Australia: Corporate retail bond market jump started by ASIC and disclosure for convertible notes eased

Last Updated: 17 December 2009
Article by Louise McCoach

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.

Background

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.

Transaction-specific prospectuses

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.

Two-part prospectuses

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.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions