Overview
3.1
As outlined in Chapter one, Australia’s retail corporate bond market is shaped by regulations and processes outlined in the Corporations Act 2001 (Cth) (Corporations Act). Reforms to this Act introduced in 2014 aimed to streamline the regulatory process relating to offers of simple corporate bonds (SCBs).
3.2
This chapter examines the benefits of developing Australia’s corporate bond market, and whether there is a need for further streamlining of SCB processes, particularly in relation to disclosure requirements. Related regulatory requirements, such as early redemption, bond tenure, financial ratios and tracing notices, as well as the availability of retail bond trustees are also discussed.
3.3
New Zealand’s corporate bond market is presented as a potential model for Australia to draw upon when considering the development of its bond market.
The framework and process for issuing corporate bonds
3.4
Gilbert + Tobin outlined to the Committee the evolution of the SCB regime advising that the 2009 Australia as a Financial Centre report (the Johnson Report) triggered a series of government initiatives to ‘encourage the growth of Australia’s retail corporate bond market.’
3.5
KPMG Australia (KPMG) explained:
The [Johnson] report recommended a reduction in regulatory requirements, as the cost of bond issuance exceed the value. To reduce the regulatory burden the report recommended the creation of a system of disclosure which would consist of two parts… The recommendations from this report were brought into law by the Corporations Amendment (simple Corporate Bonds and Other Measures) Act 2014 (Cth).
3.6
In 2010, the Australian Securities and Investments Commission (ASIC) introduced Class Order 10/321 to implement the recommendations from the Johnson Report. This change marked the onset of a wave of reforms to come and reflected an effort to streamline disclosure requirements. The Class Order allowed listed companies to issue ‘vanilla bonds’, the simplest form of corporate bonds, using either a short-form prospectus or a simplified two-part disclosure prospectus. The Class Order was later repealed as it was found not to simplify disclosure requirements as intended.
3.7
In 2013, the Australian Government passed legislation to open up its bond market to retail investors. This enabled Australian Government Bonds (AGBs) to be quoted on the Australian Securities Exchange (ASX), which the ASX argued ‘was a necessary pre-condition for any successful development of a retail corporate bond market.’
3.8
In 2014, ASIC introduced Class Order 14/1276, which amended the Corporations Amendment (Simple Corporate Bonds and Other Measures) Act 2014 (Cth) (Simple Corporate Bonds Act) to establish a Simple Corporate Bond (SCB) regime. The reform aimed to reduce the ‘administrative burden’ for issuers. Like the ‘vanilla bonds’ regime, the SCB regime introduced a streamlined disclosure process for issuers. It featured a two-part prospectus that allowed listed companies to issue SCBs to retail investors without the full prospectus requirements of Chapter 6D of the Corporations Act.
3.9
Ms Louise McCoach, Special Counsel, Gilbert + Tobin told the Committee that the Simple Corporate Bonds Act and the resulting SCB regime aimed ‘to strike a more appropriate balance between the needs of issuers in terms of streamlining disclosure and also protecting the interests of retail investors.’ However, Ms McCoach went on to state that ‘the fact that only four companies have issued under the regime suggests the right balance has yet to be struck and more work is yet to be done.’
3.10
KPMG similarly considered that the SCB reforms had been ‘ineffective’:
This Act introduced the … two-part prospectus process for disclosure and reduced the deemed civil liability for directors, although the criminal liability remained unchanged. KPMG Australia considers that these changes have been ineffective at incubating a greater retail bond market due to their inability to achieve the overarching objective of streamlining the issuance process. KPMG Australia considers that the reduction of liabilities for directors [under the Act] has failed to achieve this streamlining. This failure is the consequence of existing liabilities still requiring a full due diligence process.
3.11
Similarly, Gilbert + Tobin expressed concerns about the provisions under the Corporations Act which ‘may expose directors to criminal liability provisions’ and suggested that ‘if the intention is to relieve directors of the compliance burden of the due diligence process for omissions or misstatements they are not directly involved in, more needs to be done to achieve this outcome.’ They explained that:
…the involvement of directors in a prospectus can still be inferred from the continued requirement under section 720 of the Corporations Act for the directors of an issuer to consent to the issue of a two-part prospectus. This potentially undermined the intended protection from deemed liability… it should be broadened to make it clear that a director authorising the issue of an SCB prospectus under section 72 does not qualify as involvement for the purposed of section 729… Even if directors are not liable under section 729, the SCB regime does not remove the need for directors to be involved in the due diligence process. This is because a failure to do so may expose directors to the criminal liability provisions.
