ASIC relief for corporate bonds

The Australian Securities and Investments Commission (ASIC) yesterday provided class order relief to facilitate:

• retail offers of certain ‘vanilla’ listed bonds (in [CO 10/321],¹ and
• institutional offers of convertible notes (in [CO 10/322].²

The relief is welcome, and follows ASIC’s consideration of submissions on Consultation Paper 126. Freehills, along with a number of other organisations, made submissions.

ASIC also published Regulatory Guide 213 Facilitating debt raising³ and Report 196 Response to submissions on CP 126 Facilitating debt raising⁴ as well as a guide for retail investors called ‘Investing in corporate bonds’⁵.

Release of the class orders and associated regulatory guide coincides with limited tax relief flagged in the Federal Budget 2010 for individuals’ investments in bonds. Individuals will be provided with a tax discount equal to 50% on up to $1,000 of interest income earned on a number of savings products, including bonds. Greenwoods & Freehills’ Tax Brief⁶ provides further details.

ASIC stated that its key considerations in providing the relief were to maintain standards of consumer protection while expanding suitable investment opportunities for retail investors and developing the Australian quoted debt market.

Simpler retail prospectuses for certain vanilla listed bonds

The relief will allow certain offers of listed vanilla bonds to be made under:

• a simplified ‘short-form’ prospectus (vanilla bonds prospectus) – satisfying requirements modelled on the requirements for a ‘transaction specific’ prospectus, or 
• a two-part prospectus – comprising a base prospectus (which may be used for up to two years, for a number of different offers) and a second part prospectus (which will relate to a particular offer), where the two parts together satisfy the vanilla bonds prospectus requirements and are ‘clear concise and effective’.

The relief is subject to conditions relating to:

• the issuer—
  • the issuer must be entitled to use a transaction-specific prospectus for an offer of an existing class of its securities (case by case relief may be considered for SPV issuers which are subsidiaries of listed corporations which would meet this requirement where the listed corporation guarantees the vanilla bonds)
  • trading in the issuer’s continuously quoted securities must not have been suspended for more than five days during the shorter of the period in which the securities have been listed and the period of 12 months before the offer is made
  • the auditor’s report on the most recent annual financial report of the issuer, and any subsequent half year report, must be unmodified
  • there must be no determination in force disentitling the issuer from using a cleansing statement for a placement or rights issue, and the prospectus must be lodged on its date with the relevant market operator and displayed on the issuer’s website
• the bonds—
  • the relief will only apply to ‘vanilla’ bonds being simple bonds denominated in Australian dollars, with a fixed term of not more than 10 years with the principal and accrued interest payable at maturity. There must be a fixed or floating rate (that, in the case of a floating rate, comprises a variable market rate plus a fixed margin), interest must be paid periodically on the dates specified in the prospectus, and the bonds must not be subordinated or convertible (and must all be issued at the same price)
  • the issue must be for a total of at least $50 million (down from $100 million in the Consultation Paper) – this requirement is to maximise the prospects of a liquid secondary market and will lapse after two years unless ASIC renews it
• disclosure—
  • vanilla bonds prospectus disclosure must include certain specified matters – including any information excluded from continuous disclosure because of the ‘confidentiality carve-out’, information on the timetable and how to apply (and mandatory reference to ASIC’s investor guide – ‘Investing in corporate bonds’), a statement regarding quotation, disclosure of key features, risks and benefits, a brief description of the issuer, and key financial disclosures (including details of any prior ranking debt, any covenant breaches or default on previous debt obligations, gearing ratio, interest cover and working capital ratio)
  • ongoing disclosure must also be provided in relation to certain matters – including quarterly reports under section 283BF (which has been modified to only apply to the issuer and any guarantor) and half-year and annual updates of key financial disclosures.

One of the other conditions considered, namely that the bonds or the issuer have a minimum credit rating, has not been pursued as there are currently no credit ratings agencies licensed to provide ratings to retail investors.

Exposure period relief has also been provided for subsequent series of bonds differing only as to such matters as term, interest rate and interest payment dates.

Cleansing statements for institutional offers of convertible notes

ASIC has also provided relief to facilitate institutional offers of convertible notes. Quoted securities issued on conversion of such convertible notes may be on-sold to retail investors provided a cleansing notice containing prospectus-like disclosure was given to the relevant market operator (typically ASX) when the convertible notes were issued.

This relief reverts to a position similar to that which applied under ASIC policy prior to 31 March 2008, except that there is now an additional requirement for certain on ongoing disclosures in the issuer’s annual report during the term of the convertible notes (see below). The policy basis of this additional requirement is difficult to understand—issuers will always be subject to ordinary continuous disclosure requirements, subject to the ‘confidentiality carve-out’, and it is hard to see why that carve-out should cease to be available at annual report time merely because an issuer has chosen to issue institutional convertible bonds using a cleansing statement rather than a prospectus.

Key conditions of the relief include the following:

• the issuer must have been entitled to use a transaction-specific prospectus for the offer of the convertible notes under [CO 00/195]
• trading in the underlying quoted securities must not have been suspended for more than five days during the previous 12 months
• the issuer must provide a cleansing notice to the relevant market operator which:
  1. contains the information required by section 713(2) for the convertible notes
  2. contains the information required by section 713(2)–(5) for the underlying securities
  3. is worded in a clear, concise and effective manner
  4. satisfies the requirements of section 716(2) for statements by third parties, and
  5. is given to the relevant market operator on the same day as, or within two business days before, the day on which the convertible notes are first issued
• the conversion of the convertible notes must not involve any further offer, and
• the annual reports of the issuer during the term of the convertible notes must contain information about various specified matters, including any matters relating to the notes that holders of the issuer’s enhanced disclosure (ED) securities would reasonably require to make an informed assessment of the issuer’s financial position and its prospects for future financial years.

This article was written by Philippa Stone, Partner, Sydney.

Endnotes

The following are links to documents referred to in this article:

1. ASIC Class Order [CO 10/321]
2. ASIC Class Order [CO 10/322]
3. Regulatory Guide 213 Facilitating debt raising
4. Report 196 Response to submissions on CP 126 Facilitating debt raising
5. ‘Investing in corporate bonds’
6. Greenwoods & Freehills Tax Brief, 11 May 2010

More information

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