On 13 December 2011, the Commonwealth Treasury released a discussion paper, 'Development of the retail corporate bond market: streamlining disclosure and liability requirements', (Paper) which invites submissions on proposals that are designed to enhance the depth and liquidity of the corporate bond market in Australia. The proposed reforms would reduce the current Corporations Act 2001 (Cth) disclosure and liability burden for issuers but retain key investor safeguards.
- Proposals seek to reduce disclosure and liability burden for issuers while retaining investor safeguards.
- Shorter, simplified, or two-part, prospectuses would be permitted for retail corporate bonds.
- New regime would require issuers and bonds to meet certain requirements to ensure investors are protected.
- Directors' deemed liability for retail corporate bond prospectus may be removed
- Submissions due by 10 February 2012.
Issuers of retail corporate bonds in Australia are currently required to prepare a full-form prospectus in accordance with section 710 of the Corporations Act, unless they are eligible to rely on ASIC's 'vanilla bonds' class order [CO 10/321] (Class Order). The Paper notes that these documents can be overly voluminous and complex for retail investors and impose an onerous liability regime on directors. The proposed reforms aim to help issuers to prepare shorter, more standardised prospectuses to:
- encourage increased corporate bonds issuances into the retail segment of the market as a result of the reduced transaction costs and liability consequences, and
- aid retail investors in making fully informed investment decisions by increasing the effectiveness of prospectus disclosures.
General overview of proposals
Treasury has recognised that, given the limited use of the Class Order to date, further reform is needed to encourage Australia's bond market. The Paper invites discussion on supplementing or replacing the current prospectus content and liability with a new optional regime for issuers of retail corporate bonds that meet certain specific conditions. The new framework could encompass either the issuance of a single simplified prospectus or a new 'multi-stage' disclosure framework which would require the preparation of a 'base' prospectus followed by secondary prospectuses as subsequent bond offerings are conducted (in each case having regard to new prescriptive contents provisions).
The single 'simplified' prospectus
This proposal draws on the success of the 'low doc' rights issues provisions included in the Act in 2007 and has parallels with the simplified disclosure prospectus regime recently enacted in New Zealand. Like those provisions, the Paper proposes that, in order to be eligible to use a simplified prospectus, issuers or retail corporate bonds would have to satisfy a number of conditions such as:
- the issuer has continuously quoted securities
- the issuer's continuously securities have not been suspended for more than 5 days in the last 12 months
- there are no determinations in force which would disentitle the issuer from using a cleansing statement for a placement or rights issue, and
- there have been, in the 12 months prior to the shortened prospectus' date, no contraventions of Corporations Act provisions relating to financial reporting and continuous disclosure.
There would also be eligibility criteria for the corporate bonds themselves, including that they:
- be quoted on issue
- be denominated in Australian dollars
- have a fixed tenure with the repayment of principal upon maturity
- have a coupon paid based on either a fixed or floating rate
- not be convertible into any other security of the issuer, and
- if not issued by the listed entity itself but a special purpose vehicle be guaranteed by the listed entity.
In line with ASIC's recent warning to investors regarding hybrid securities, the Paper draws a distinction between bonds with relatively straightforward terms and those with more complex, or hybrid-like, terms. It is in this context and the light of recent issue regarding the use of credit ratings that the Paper seeks submissions on the adoption of other mandatory requirements such as:
- the issuance of corporate bonds having to be for a minimum amount of at least $50 million (designed to increase the likelihood of a deep and liquid secondary market in the bond)
- imposing a maximum tenure of 10 years from the date of issuance to ensure that investors will not be locked in to a particular investment (in the event that secondary market liquidity isn't sufficient to allow the investor to sell their investment)
- prohibiting the deferral of interest payments (which would increase the attractiveness of the bond to retail investors who require a steady income stream from their investments, such as retirees), and
- limiting the use of short form prospectuses to 'investment grade' issuers and /or taking steps to enable the provision of ratings information to retail investors.
The Paper proposes that the Corporations Act would be amended to set out in detail the form and content requirements for the new 'retail corporate bond-specific' prospectus and would provide that the content requirements contained in section 710 of the Corporations Act would be taken to be satisfied if the newly inserted sections are complied with. The content requirements proposed include, among other things:
- a timetable in relation to the bond offering
- a description of how the corporate bond works
- benefits of investing in the bond
- a description of the risk of retail corporate bonds
- summary of the financial position of the issuer, and
- summary of how the bonds are taxed.
Under this proposal, an issuer would be able to offer corporate bonds to retail investors under a 'two-part' prospectus, consisting of a base prospectus and a second part prospectus which relates to the terms of a particular bond offering itself.
The base prospectus would contain information which is not likely to change materially over the life of the base prospectus and would relate to the issuer and the offers of bonds that it may make over time including, among other things:
- information which would ordinarily be required under a short-form prospectus
- the purpose of the bond issue
- the issuer's capacity to meet its obligations arising under the issuance of the bonds, and
- financial ratios of the issuer, together with an explanation of what the ratio means to an investor.
The second part prospectus would include the details of a specific bond offering and the effect of that offer on the issuer and would contain such items as:
- details pertinent to the particular offering
- details of the effect of the offer on the issuer, and
- any information excluded from a continuous disclosure notice in accordance with disclosure rules of the relevant market operator.
The prospectus would be able to incorporate by reference material located outside the prospectus document itself (with this information also being subject to the prospectus liability provisions). This would provide investors with information that may be relevant to their investment decision but not necessarily central to it, and would assist issuers in minimising the length of their prospectuses.
Liability for prospectus content
It has been suggested that the current liability regime for defective prospectuses acts as a deterrent to the issuance of corporate bonds to retail investors. Some stakeholders have suggested that liability be removed or that directors be given the benefit of a safe harbour or business judgement rule. The Paper invites comment on whether it would be appropriate to remove directors' deemed liability for retail corporate bonds. While this would appear to be a sweeping reform, it would bring the law relating to issuance of retail corporate bonds into line with that applying to 'low doc' rights issues and should be seriously considered (particularly in light of the fact that debt ranks before equity).
Even though other measures, as Treasury has acknowledged, may be required to address the structural issues that are inhibiting the domestic bond market, Minter Ellison welcomes the government's attempts to enhance the depth and liquidity of Australia's capital markets via legislative amendment and optimisation, while retaining crucial investor safeguards.
Australian listed entities wanting further information on the discussion paper or which are interested in raising debt or equity capital can contact a member of Minter Ellison's Capital Markets team.