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Treasury releases retail corporate bond market proposals

Following a series of roundtable discussions with key market participants, the Treasury released today a Discussion Paper (view here) on proposals aimed at further developing the retail corporate bond market in Australia.

The Discussion Paper is a welcome initiative and a positive step toward reforms that should help strengthen the retail bond market and we encourage all interested participants to consider the suggestions with a view to contributing to the debate.  Submissions are due by 10 February 2012.

The Paper suggests reform in two key areas:
 
  • streamlining prospectus content requirements for qualifying bond offers, emphasising a focus on core information that will aid in investors investment decisions; and
  • amending the existing directors prospectus liability regime.

The proposals are aimed at reducing the time, cost and regulatory burdens for ASX-listed companies seeking to access the retail bond market.  The risk of liability (particularly for board members) can drive issuers to include more information, rather than risk incomplete disclosure.  In addition, deemed director liability requires due diligence processes to involve board members for retail debt offers, when it may not necessarily be required for routine funding initiatives in the wholesale or intermediated bank markets.  Recognising these issues, Treasury has asked for submissions on relaxing deemed director liability for retail bond prospectuses (whilst still maintaining an appropriate level of investor protection). 

Specific proposals

Changes to the prospectus and disclosure regime

 

The Paper invites comment on the following specific proposals:

  • Replacing or supplementing the existing prospectus content regime by mandating specific content conditions.  These could be satisfied through either a single simplified prospectus or a multi-stage disclosure process (see below);
  • Issuer eligibility conditions.  The proposed changes will only apply to listed companies and take into account the fact that the entity is already subject to continuous disclosure obligations.  In a significant advance from previous vanilla bond initiatives, the position of finance subsidiaries guaranteed by their listed parent is also recognised;
  • Bond eligibility conditions.  Significantly, the Paper contemplates that the bonds may be subordinated and would allow for amortising bonds. However, in particular, the Paper raises for discussion whether any new regime should apply to bonds that have a range of more ‘complex’ features such as interest deferral mechanisms.  In addition, the tenor of bonds is also under consideration.  There is some room for early redemption rights - but strictly limited. Convertible bonds will not be covered by the new arrangements and instruments typically regarded as 'hybrids' will not be covered;
  • Disclosure of credit ratings.  The role of credit ratings, and their disclosure to retail investors has once again been flagged as an important discussion point although the Paper does not put forward any formal solution for consideration.  The Paper also highlights a concern that limiting any relaxation under these initiatives to investment-grade companies only may unfairly exclude small to medium issuers, which could be significant users of any new regime;
  • Prescribed content of the prospectus.  It is proposed that the prospectus could be required to include the following key sections:
    • a timetable;
    • information about the issuer, its business and how the money raised will be used;
    • information about the bond, including interest rate, maturity, any security and any redemption provisions of the bond;
    • benefits of investing in the bonds, such as regularity of interest payments and  the advantage of a fixed term investment;
    • the risks of investing in the bonds;
    • a summary of the financial position of the issuer;
    • a summary of how the bonds are taxed;
    • a summary of how to apply; and
    • other relevant information.

To further simplify the prospectus, the Paper proposes that other information can be incorporated by reference and invites discussion as to how this may be effected.

Treasury observes that ASIC guidance states that prospectuses should include an investment overview, and comments that this may be useful. There is no broader commentary on the interaction of the Paper with ASIC's prospectus guidance.

The Paper also includes a proposal to allow for multi-stage prospectuses, whereby a base prospectus could be used for several different offers of bonds, together with a second part prospectus for the terms of a particular offer, which together would satisfy the content requirements.  This is broadly in line with existing ASIC class-order relief. However,  the Paper also opens up a new proposal for discussion: allowing the use of a short bond prospectus in respect of an initial issuance, with further issues conducted under a term sheet and a cleansing statement.  This proposal suggests a process that is similar to that used for bonds issuance in the wholesale market, and would represent a significant reduction of procedural impediments to retail offers. The cleansing statement would require disclosure of matters material to a consideration of an investment in the bonds (not in an equity investment) which has not already been the subject of continuous disclosure.  The shelf life of the initial prospectus could be up to 5 years.

Changes to directors liability

 

The Paper acknowledges the Council of Australian Government (COAG) developments that have called for reform of directors' personal liability rules - both civil and criminal.

Having regard to that, the Paper includes a proposal that, in light of the specific content rules for prospectuses discussed above, it may be appropriate to remove directors’ deemed civil liability for retail corporate bonds.

In addition, the Paper notes that some stakeholders have suggested that potential criminal liability for directors arising from their consent to the lodgement of a prospectus under sections 1308 and 1309 of the Corporations Act be removed, or perhaps that directors be given the benefit of a safe harbour or business judgment exception. However, it is not clear whether Treasury will pursue those suggestions, noting that they raise broader issues.

These proposals will apply only to directors' deemed liability - the liability of the company and others involved in preparing the prospectus (including directors, to the extent that they are actually involved) will remain unchanged.

The logic behind the proposals is clear - the deemed liability of directors drives much of the formality of the process around the preparation of prospectuses.  Removal of the requirement would not remove the need or rationale for due diligence - but it would enable processes to be streamlined.  However, that would only be achieved if both civil and criminal deemed liability was addressed. 

What is less clear is whether simply removing deemed liability for directors would be sufficient, without inclusion of a safe harbour for good faith decisions by individuals about abbreviated disclosure, to encourage shorter prospectuses.

Conclusion

Whilst the Paper does not address all of the issues (such as asset allocation) confronting the future development of the retail debt space, the proposals considered in the Discussion Paper are a positive move. They should be seen in the context of developments over the last two years to help facilitate the development of a deep and liquid retail corporate bond market.  These are on-going reforms and broader structural reform does not appear on the agenda.  Rather, the latest proposals are further steps that are in the right direction for an accessible (for both issuers and investors) and sustainable Australian retail corporate bond market.

 

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