3.12
ASX advised the Committee that the SCB regime also imposed new prescriptive requirements:
strict constraints on bond terms surrounding terms, interest rates, seniority and early redemption rights, which meant tight criteria around SCB regime eligibility; and
no fungibility with the wholesale market, meaning the SCB regime cannot be used to fund usual wholesale debt issuances, as wholesale debt typically has additional early redemption rights than are permitted under the SCB regime.
3.13
The Australian Financial Markets Association (AFMA) expressed concerns about what they described as the ‘highly prescriptive nature’ of the SCB disclosure regime, which in their view has ‘not proved successful.’ AFMA highlighted that the ‘nature of civil liability attaching to the prospectus’ caused ‘different diligence processes for both the issuer’s directors and the joint managers from those used in the wholesale market.’ AFMA recommended ‘reducing the differences between instruments that may be eligible for wholesale and retail investors’ and to start with ‘reducing the disclosure requirements for large listed corporate issuers of “simple” bonds,’ as recommended previously by the Financial System Inquiry.
3.14
The Government’s response to the Financial System Inquiry Final Report, in October 2015, indicated that:
[The Australian Government] agrees to develop legislative amendments to modernise and simplify disclosure requirements for large corporations issuing “simple” corporate bonds to the retail market. We are working with ASIC and market participants to assess the need for further improvements to support the corporate bond market.
3.15
However, the ASX submission pinpoints that ‘since 2015, no progress has been made in introducing the necessary legislative amendments due to competing policy priorities.’ The ASX found that:
this initiative was not widely used after early examples showed that the Vanilla Bonds Regime did not produce simplified disclosure. Feedback from legal firms assisting corporate bond issuers at the time made it clear that the obstacles to simplified disclosure lay more in the interpretation and implementation of the disclosure tests and regulatory policy around prospectus disclosure, rather than the disclosure tests themselves.
3.16
Similarly, King & Wood Mallesons (KWM) further advised that the SCB reforms had not led to growth in the corporate bond market:
Since 2014 there have only been five offerings of SCBs and only one issuer has made use of the two-part prospectus regime to undertake a second issuance within the three year time frame during which a base prospectus may be utilised. SCB issuance is still costly and time consuming and the current regime has not significantly enhanced either the issuer or investor experience (although it has gone some way towards streamlining the process).
Complex and onerous disclosure requirements
3.17
Gilbert + Tobin recommended replacing the ‘full prospectus requirement for non-SCBs with slimmed down disclosure requirements’ and advised that legal impediments created a situation where ‘the process for issuing retail corporate bonds outside the SCB regime is perceived as costly and onerous in comparison to other avenues for borrowing.’
3.18
Australian Unity stated that currently ‘the legal requirements for SCBs were inherently lengthy and complex,’ with ‘considerable overlap between the two parts’ of the prospectus process. Similarly, ASX stated that the prospectus issuance process as ‘expensive and cumbersome’, which they say results in the SCB market having ‘no depth or liquidity.’ By the same token, the National Australia Bank (NAB) highlighted that despite the intent of the reforms being to simplify the issuance process, it remained ‘time consuming’ and burdensome:
While originally implemented to simplify debt issuance, the current SCB rules are onerous and relatively time consuming to adopt. The time and effort required to prepare prospectus documentation is also disproportionate to the risk being borne by the investors in purchasing senior debt instruments, particularly where borrowers have existing ASX listed instruments and are therefore subject to continuous disclosure requirements.
3.19
NAB contrasted this process to that of wholesale bond markets, stating that ‘wholesale offering documents are simpler to understand, easier to prepare and focus on the relevant transaction features in assessing the investment opportunity.’ The Property Council of Australia (PCA) similarly outlined that issuers are ‘subject to extensive prospectus requirements which adds complexity, time and costs compared to wholesale bond markets.’
