The “first ever simple corporate bond”

Australian Unity is offering retail investors a rare chance to invest in senior ranking bonds.

Summary: New legislation allows for “simple corporate bonds”, with terms to maturity up to 15 years and a shorter prospectus. Australian Unity is offering senior ranking simple corporate bonds with a floating rate coupon paying a margin of 2.8 to 2.9 per cent above the 90 day bank bill rate.

Key take-out: The issue presents a rare opportunity for retail investors to invest in senior ranking bonds rather than subordinated or hybrid notes, which abound on the ASX.

Key beneficiaries: General investors. Category: Investment bonds.

The first ever simple corporate bond: This is how NAB, the joint arranger of a new bond issue by Australian Unity, referred to the bonds in a press release issued on Monday. The claim is technically correct but there is a story behind it.

The federal Government finally passed the Corporations Amendment (Simple Corporate Bonds and Other Measures) Bill 2014 late last year, although it took four years to do so. The bill seeks to facilitate increased issuance and trading of listed corporate bonds in Australia. It is intended that issuers of simple corporate bonds will incur lower bond disclosure costs and will be relieved of deemed liability for company directors when issuing simple corporate bonds.

Lessons from history

The first attempt to develop a vibrant listed corporate bond market was ASIC’s Class Order CO 10/321 which sought to promote issuance of vanilla corporate bonds via a short form prospectus. The short form prospectus was considered a failure when ultimately only three companies used it to issue bonds.

Primary Healthcare was the first to do so, when it sold $152 million of five year bonds in September 2010. It was followed by Tatts Group when it raised $195m of seven year bonds in June 2012. Lastly, IMF Bentham used the short form prospectus to raise $50m for five years in June last year.

How simple corporate bonds work

Simple corporate bonds allow a base prospectus with a life of three years to provide necessary information on the issuer and reference other information provided by the issuer under its continuous disclosure obligations. This requires the issuer to have continuously quoted securities listed on the ASX.

Incorporation of information by reference reduces the length of a prospectus and requires less cross checking of information, thereby reducing costs to issuers. It will also benefit investors by allowing more targeted disclosure.

A supplementary prospectus is required for individual bond issues during the life of the base prospectus. The supplementary prospectus will contain issue specific information.

Simple corporate bonds can have a term to maturity up to 15 years, whereas vanilla corporate bonds were limited to 10 years. Otherwise simple corporate bonds are much the same as vanilla corporate bonds in that they must be debentures as defined under the Corporations Act, quoted on an exchange, denominated in Australian dollars, have a fixed or floating interest rate, and among other things, the face value cannot exceed $1,000.

Considering the new offer

So how does the new simple corporate bond issue from Australian Unity stack up?

Australian Unity is not listed on the ASX, so at first glance it would appear to be disqualified from issuing simple corporate bonds. However, Australian Unity has had $120m of Australian Unity Notes listed on the ASX since April 2011, and thus has had continuously quoted securities listed on the ASX since then.

A base prospectus has been issued, along with an offer specific supplementary prospectus. The Series B Australian Unity Bonds being offered are referred to as Tranche 1, not so much because second or third tranches are anticipated, but because Australian Unity has the flexibility to issue subsequent tranches, if it chooses to do so.

The bonds are senior ranking obligations of Australian Unity and are unsecured. The term to maturity is five years and the bonds will pay a floating rate coupon which will be based on a margin of 2.8 per cent to 2.9 per cent added to the 90 day bank bill rate.

The exact margin and size of the issue, which has been set at around $200m, will be determined in a bookbuild scheduled for next Monday.

There is a negative pledge in relation to the granting of security to other lenders without offering the same to bond holders, and there is a covenanted gearing ratio which Australian Unity must ensure remains under 50 per cent.

The proceeds of the issue will be used in part to refinance the Australian Unity Notes, to assist in funding the acquisition of Home Care Services of NSW from the NSW state government, and for general corporate purposes.

Holders of the Australian Unity Notes will be offered an opportunity to roll over their investment into the new bonds. While the bonds will pay a lower credit margin than the notes, note holders will be compensated with a payment for the difference, calculated to the April 2016 maturity date of the notes.

The notes have a “BBB /GREEN” rating from Australia Ratings. The “BBB ” signifies the credit quality of Australian Unity and the “GREEN” signifies a senior ranking bond.

The same rating applies to the Australian Unity Notes.

Conclusion

The issue presents a rare opportunity for retail investors to invest in senior ranking bonds rather than subordinated or hybrid notes, which abound on the ASX. There are only three other senior ranking bonds listed on the ASX and one of these matures next month.

The offer will open on November 17 and close on December 11. Deferred settlement trading on the ASX will commence on December 16 under the ticker code AYUHB.


Philip Bayley is a director of Australia Ratings. He is a former director of Standard & Poor's and now works as an independent consultant to debt capital market participants. He also writes on matters concerning debt capital markets and banking for various publications.