dollars’ worth of new investments to retail investors.

Why has Australia’s corporate bond market been slow to develop?

The article points to several reasons: big businesses have often raised funds offshore, bond investors say there’s a lack of quality domestic offerings, and regulatory complexities have slowed initiatives such as listing government bonds on the ASX.

What role did the Australian Financial Centre Forum recommend for corporate bonds?

A 2010 report by the Australian Financial Centre Forum, chaired by Mark Johnson, recommended developing the corporate bond market. Since then, efforts have focused largely on stimulating retail investment interest in bonds as part of that broader recommendation.