3.20
The PCA added that for corporations listed on the ASX, the majority of information required for investors as part of the SCB prospectus process is already available, leading to regulatory duplication. The PCA also stated that the base prospectus was only valid for three years, which meant it had to be re-done at the end of this period, and it contrasted these challenges with the process for raising equity:
By comparison, there is a stringent, well known process for raising equity in Australia which allows listed entities to raise additional equity off the back of half year or full year results with limited disclosure requirements. This is a far less onerous process than the offering of a full base and issue specific prospectus which is required for retail bonds in Australia.
3.21
Dr Rand Low (Dr Low) also emphasised the importance of having a system that encourages more corporate issuers:
… we need to have corporate issuers there for choice. They want to raise capital from bank loans, the debt market, which is bonds, or the equities market. In this scenario, most of the issuers who are actually going out there and trying to raise a company via loans are really looking at banks or the capital markets through bond exchanges. So ideally what you need to do is level the playing field to ensure that issuing bonds remains a non-onerous, cost-effective, viable alternative to bank lending for corporates. This will encourage more issuers, instead of going to one of the big four banks to get a small, medium or large loan, to go straight to the debt markets to raise the capital.
Costs associated with the issuance process
3.22
Some inquiry participants highlighted the costs associated with the issuance process, which NAB described as being ‘significant.’ Mr Collin Jennings from the PCA similarly stated that a major barrier to the growth of the retail bond market was that ‘the cost of putting together a bond can be prohibitively expensive compared with the wholesale market.’
3.23
NAB provided estimates of legal and issuance costs:
Borrowers face legal and other operational costs of approximately $100,000 for a wholesale investor targeted transaction in the local bond market … By comparison, legal and process costs for issuance of SCBs usually exceed $500,000 with little or no incremental benefit in funding cost.
3.24
KPMG recommended that the regulatory costs associated with the issuing of bonds be reduced, to encourage greater up take. KPMG recommended that the Australian Government:
…lower the regulatory cost of bond issuance to increase take-up and ensure that benefits exceed the cost of issuance; consider legislating the issuance of bonds to resemble the “Low Doc” process of secondary offerings; and review Chapter 2L of the Corporations Act given its prominent in debenture related markets.
3.25
Similarly, Dr Shumi Akhtar agreed and outlined that costs associated with corporate bonds may be higher than those associated with equity issuances:
Transaction costs (e.g. underwriter fees, management fees, broker fees, legal fees) for bonds can be higher than its counterpart, equity issuances. This additional cost is primarily due to a lack of bond price transparency which directly relates to bond liquidity (frequency of transactions) and information availability. Since the Australian corporate debt market is relatively inactive, transaction costs for debt issuances are most likely to be higher and this is just one of the many reasons why Australian businesses would be reluctant to raise debt capital locally (on the demand side).
Streamlining the issuance process
3.26
Several submitters suggested to the Committee that an option to improve the facilitation of bonds was to adapt the continuous disclosure regime currently associated with shares or the wholesale market, and use a ‘cleansing notice’. In a capital raising context, a ‘cleansing notice’ is the disclosure of information that is otherwise not required to be released to the market. The intent is to allow investors and financial advisers to make an informed assessment of the issuer’s assets, liabilities, financial position, performance and prospects or the rights attaching to the securities issued.
3.27
KWM highlighted that an option to improve the facilitation of bonds was to adapt the continuous disclosure regime currently associated with shares:
Australian corporates with equity listed on the ASX are subject to a continuous disclosure regime whereby they are required to immediately disclose any information that would have a material effect on the price or value of their shares. In addition, they are able to offer and issue additional shares (e.g. through a rights issue) to retail investors without a prospectus or other disclosure document through the use of the “cleansing notice” approach … We submit that this existing cleansing notice regime can easily be adapted to help facilitate the issuance of bonds.
3.28
AFMA similarly stated that ‘allowing listed issuers who comply with the continuous disclosure regime to issue senior bonds through a simple term sheet in conjunction with a statement that all material information has been disclosed to the market has been a long‐standing proposal of eminent good sense.’
