Publications / Corporate Advisory
Small to medium public companies seeking to raise capital will welcome the potential introduction of ‘simple corporate bonds’ to Australia’s bond market. Legislation was introduced on 20 March 2013 which aims to cut red tape and streamline the process for companies seeking to access this type of funding.
The Australian government has taken further steps towards developing the retail corporate bond market by introducing legislation into Parliament on 20 March 2013. The proposed changes to the law come on the back of the government’s banking reform agenda. A key part of the agenda has been to promote a ‘deep and liquid’ retail corporate bond market, which will provide an alternative source of funding for Australian companies.
The Corporations Amendment (Simple Corporate Bonds and Other Measures) Bill 2013 (the Bill) contains the proposed changes to the Corporations Act 2001 (the Act), which are aimed at increasing offerings of corporate bonds to retail investors by:
- streamlining the disclosure regime for companies by introducing a shorter, two-part prospectus when issuing ‘simple corporate bonds’; and
- easing civil liability of directors in relation to ‘simple corporate bonds’.
‘Simple corporate bonds’
An offer to the retail corporate bond market will qualify for the simplified regime if it falls within the definition of ‘simple corporate bonds’ as set out in the Bill. Simple corporate bonds’ have the following features:
|The issuer||The issuer must have continuously quoted ASX securities on issue and be subject to the continuous disclosure regin|
|Minimum subscription amount||A minimum aggregate issue of at least $50 million.|
|Price||The price payable for each bond must not exceed $1,000.|
|Australian currency||The bonds must be denominated in Australian dollars.|
|Debenture||The bonds must be debentures (as defined in section 9 of the Act).|
|Quoted||The bonds must be quoted on a prescribed financial market, such as the ASX.|
|Fixed term||The bonds must be for a fixed term of not more than 10 years.|
|Principal||The principal must be paid to the bondholder at the end of the fixed term.|
|Interest rate||The rate at which interest is payable must be either fixed or floating. A fixed rate must not be decreased during the term of the bonds, but may be increased.|
|Redemption||The bonds must not be redeemable prior to the term expiring except at the option of the bondholder, or an acceptance of an offer to buy back the bonds, or a change in law which impacts on taxation liabilities, or a change of control of the issuer, or fewer than 10% of the bonds remain on issue.|
|Senior unsecured||The bonds must not be subordinated (other than to secured debt) and must rank equally to unsecured debt of the issuer.|
|Not convertible||The bonds cannot convert into another class of securities.|
|Offer||The bond must be offered at the same price for each investor.|
Full details of the ‘simple corporate bonds’ can be found in section 713A of the Bill, which also sets out a number of qualifying criteria relating to the issuer, such as its continuous disclosure history, trading suspensions and audit reports.
The disclosure regime for ‘simple corporate bonds’
To simplify the current disclosure regime, where issuers are required to prepare a full prospectus under Chapter 6D of the Act, the Bill introduces a two-part prospectus. The two-part prospectus is made up of:
- a ‘base prospectus’, containing general information about the issuer which would be unlikely to change over the three year validity period of the document; and
- an ‘offer-specific prospectus’, containing information relating to each particular issue of bonds outlining the key details of the offer. The ‘offer-specific prospectus’ may supplement or modify the ‘base prospectus’.
The incorporation by reference regime will apply to the two-part prospectus. This will allow issuers to omit certain documents to enhance readability and reduce the length of the prospectus overall. Documents incorporated by reference must be lodged with ASIC and investors must be informed of their right to obtain copies of the document.
The two-part prospectus is not a new concept. Companies are already permitted to issue ‘vanilla bonds’ to retail investors by two-part prospectus under ASIC Class Order 10/321 (the Class Order). However, the Class Order has not resulted in developing an extensive retail corporate bond market. This may be due to the fact that it still must meet prospectus content requirements. At this stage, the Bill does not mandate content for the ‘simple corporate bond’ two-part prospectus. It is expected that this will be provided for in the regulations, which are yet to be released. It will be interesting to see whether Class Order 10/321’s onerous requirements will be departed from under the ‘simple corporate bonds’ regime.
Civil liability for directors
An aspect of current law is the personal liability imposed on directors when issuing corporate bonds. This liability extends to cover any loss or damage suffered by an investor as a result of misleading or deceptive statements or an omission from a prospectus. The Bill proposes to limit the range of persons who may be liable for misleading or deceptive statements and omissions to only those directors who had a direct involvement in making such statement or omission.
Interestingly, the Bill does not remove the need for the board of an issuer to be involved in the due diligence process. Some have suggested that there is a need for a board to be given the benefit of a ‘safe harbour’ in relation to the due diligence process. In the absence of any safeguards for boards, the Bill may not have gone far enough to give efficacy to the protections desired by industry participants.
How simple is ‘simple’?
The Bill is noticeably similar to the Class Order which failed to generate a retail corporate bond market when it was introduced in 2010. The government will need to ensure it properly implements the legislative framework around the ‘simple corporate bonds’ that, in reality, will reduce the red tape around the existing corporate bond market. The release of the Bill’s regulations in due course will further indicate the government’s intentions here.
However, the government will not be able to encourage the creation of a ‘deep and liquid’ retail bond market purely from how ‘simple’ it will be for issuers to release the ‘simple corporate bonds’. Numerous factors will come into play such as market forces, the commercial environment, how attractive bonds are to issuers and the presence of willing investors. Nevertheless, it is a healthy step towards the development of an alternative source of funding for Australian companies.
Wholesale corporate bond market signals strong investor potential in the retail market
McCullough Robertson has recently advised Mackay Sugar Limited and Silver Chef Limited on their issuance of wholesale corporate bonds to institutions and other sophisticated investors. The success and scale of response seen with these offers has indicated that there can be serious appetite for this type of investment.
The retail market could enjoy a similar response from investors with the introduction of ‘simple corporate bonds’. The streamlined disclosure regime and reduction in red tape proposed by the Bill is more in line with the process typically followed for wholesale offers, which benefit from relaxed disclosure that is mostly unregulated. Boards should consider the advantages offered by the proposed ‘simple corporate bonds’. If there is investor appetite, then companies seeking to diversify their funding mix could tap into what could be a newly ignited retail bond market.
Focus covers legal and technical issues in a general way. It is not designed to express opinions on specific cases. Focus is intended for information purposes only and should not be regarded as legal advice. Further advice should be obtained before taking action on any issue dealt with in this publication.