Australia’s retail corporate bond market requires much further simplification and more equitable tax treatment if it is to become more attractive to retail investors, according to submissions to a new Parliamentary Inquiry.
After ten years and numerous previous attempts to facilitate a deeper and more active retail corporate bond market the Federal Standing Committee on Tax and Revenue is undertaking a new enquiry to identify the impediments and obstacles that have kept a lid on Australians’ exposure to corporate bonds.
Despite the best intentions, the Australian retail bond market remains small in comparison to similar countries and, in terms of amount of debt raised, Australian-based businesses make greater use of offshore bond markets.
The inquiry has so far received 14 submissions from a range of market participants with most addressing the complexity and associated costs of issuing corporate bonds under the exisiting, somewhat misleadingly named, Simple Corporate Bonds (SCB) regime that came into effect in 2014.
ASX Urges Shift To Simple Term Sheets
The ASX highlighted that previous attempts at reform to create a “viable” corporate bond market had failed because issuers find the prospectus framework expensive and cumbersome.
The ASX recommended changes to allow ASX 200 issuers to list $A senior bonds, either new or exisiting, with a simple term sheet and cleansing notice. Furthermore, issuers outside the ASX 200 should be able to list bonds with a reformed SCB prospectus for an initial offer, but only a term sheet and cleansing statement for subsequent tranches
The ASX also argued SCB terms should be amended to permit early redemption at the discretion of issuers and the removal of anomalies and inefficiencies in the exisiting two-part prospectus regime.
“Allowing exisiting senior wholesale bonds to qualify as SCBs would provide the critical mass needed to establish a listed bond market,” the ASX submission said. “Our initial research indicates that there are up to 40 corporate, and 100 bank, exisiting bond issues which would qualify to take advantage of this improved regime.”
The ASX said its recommendations were only minor and would not compromise investor protections but the changes would be “profound” by removing the barriers to transmuting wholesale bonds into retail bonds and result in much deeper liquidity.
FIIG Calls For Structural Tax Changes
Australia’s leading independent fixed income broker FIIG Securities called for structural changes to the tax system that would result in greater balance in investor allocations while easing the burden on the Commonwealth as the baby boomer generation enters retirement.
In the submission, FIIG CEO Jim Stening said previous changes to the corporate bond market had been immaterial and “tinkering at the edges” that had resulted in no progress towards the development of a retail corporate bond market.
“Without the ability to autonomously provide various and flexible debt-funding to Australian companies, we cannot credibly lay claim to best-practice in our capital markets, let alone be described as a centre of financial excellence in the Asia-Pacific region,” Mr Stening said.
FIIG’s submission argues a more favorable tax treatment of bonds for issuers and investors would incentivise investment and participation in the retail bond market.
“The current imbalance in the tax treatment of the various asset classes has served to dramatically and dangerously distort asset allocation practises in Australia such that they are extremely different to other OECD countries and materially divergent from what is considered to be… best practises,” he said.
FIIG called for tax exemptions on bonds in a self-managed superannuation portfolio up to an allocation of 40% of the portfolio to facilitate a migration away from high risk assets to lower risk assets.
“We regularly receive feedback from the Australian investing public that they are currently unfairly penalised for investing in the corporate bond market in Australia by virtue of the absence of concessional treatment available with other assets classes, namely equities and property,” Mr Stening said.
FIIG’s submission also called for tax or levies on offshore Australian corporate issuance to help create a deeper liquidity pool of domestic fixed income investments. It also recommended best practice asset allocation should be part of the ethical standards of financial advisors.
Acacia Partners Calls for Early Payment Option
Financial advisors Acacia Partners said the SCB regime limits the ability of a corporate issuers to manage the refinancing risk because it places substantial limitations on the ability to repay SCBs prior to their stated maturity.
The Acacia submission, authored by partners Damian Pretty and Emma Simson, said the flexibility to repay bonds early was critical to the development of the retail corporate bond market and would give corporate treasurer’s more flexibility.
The submission recommended giving issuers of SCBs greater flexibility to refinance during the 12 months prior to the maturity date of the bond.
“This would include allowing issuers, during this period only, the right to redeem at face value or a premium to face value, or step-up the interest rate or margin of the security isn’t redeemed early,” the submission said.
Like most submissions, Acacia also called for a simplification of the “unwieldy and prolonged” SCB compliance documentation regime.
“The preparation and issuance of multiple disclosure documents means more resources and time are required by issuers to produce and verify the content of those documents. This increases transaction costs and adds execution risk,” Acacia said.
Acacia recommended that for an SCB the base prospectus should only be subject to 7-day exposure period and the offer specific prospectus should be replaced by a pricing supplement (which should not be subject to an exposure period)
NAB Wants Standardisation and Simplification
NAB, a long term supporter of the domestic corporate bond market, called for a simplification of the corporate bond issuance process to help increase market depth.
“NAB believes simple bonds should mirror the features of institutional level wholesale bonds. This would create fungibility to exisiting wholesale debt markets to maximise liquidity and provide price discovery for both borrowers and investors,” the submission said.
NAB said the disclosure regime for corporate bond issuance should move away from providing detail about prescribed, mandated criteria to focussing on an individual offer’s variation from a new “standard form” of corporate debt issuance.
Under NAB’s proposed “standard” a new bond issue would, among other features, need to be an unsubordinated senior unsecured debt instrument with guarantees from at least 80% of the subsidiaries of the listed issuing entity. The bonds would also need to pay a basic interest rate with no deferred interest and no step-downs for the life of the instrument.
“A borrower could retain the right to vary from these terms, but would need to clearly disclose and justify this variation,” NAB said.
The NAB submission also recommended the removal of the “complex and duplicative” prospectus documentation to allow retail investors access using existing wholesale style disclosure documentation and a cleaning notice (where a debt program is already in place).