3.29
The PCA recommended that the disclosure requirements of the Corporations Act be reviewed, ‘with a view to streamlining the information required for each issuer and issuance.’ The PCA told the Committee that it:
… would strongly recommend a more streamlined approach for listed entities, given entity specific information is readily available and subject to continuous disclosure requirements. These changes would reduce the currently prohibitive time and costs currently associated with retail bond issuances.
3.30
NAB similarly recommended that:
For simple bonds, the issuance process should remove the current complex and duplicative prospectus documentation and allow issuance using existing wholesale style disclosure documentation and a cleansing notice where bonds are being issued by a public company which has its ordinary shares listed on ASX. For simple bonds where the borrower is not listed, the issuance process should require a single, detailed prospectus for the inaugural simple bond issuance, followed by continuous disclosure and financial reporting obligations consistent with those applying if the entity has listed its ordinary shares. Follow on issuance would use wholesale style disclosures complemented by a cleansing notice.
3.31
The ASX also put forward for the Committee’s consideration legislative reforms to ‘deliver a vibrant retail corporate debt market,’ including to:
allow ASX 200 issuers to list $A senior bonds, either new or existing, with a term sheet and cleansing notice;
allow issuers outside the ASX 200 to list $A senior bonds with a reformed SCB prospectus for the initial offer, but to require only a term sheet and a cleansing statement for subsequent tranches;
amend the prescribed SBC terms to permit early redemption at the discretion of issuers; [and]
remove the anomalies and inefficiencies in the existing two-part prospectus regime for SCBs.
3.32
KPMG recommended that the regulatory costs associated with the issuing of bonds be reduced, to encourage greater take up. In addition, KPMG recommended that the government ‘consider legislating the issuance of bonds to resemble the “Low Doc” process of secondary offerings’.
3.33
However, in contrast, Gilbert + Tobin stated:
We do not believe that the introduction of a 'low doc' liability profile is essential to the development of Australia’s corporate bond market and also question whether it is practical to do this for corporate debt instruments. Unlike ordinary shares or ordinary units, debt instruments are not homogenous and so there will always be a need to ensure there is appropriate disclosure of the terms of issue of the debt (and the risks associated with those debt instruments).
3.34
Instead, Gilbert + Tobin considered that for non-SCB issuers:
… there is room for the full prospectus requirement for non-SCBs to be replaced with slimmed down disclosure requirements which will also result in a less time-consuming due diligence process for non-SCB issuers.
3.35
AFMA stated that the wholesale and retail markets should not be developed in isolation from one another, and recommended that a focus ‘on measures that promote funds' ability to have corporate bonds traded by wholesale and retail investors through lowering barriers to having corporate bonds available to retail.’
3.36
NAB also stated that ‘simple bonds should mirror the features of institutional level wholesale bonds.’ NAB further advised that:
This would create fungibility to existing wholesale debt markets to maximise liquidity and provide price discovery for both borrowers and investors. Rather that prescribing in detail mandated criteria of a ‘Simple Corporate Bond’, regulation should instead focus on disclosure variation away from what is prescribed as the standard form of corporate debt issuance.
3.37
The Association of Superannuation Funds of Australia (ASFA) stated that ‘the availability of close substitutes’ to corporate bonds, such as the ability of self-managed super funds to invest in bank deposits (which are subject to a government guarantee for the first $250 000) was an impediment to greater investment by households in corporate bonds. AFMA similarly noted that the government guarantee available for retail bank deposits may make them more attractive to investors, but that this has changed in recent times:
Under the Financial Claims Scheme, retail bank deposits are guaranteed by the Federal Government for deposits up to $250 000 per account holder per Approved Deposit‐Taking Institution. Accordingly … there is a relative attractiveness for bank deposits covered by the Financial Claims Scheme relative to corporate bonds, which are unsecured, albeit ranking higher than equity in the event of insolvency. As such, in order to attract retail investors, the bond yields need to be significantly larger. This issue was exacerbated in the last few years, particularly as the cost of retail deposits for banks increased; however recently the returns on retail deposits has fallen, making corporate bonds increasingly attractive on a risk‐adjusted basis.
Further regulatory hurdles
3.38
Evidence received drew the Committee’s attention to further regulatory impediments that submitters said contribute to the relatively low uptake of corporate bonds.
