Following a three month consultation process, ASIC has now provided class order relief for offers of vanilla bonds to retail investors (ASIC Class Order [CO 10/321]) and offers of convertible notes to wholesale investors (ASIC Class Order [CO 10/322]).
The Class Orders are a welcome initiative and positive step towards the development of a retail corporate bond market. ASIC has responded to a number of observations made through the consultation process, benefitting the form of relief provided.
However, there remain some questions as to the practical utility of the relief. A number of disincentives remain embedded which may result in the relief being under-utilised.
The requirement for half-year and annual updates with respect to financial metrics is an increase in the reporting and compliance burden that currently applies for a retail prospectus. In addition, the two-part prospectus relief is still likely to require a significant due diligence exercise for both parts of the prospectus. This may also influence an issuer’s assessment of the new relief.
The relief prescribes a list of itemised disclosure requirements for a vanilla bonds prospectus - significantly, these form part of the legislation rather than policy guidance. This is a departure from the traditional ‘general disclosure’ regime for retail prospectuses, and we will be interested to see whether issuers find this helpful and whether it assists effective disclosure.
In summary, ASIC’s proposals offer some improvements to the processes for these forms of debt raisings. However, their practical application will require careful consideration of the potential costs and benefits.
Vanilla bond offerings
The relief will only apply to “vanilla” bonds which must:
be denominated in Australian dollars;
be for a fixed term of no more than 10 years;
repay principal and pay all accrued and unpaid interest at maturity;
only be redeemable prior to maturity in limited circumstances (including at the option of the holder, following an issuer’s offer to buy back, as a result of changes in law having an impact on the tax treatment of the bonds, following a change in control or to clean up de minimus holdings);
pay interest at a fixed or floating rate;
provide for periodic interest payments on specified dates;
not be subordinated to other unsecured debt;
not be convertible into other securities; and
be issued to all investors at the same price.
The relief allows an issuer offering vanilla bonds to use either (i) a simplified prospectus, or (ii) a two-part prospectus (a base prospectus together with a second part prospectus for a specific offer).
A base prospectus (with an appropriate second part prospectus for individual offers) can be used for up to two years. Each two part prospectus (being the base prospectus and the second part prospectus read together) will have an expiry date as the lesser of 2 years from the date of the base prospectus and 13 months from the date of the second part prospectus.
The content requirements are set out in prescriptive detail in [CO 10/321] and are summarised below.
The relief requires an issuer to include key financial disclosures in the vanilla bond prospectus and update them on a half-yearly and annual basis. These updates, together with the quarterly reports required under section 283BF of the Corporations Act, would have to be given to ASX and posted on the issuer’s website.
The prospectus would also, amongst other matters, be required to:
describe a facility allowing investors to receive email notifications of new ongoing information;
state that continuous disclosure notices and certain financial information and updates would be available from ASX and on the issuer’s website;
draw investors’ attention to ASIC’s consultation guide on investing in corporate bonds;
include the key features and terms and conditions of the bonds and the offer including general tax implications, ranking (and a description of prior ranking debt), voting rights, material provisions relating to the bonds in the trust deed and the existence and implications for holders of security and guarantees in respect of the bonds;
include information with respect to significant risks of investing in the bonds and significant benefits to holders;
include information with respect to the business of the issuer;
include a description of the financial position of the issuer including the purpose of the issue and the issuer’s capacity to meet its obligations under the bonds; and
include any other information that has otherwise been excluded from continuous disclosure in accordance with existing market rules.
Limits on the proposed relief
In addition to the disclosure obligations noted above (which will impact on cost and speed to market), there are some constraints on the relief:
it will only be available for vanilla bonds as described above;
the minimum offer size would be $50 million (although this will be reviewed after two years);
the relief would not be available to all issuers:
the issuer must be eligible to use a transaction specific prospectus for its equity offerings;
trading in the issuer’s continuously quoted securities must not have been suspended for more than 5 days in the last 12 months (or the quotation period); and
there must be an unmodified auditors report on the most recent annual financial report and any subsequent half-yearly financial report;
the 7 to 14 day exposure period applicable to a prospectus, which would impact on speed to market, remains applicable (although relief is provided for bonds in the same class as existing quoted bonds);
the existing statutory liability regime remains unchanged and will apply to vanilla bond prospectuses; and
the requirement to appoint a debenture trustee (under Chapter 2L of the Corporations Act), and to have a trust deed governing the vanilla bonds, remains.
The new ASIC relief for convertible notes issues is welcome as it offers procedural and timing advantages for institutional offers of convertible notes. It will help to simplify the offer process.
However, the relief still requires prospectus-equivalent disclosure for an institutional offer. There are also some ongoing disclosure obligations that would not specifically apply if a ‘compliance’ prospectus was issued.
Background - on-sale issues with convertible notes
Offers of convertible notes can currently be made in Australia to institutional investors without a prospectus under Chapter 6D of the Corporations Act.
However, where those notes convert into continuously quoted securities that must be freely tradeable on ASX, the offer of the convertible notes currently requires either:
a transaction-specific prospectus to be lodged prior to issue of the convertible; or
a cleansing notice under section 708A(5) to be released to ASX upon each conversion of a note into the continuously quoted securities. This results in multiple cleansing notices being required to be given, at short notice.
Expanded cleansing notice relief
CO 10/322 now gives relief so that convertible notes can, instead, be issued with release of a single, expanded cleansing notice to ASX at the time of issue of the convertible security. The relief is substantially the same as that ASIC put forward for consultation.
This cleansing notice will differ significantly from the form now familiar to the market in the context of placements and low doc rights issues. In particular, this cleansing notice:
is required to contain the information required by sections 713(2) to 713(5) of the Corporations Act (ie transaction-specific prospectus content) in relation to the convertible notes and the underlying securities;
must be clear, concise and effective (i.e. this requirement which applies to prospectuses applies to the cleansing notice); and
can only include a statement by a person, or said to be based on a statement by a person, if that person’s consent has been obtained (and is stated to have been obtained).
The requirement for this level of disclosure, equivalent to a transaction-specific prospectus, is similar to the conditions of ASIC case-by-case relief granted for a number of institutional convertible note offers prior to 2008.
Additional disclosure obligations - annual report
A difference with the pre-2008 relief position is that (as put forward in ASIC’s consultation paper), the relief now requires additional disclosure in the issuer’s annual report, about:
the number of convertible notes remaining; the number of underlying securities they will convert into; the price (if any) to be paid on conversion and the circumstance in which conversion may occur;
the issuer’s remaining liability to make payments under the convertible notes;
the average conversion price (if any) paid for notes converted in the previous 12 months, and number of underlying securities issued on conversion; and
any other matters relating to the notes that holders of the issuers’ ordinary shares (or other ED securities) would reasonably require to make an informed assessment of the issuer’s financial position and its prospects for future financial years.
ASIC has clarified in the relief that disclosure on the last bullet point may be omitted if it is likely to result in unreasonable prejudice to the issuer. If material is omitted, the report must say so. This exception corresponds to the similar exclusion in sections 299 and 299A of the Corporations Act (which set out the annual report requirements).
While linking the relief to these annual reporting requirements does introduce a disparity with the ‘compliance’ prospectus route, it should not materially alter the issuer’s disclosure burden given the existing obligations in section 299 and 299A.
Other conditions of the relief
This relief also requires certain contextual conditions to be satisfied, similar to current conditions for use of a transaction-specific prospectus for a convertible note.
CO 10/322 also includes analogous relief from the PDS provisions which will be relevant to listed trusts and stapled groups.
The Mallesons debt and equity capital markets team would be delighted to discuss any aspect of the ASIC relief.