ASIC jump-starts corporate retail bond market and eases disclosure for convertible notes
ASIC wants to facilitate the establishment of a retail corporate bond market, by easing prospectus requirements for listed issuers:
- it proposes simplified prospectuses similar to transaction-specific prospectuses for corporate bonds; and
- it seeks feedback on whether the simplified prospectuses should be structured as two-part prospectuses;
It is also proposing to allow cleansing notices to facilitate the on-sale of securities issued on the conversion of convertible notes.
ASIC's proposals for bonds need to be seen in the context of the growing support for the development of a retail corporate bond market in Australia. ASX would like to quote government bonds as a precursor to the development of a corporate bond market, while the National Executive of the Group of 100 has formed a Working Group to investigate the feasibility of developing a corporate bond market in Australia.
While ASIC's proposals will be extremely useful, some key elements in developing a retail bond market could be subject to decisions made elsewhere. A particular issue is whether corporate bond issuers should be subject to prudential regulation - a question which ASIC raised in its submission to the recent Parliamentary inquiry into the financial services industry.
Offers of corporate bonds to retail investors generally require full prospectus disclosure. In contrast, a listed issuer generally only requires a transaction-specific prospectus for offers of quoted shares, options over quoted shares and securities that are convertible into quoted shares. The advantage of a transaction-specific prospectus is that it does not have to include certain information that is required for full prospectus disclosure (information already disclosed to the market).
An offer of corporate bonds can be made using a transaction-specific prospectus if the bonds are in a class of continuously quoted securities. However, if new corporate bonds have a different term or interest rate from existing bonds, they will be in a new class and a transaction-specific prospectus cannot be used. The practical effect of this is that very few corporate bonds are eligible for transaction-specific prospectus relief. In recognition of this, ASIC is proposing to allow simplified prospectuses (similar to transaction-specific prospectuses) for issues of "vanilla bonds" by companies that have quoted shares on issue. A "vanilla bond" would:
- be quoted on issue;
- be denominated in Australian dollars;
- have a fixed term of no more than 10 years (with accrued interest payable at term);
- have either a fixed rate or a floating rate made up of a market-determined rate plus a fixed margin;
- pay interest periodically;
- not be subordinated or convertible;
- be issued at the same price to all investors.
In addition, the aggregate size of the bond issue would have to be at least $100 million. It is also important to note that ASIC's proposals still require retail bond issues to comply with the trust deed and trustee requirements of Ch 2L of the Corporations Act. In addition, retail bond prospectuses would not be eligible for exposure period relief, such as is currently available for offers of shares and options under transaction specific prospectuses.
The qualification requirements for the issuer would be the usual:
- the issuer's shares have been quoted for at least three months;
- trading in the shares has not been suspended for more than five days;
- the most recent auditor's report was unqualified.
Given the specialised nature of the product, it is unsurprising that ASIC proposes some fairly specific disclosures for a vanilla bond prospectus. These include information about the gearing ratio, interest cover and working capital ratio, as well as details of any higher-ranking debt.
What form would vanilla bond prospectuses take? ASIC currently allows some debenture issuers to use a "base prospectus", which contains all the relevant prospectus information except interest rates and terms, and an application form containing that information.
It proposes extending this concept to issues of quoted vanilla bonds. The idea is that the base prospectus would contain generic information, while a "second-part" prospectus would contain updated corporate information and information relevant to the particular tranche on offer. The issuer could prepare a base prospectus that could be used for a number of bond issues, only having to tailor the "second-part" prospectus for each tranche.
One of the matters on which ASIC is seeking comment is the division of information: what would be in the base prospectus and what would be in the second-part prospectus?
It also notes that the current 13-month maximum term for prospectuses may undercut the utility of the two-part idea. Accordingly, it is asking whether there should be a different maximum term.
On-sales and convertible notes
The offer of convertible notes to institutional investors does not legally require a prospectus. However, the possibility of on-sale of the underlying securities to retail investors usually means that:
- the notes are issued with a prospectus; or
- a cleansing notice is issued each time the notes are converted (rare).
Both options are unattractive: a wide range of people (other than just the issuer) are liable for a prospectus, while the possibility of multiple conversions creates a multiple cleansing notice headache (apart from anything else, an investor's decision to convert may force the issuer to issue a cleansing notice that contains confidential price-sensitive information).
ASIC proposes to simplify things by allowing on-sale of the underlying quoted securities where the issuer has issued a cleansing notice at the time of issue of the convertible notes. The intention is that the issuer's continuous disclosure obligations will ensure that retail investors are adequately informed before they decide to buy the underlying quoted securities. Importantly, this relief would only apply to sales of the underlying securities - not the convertible notes themselves.
So what now?
ASIC needs comments on the proposals by 19 February 2010. Any changes, along with class orders etc, would be released in April 2010.
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