Restrictions on early redemption and bond tenor
3.39
Gilbert + Tobin outlined how restrictions on early redemption and bond tenor in the SCB regime hamper flexibility in the market and recommended that restrictions on early redemptions and bond tenor for SCBs be removed. This includes a current 10 year limitation for the tenor of SCBs.
3.40
Gilbert + Tobin further outlined these issues:
Issuers typically refinance maturing bonds by the issue of new bonds. Given their dependence on market conditions for a new issuance, issuers often require the flexibility to restructure the bonds in advance of a refinance by either seeking to redeem the bonds early or extending their maturity date. The restrictions on redemptions and bond tenor under the SCB regime reduces this flexibility, increasing the refinance risk for bonds to levels that may be unpalatable for risk-averse issuers.
3.41
Australian Unity similarly emphasised that ‘the inability to include terms that permit early redemption/call back funds at an issuer’s discretion is restrictive in relation to providing an efficient mechanism for the refinancing of SCBs.’
3.42
AFMA expressed similar concerns:
The strict prescribed terms, particularly the limitation in not permitting early redemption mean that bonds are not fungible with equivalents traded in the wholesale market. This presents a barrier to liquidity in the retail bonds of companies with well-established bond programmes.
3.43
KWM also shared this view and stated that the SCB regime was ‘overly prescriptive and restrictive’ in relation to redemption:
… the current regime … requires the bonds to adhere to a number of restrictive features, including that their terms and conditions can only contain certain types of redemption events. This has made it difficult for issuers and their lead managers to bring wholesale bonds across into the retail market, given that wholesale bonds normally contain additional redemption events.
3.44
Acacia Partners similarly highlighted limitations on early repayment as a significant barrier:
The current SCB regime limits the ability of a corporate issuer to manage its refinancing risk because it places substantial limitations on the ability to repay SCBs prior to their stated maturity … Early repayment rights are a feature of the wholesale unrated market, particularly amongst the less frequent borrowers who would benefit most from reform. In contemplating what measures may assist the development of the market, flexibility to repay early may be the most important on any corporate treasurer’s list.
3.45
To address this, Acacia Partners recommended that the Australian Government ‘grant issuers of SCBs greater flexibility to refinance during the 12 months prior to the maturity date.’ The ASX similarly recommended that the prescribed SCB terms be amended to ‘permit early redemption at the discretion of issuers.’
Financial ratios
3.46
Several submitters commented on ASIC’s standardised approach, which they described as a ‘one size fits all approach’.
3.47
Gilbert + Tobin explained that regulations required issuers to include key financial ratios in the offer-specific prospectus for an SCB and added:
Each issuer has a different capital structure and its cash flow liquidity depends on various factors. Therefore, a ratio applicable to an issuer in one industry may not be as commercially relevant to another issuer operating in a different industry… A further issue is that while ratios are useful to track changes in a business over time, they are not as useful when comparing one company to another since there are many factors which impact such ratios… To address these issues… the issuer should be required to explain how it intends to meet its obligations to pay principal and interest on the bonds (leaving it up to the issuer to determine how best to do that).
3.48
Acacia partners agreed and stated that this approach ‘doesn’t sufficiently recognise the diversity of business models, funding models, and accounting standards which apply to different corporates.’ They recommended removing prescribed financial ratios, and instead requiring that issuer ‘explain and disclose key financial ratios which it believes are relevant to its capacity to service and repay or refinance SCBs.’
3.49
MSC Trustees saw ASIC’s approach as ‘overly simple’ as it ‘only [differentiates] between listed and unlisted issuers.’ They suggested that this method was ‘potentially overly influenced by historical retail investor losses… thereby insisting on onerous conditions, particularly applied to unlisted issuers and trustees… and applying disproportionate responsibility for performance of bonds.’
Tracing notices
3.50
Acacia Partners and Gilbert + Tobin both recommended the introduction of tracing notices to allow issuers to obtain details of the beneficial ownership of their debt securities. Gilbert + Tobin described the current process for bond issuers to ‘obtain trustee’s consent to any potential amendments or waivers to their bond terms if they wish to restructure these prior to their maturity’ as ‘cumbersome and inflexible.’ They recommended the ‘introduction of tracing notices to allow issuers to obtain details of the beneficial ownership of their debt securities on issue’ and to ‘improve communication channels between issuers and investors.’
