Proposed amendments to Australia's Corporations Act are
intended to encourage the issuance of retail corporate bonds.
But market participants have branded them too restrictive.
While Australia boasts a vibrant equity-linked market, its
corporates have traditionally relied on bank loans or tapped
debt capital markets abroad. According
to a September 2012 report by the Reserve Bank of
Australia, the stock of non-financial corporate bonds
outstanding offshore is more than double the non-financial
stock of bonds outstanding onshore.
The terms set out in the
Corporations Amendment (Simple Corporate Bonds and Other
Measures) Bill 2013 aim to kick off retail corporate bond
But stringent limitations within the amendments may make it
difficult for the programme to succeed.
Most media coverage relating to the Amendments to the
Corporations Act has focused on directors liability for a
defective prospectus. Local lawyers agree that it is the most
important aspect in this proposed legislation.
Herbert Smith Freehills Patrick Lowden said that
directors will now be exempt from per
se liability for defects. This has been a
significant disincentive for public companies to issue bonds
especially top public companies able to readily borrow
Bond issues are harder to sell to the board when the
board must take that risk, he said.
However Lowden added that while directors may not be
automatically liable for a defective prospectus, the issuer and
underwriters would remain liable.
Directors may still be liable if they failed to take
reasonable care to ensure the prospectus is not misleading,
which falls short of the bar set for civil liability at the
moment, he said. The scope of the carve out in
favour of the directors is broad, and its fair to wonder
whether its consistent with the broader prospectus
However, a larger issue is that the proposed new prospectus
regime requires companies to rank retail corporate bonds above
Lowden explained that the new prospectus regime is only
available to debentures that rank ahead of the unsecured
creditors of the issuer.
If that remains, that will rule out a lot of the top
prospective issues that the government might like to see
because those companies would typically borrow on an unsecured
basis; we wouldnt expect them to start issuing secured
bonds as that would require them to restructure existing
borrowing agreements, he said.
Gilbert + Tobins Janine Ryan agreed that the
stipulation that the notes take priority over unsecured
creditors is difficult, as it suggests the notes must be
secured in some way. She said that the intention may be that
the bonds should not be subordinated to other unsecured
creditors, but currently the draft legislation requires some
form of security.
Moreover the proposed legislation requires a specific
prospectus regime. It stipulates that there is a base
prospectus valid for three years that will include
general company information. It does not need to be
The offer-specific prospectus will be required for each
tranche of notes, and must have an expiry date no more than 13
months after the document is filed with the Australia
Securities and Investments Commission (Asic).
Therefore the types of notes that can actually be issued
under this amendment to the Corporations Act is limited to
vanilla bonds with fairly specific terms, Ryan said.
I think its a little odd that theyre
mandating the two-part prospectus, rather than giving issuers
the option to having a base prospectus with specific
supplements, Lowden commented. It seems a bit
prescriptive in the requirement to use that path, especially if
a company has a one-off issue in mind.
Future of the bond market
However this may be the first step in a series of rules for
the corporate bond market. David Lynch, executive chairman of
the Australian Financial Markets Association, said that
theres general agreement that it will take a range of
initiatives in respect of both the demand and supply sides to
develop a highly liquid corporate bond market in Australia.
The government measures are seen as a necessary and
welcome step in the process, but there is, for example, a
significant role for investor education in relation to the
nature of bonds and also their role in a diversified
portfolio, Lynch added.
In particular, a development Lowden is hoping for is a
relaxation of restrictions that apply to the use of
It will be disappointing if the government does
nothing to facilitate the use of ratings in the face of a
current content rule that requires all experts named or
referred to in the prospectus to consent to their being
named he added.
Asic relies on this section to stop any credit ratings from
appearing in a prospectus because the credit agency ratings
would need to consent, Lowden explained. They effectively
cannot do that because Asic would then view them as providing
financial advice, for which they would need a retail financial
services license which they dont have which
is a significant impediment.
But the corporate bond market in Australia might develop
anyway as funding costs rise elsewhere. Lynch added that he
expects a number of changes to regulations on the global front
to influence the evolution of the domestic bond market.
Companies may have to be less reliant on bank funding
as the Basel III reforms are implemented, he said.
Moreover, Australian companies issue far more bonds
overseas than locally and the Australian dollar cost of this
funding may rise as a consequence of the various global
Australias shadow banking regulations revealed
How Australia hybrid first clarifies Basel III
Australia FDI regime must change for Asia success