Disclosure and liability requirements under the Corporations Act for the Australian retail corporate bond market could be streamlined, if proposals in a new discussion paper are adopted.
Released by the Deputy Prime Minister and Treasurer on Tuesday, the Development of the Retail Corporate Bond Market: Streamlining Disclosure and Liability Requirements proposes that the retail corporate bond disclosure and liability regime should facilitate a sustainable corporate bond market by:
- reducing the regulatory burden on potential issuers while maintaining appropriate investor protection;
- ensuring that investors are made aware of the key features and risks associated with retail corporate bonds, while reducing the complexity of prospectuses; and
- ensuring that there is an appropriate liability regime in place which balances investor protection against ensuring that directors are not unduly burdened.
Currently, the process for issuing retail corporate bonds is perceived as costly and onerous in comparison to other avenues for raising funds because of the requirement to issue a full prospectus and the personal liability of directors for its content.
Additionally, the average retail investor often finds it difficult to identify the key provisions in lengthy prospectuses. On the other hand, a shorter prospectus may not fully inform investors about more risky or complex products.
The Government has made clear that all these considerations will need to be carefully weighed before adopting a final approach to streamlining the disclosure and liability requirements for retail corporate bonds.
Under the proposals, corporates will be able to issue under a new streamlined disclosure regime if they satisfy certain eligibility criteria. Under the streamlined regime, issuers will be allowed to issue retail bonds without a full prospectus provided they prepare either:
- a single simplified prospectus; or
- a multi-stage disclosure document, which could comprise a base document together with a subsequent disclosure document (for example, a second part prospectus or a term sheet and cleansing statement).
The proposed eligibility criteria that must be satisfied by corporates who wish to issue under the streamlined regime is summarised below.
Conditions relating to the issuer – Under the proposal, only listed entities with quoted securities (which are compliant with the relevant continuous disclosure and financial reporting requirements) will be eligible to issue under the streamlined regime. As the market will already have the relevant information through other disclosures, a full prospectus is not thought to be necessary for these entities.
Conditions relating to the bonds – Certain eligibility criteria applicable to the bonds have also been proposed to ensure that the bonds do not have any unusual or complicated terms. Under the proposals, the bonds would need to satisfy the same criteria applicable to bonds issued under the current Australian Securities and Investments Commission (ASIC) "vanilla bonds" class order relief (CO 10/321), but with modifications so that the conditions are more relaxed.
Conditions relating to credit ratings – The discussion paper notes that it is possible to limit eligibility to investment grade issuers. However, adopting a minimum rating may exclude small to medium issuers seeking to enter the debt capital markets, as these entities are unlikely to be rated. Additionally, only one of six credit rating agencies in Australia are licensed to provide credit ratings to retail investors. In light of this, the paper raises for discussion whether the provision of rating information to retail investors would be desirable and, if so, whether there are other measures that the Government or ASIC could adopt to facilitate this.
Other proposed conditions – The discussion paper also outlines a number of additional criteria that could be imposed upon issuers wishing to use the shorter prospectus, including:
- a minimum amount of $50 million for the issuance;
- prohibition of subordination and deferral of interest; and
- a maximum term for the bonds (such as 10 years).
Additionally, there could be a requirement for issuers to provide ongoing disclosures, including half-year and annual updates of key financial disclosures through the issuer's half-year and annual reports.
Proposed prospectus content requirements
The discussion paper proposes to prescribe a maximum length to the prospectus to ensure the objective of a shorter document is achieved. However, the Government recognises that the limit of eight pages for product disclosure statements is insufficient for retail bonds as they are less familiar to investors.
Additionally, it is proposed that a new Subdivision be inserted into the Corporations Regulation specifying the form and content requirements for the prospectus. A number of possible headings/sections include:
- timetable setting out the key dates in relation to the offer;
- information about the issuer of the bond;
- how the retail corporate bond works;
- benefits of investing in the retail corporate bond;
- risks of the retail corporate bond;
- summary of the financial position of the issuer of the bond;
- summary of how the bonds are taxed;
- summary of the interests of advisers and of any fees relating to the bonds; and
- summary of how to apply for the retail corporate bond.
The paper also discusses the possibility of issuing bonds under a two-part prospectus, comprising:
- a base prospectus (which could be used for several different offers and would contain information relating to the issuer generally including its gearing ratio, interest cover, working capital ratio and other financials); and
- a second part prospectus (which would contain the details of the particular offer, for example, interest rate, term, offer size and application process).
Alternatively, issuers may be allowed to issue a first tranche of bonds under a shorter prospectus and further tranches by publication of a term sheet (outlining the details of the particular offering and the effect of the offer on the issuer) and a cleansing statement (disclosing any material matters which have not already been the subject of continuous disclosure).
The shorter form prospectus may also incorporate relevant but not key information by reference. However, a prominent warning would be required and a telephone number must be included so that investors may request a hard copy of the prospectus and any incorporated information.
Liability for prospectus content
Currently, deemed directors' liability for prospectus content results in a lengthy due diligence process, which potentially inhibits retail bond issuance by corporates. As the Government aims to provide specific content rules, the paper considers whether it would be appropriate to remove directors' deemed liability for prospectus content. This particular aspect of the proposals will be of interest to corporates who currently bypass the retail bond market because of the extra expense and delays caused by the lengthy due diligence process associated with prospectus disclosure.
At present, Australian ADIs are exempt from the obligation to lodge a disclosure document under Chapter 6D of the Corporations Act. Although the paper observes that this exemption is longstanding, and related to the fact that ADIs are prudentially regulated, it raises for discussion whether it may be appropriate to remove the exemption in relation to retail corporate bond issues in order to ensure a level playing field between issuers.
The Government is seeking industry feedback on the above by 10 February 2012.
If you have any specific queries in relation to the matters referred to above or if you would like any assistance in preparing a submission on the discussion paper, please contact one of our team.
Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.