3.51
Acacia Partners explained that there were tracing notices for equity securities, but that this was missing in regards to bonds:
… an issuer of a bond in Australia right now doesn't have a right to trace the holder of that bond. So it's entirely plausible that an issuer might not know who actually holds it and who they should be having discussions with in relation to amendments or refinancing … being able to provide that information will make the pathway for amendments, waivers and refinancing simpler for issuers of bonds. We also think that, from a reform perspective, that simple change would be the lowest hanging fruit, and we see no substantive arguments against that approach.
Box 3.1: Case study: New Zealand’s retail bond market
A number of inquiry participants pointed to New Zealand’s retail bond market as a potential model for Australia. Gilbert + Tobin described
New Zealand’s corporate bond market as being ‘larger, deeper and more liquid’ than Australia’s market, and that this was largely a result of reforms, including the introduction of a slimmed down disclosure regime. Gilbert + Tobin further outlined that New Zealand’s corporate bond market uses cleansing style notices to ‘great effect’.
The PCA highlighted the issuance process in New Zealand, stating that it involved: ‘a short product disclosure statement; a master trust deed; and an indicative term sheet’. The PCA outlined that this process carries less cost and less regulatory complexity than the Australian process.
NAB provided further detail on the features of New Zealand’s system:
The Financial Markets Conduct Act 2013 provides New Zealand borrowers with a streamlined non-prospectus disclosure for most equity and debt issuance by listed borrowers. Product disclosure statements [PDS] for initial issuance in New Zealand are now more streamlined documents, focussed on retail investors. The New Zealand system also makes significant use of cleansing notices for re-issuance and refinancing where existing outstanding instruments exist. The revised disclosure regulations allow for simple, flexible and easy to understand documents (basic term sheet and presentation slides focussed on the specific issuance), improving accessibility for investors and streamlining the process for borrowers. Investor protections are provided by the initial PDS disclosures and continuous disclosure obligations.
The New Zealand regulations also include different categories of “wholesale” investors (including self-certification), exclusions for small businesses and crowdfunding, new provisions for employee offers, crown offers and simple bank products.
NAB advised that ‘these features and the resulting fungibility of retail and wholesale credit issuances in the New Zealand market has resulted in significant issuance of fixed income through retail investors.’
The ASX similarly stated that disclosure reforms in New Zealand had simplified the issuing process for listed bonds. The ASX added that as a consequence, ‘there are numerous examples in that market of the new regime being used for listed bond issuance.’
Retail Bond Trustees
3.52
A bond trustee is a financial organisation, such as a bank or trust company, nominated by the issuer of bonds as the custodian of funds and official representative of bondholders. In essence, their role is to protect the interests of bondholders by ensuring, for example, that the bond interest payments and principal repayments are made as scheduled.
3.53
MSC Trustees stated that there was a ‘clear link between the current dysfunction and lack of activity in the Australian retail bond market and the limited availability of suitable trustees.’ Acacia Partners similarly stated that:
There are currently only two trustees who are active in new issuance in the Australian retail market. One of these is reluctant to act other than for substantial issuers and the other requires ASIC approval to act. This situation gives rise to material uncertainty as to the availability and or timing of a trustee appointment and consequently adds uncertainty to retail issuance.
3.54
KPMG agreed and stated that Chapter 2L of the Corporations Act imposed ‘strict and broad duties’ on trustees, which ‘consequently results in far reaching liability exposure.’ KPMG stated:
This exposure can explain what we understand to be a reluctance of approved trustee participants to enter the retail bond market as the potential risk is weighted heavily against reward.’
3.55
MSC Trustees similarly stated that:
… there is also a clear link between the limited appetite of trustees to service the Australian retail bond market and the onerous regulatory hurdles applicable to trustees, rendering them unable to provide their services economically.
3.56
MSC Trustees considered whether ‘by setting significantly higher financial conditions for Chapter 2L appointments, ASIC may unintentionally force issuers out of the retail bond market.’ They listed reasons that trustees may not be willing to provide this service, which included: a lack of relevant experience and technical expertise; onerous regulatory conditions for trustees; ‘misunderstanding between issuers, trustees, regulators and the courts in respect to the role responsibility of the trustee;’ and ‘commercial reasons relating to non-viable inadequacy in risk/return parameters’ due to these listed barriers.
3.57
In addition, MSC Trustees added that ASIC’s internal policy in this area has been a ‘constraint on the development of a deeper bond market in Australia.’
3.58
Gilbert + Tobin outlined that the obligations on trustees in Australia differed to that of other jurisdictions:
… there's a statutory obligation under Chapter 2L, which requires trustees to monitor the financial performance of issuers, issuers' compliance with covenants and various other things which extend the normal common-law fiduciary obligations. Other jurisdictions have not extended the obligations of the trustees in this way. Australia is an outlier in terms of imposing these additional obligations.
3.59
MSC Trustees stated that the impact of the lack of availability of trustees was that investment options for retail investors would be limited to higher risk capital investment opportunities. Gilbert + Tobin also argued that ‘if you don’t have trustees you can’t have a corporate bond market.’
3.60
To address these issues, MSC Trustees recommended a ‘rationalisation of regulatory conditions applicable to trustees’ to ‘reactivate and develop the Australian retail bond market.’
3.61
KPMG recommended that ‘the Australian Government review Chapter 2L of the Corporations Act given its prominence in retail debenture related markets’ and as it ‘outline[s] the duties and responsibilities of the various parties involved in a bond issuance.‘
3.62
Gilbert + Tobin commented on the impact of the regulation on smaller organisations:
The availability of trustees to service the retail corporate bond market is also negatively affected by the capital requirements for trustee appointments, which makes it difficult for medium-sized trustee companies to enter this market. We therefore recommend that consideration be given to introducing a more commercial and weighted approach to appointments of trustees to enable more entities to be eligible to assume these roles.
3.63
To reduce this impact, they recommended that Chapter 2L be amended:
… so that it strikes a more commercial balance between the risk/reward analysis for trustees and the needs of retail investors, including the removal of any monitoring obligations. These reforms would also align Chapter 2L closer to the position in other jurisdictions.
Committee comment
3.64
To facilitate the growth of a strong corporate bond market, it is vital that the right regulatory settings are in place. The Australian Government has previously taken steps to streamline the corporate bonds process, particularly through implementing the simple corporate bonds (SCBs) regime. The Committee notes these steps, however, evidence from inquiry participants suggests that there are further steps the Government can take to streamline the disclosure requirements for the issuing of SCBs.
3.65
There are other regulatory impediments that may be hindering the greater utilisation of corporate bonds by investors. This includes restrictions on early redemption of SCBs, and a limited availability of trustees. Addressing these impediments will enhance flexibility and efficiency in the market, and support its further development.
3.66
The Committee believes that to facilitate the growth of a strong corporate bond market, there is a need to reduce the regulatory burden, minimise the cost of issuance, and increase flexibility in relation to redemption, bond tenor, financial ratios, and trustees.
3.67
Lessons can be drawn from the corporate bond reforms that have been implemented in New Zealand. Inquiry stakeholders highlighted how
New Zealand’s reforms, which simplified the regulatory process, led to a reduction in regulatory complexity and an increase in the growth and depth of the corporate bond market. The Australian Government should look to this jurisdiction when taking steps to develop Australia’s corporate bond market further.
3.68
The Committee recommends that the Australian Government takes further steps to streamline and regularise disclosure requirements for the issuing of simple corporate bonds. This should ensure there is no duplication of requirements for listed entities that are already subject to continuous disclosure requirements.
3.69
The Committee recommends that the Australian Government amends relevant regulations to allow for the early redemption of simple corporate bonds to enable issuers to refinance bonds prior to their maturity date.
3.70
The Committee recommends that the Australian Securities and Investment Commission review its approach to financial ratios to maintain investor confidence in a standardised approach, while introducing more flexibility for bond issuers.
3.71
The Committee recommends that the Australian Government reviews Chapter 2L of the Corporations Act 2001 (Cth) and other regulatory obligations applicable to trustees with the aim of increasing the availability of trustees for the retail bond market.
3.72
The Committee recommends that the Australian Government review the regulatory reforms implemented in New Zealand’s corporate bond market to further develop, broaden, deepen and make more liquid Australia’s corporate bond market.