ASIC finalises regulatory guide on disclosure requirements for infrastructure entities

It’s taken almost two years, but ASIC has now issued its final regulatory guide on increased disclosure requirements for infrastructure entities.¹

With effect from 1 July 2012, new and existing infrastructure entities will need to comply with additional ongoing disclosure obligations which are both significant and – potentially – onerous.

In Regulatory Guide 231, ASIC largely adopts the structure which it had set out in its April 2011 consultation paper², and prescribes a set of ‘disclosure benchmarks’ and ‘disclosure principles’ that infrastructure entities will have to abide by.

While some of the specific content of the benchmarks and principles has been tinkered with, the overall requirements under ASIC’s new regime are substantially the same as those set out in its consultation paper.

Who is affected?

The new regime applies both to existing and new ‘infrastructure entities’. ‘Infrastructure entities’ are defined as listed or unlisted vehicles, which have been offered to retail investors on the basis that their primary strategy or investment mandate is to invest in any of:

• the physical plant, property or equipment of infrastructure assets, 
• the right to operate infrastructure assets, or 
• other unlisted entities which, either directly or indirectly, primarily invest the above types of assets.

‘Infrastructure assets’ include roads, railways, ports, airports, telecommunications facilities, electricity generation, gas or electricity transmission or distribution, water supply or sewerage, and hospitals.

When do the new requirements commence?

The new regime comes into force on 1 July 2012.

Existing infrastructure entities will be caught immediately on 1 July 2012, even if they are not offering securities at the time.

Accordingly, by 1 July 2012, all existing infrastructure entities – whether or not they are in the process of offering securities – will need to make the disclosures necessary to comply with the regime, and will need to ensure those disclosures are subsequently updated as the need arises.

The disclosure could take the form of investor correspondence, or could be included on the entity’s website or in a periodic report.

If an infrastructure entity has a ‘live’ prospectus or PDS in place as at 1 July 2012, then it may need to issue a supplementary document to comply with the new regime. Accordingly, infrastructure entities which are considering offering securities at the time of implementation should consider proactively complying with the regime from an earlier date, in order to avoid the need to make supplementary disclosure on 1 July 2012.

What are the new disclosure requirements?

Benchmarks

There are nine categories of benchmarks, relating to what ASIC perceives as ‘key risk areas’ for infrastructure entities. Infrastructure entities will need to disclose, on an ‘if not, why not’ basis, whether they comply with each of the benchmarks.

If the infrastructure entity is issuing a PDS or prospectus, a table summarising compliance (or non-compliance) with the benchmarks should be included within the first 15 pages.

The benchmarks can be summarised as follows:

1. Corporate structure and management – addresses whether corporate governance policies and practices comply with the ASX Listing Rules corporate governance guidance, whether or not the entity is listed on the ASX. 
2. Remuneration of management – addresses whether incentive-based remuneration paid to management is derived from the infrastructure entity’s performance. 
3. Classes of units and shares – addresses whether all units or shares are fully paid and have the same rights. 
4. Substantial related party transactions – addresses whether the infrastructure entity has complied with ASX Listing Rule 10.1 for substantial related party transactions. This benchmark applies only to unlisted entities (on the basis that listed entities are already bound by the Listing Rules). 
5. Cash flow forecast – addresses whether the entity has prepared, and had approved by its directors, a 12-month cash flow forecast for the entity (reviewed in accordance with auditing standards) and an internal unaudited cash flow forecast for the remaining life of each significant asset (or, if a shorter period, the duration of the right to operate). 
6. Base-case financial model – addresses whether, before material new transactions, and at least once every three years, an agreed-upon procedures check has been performed on the base-case financial model to ensure mathematical accuracy and to confirm that there are no findings that are materially relevant to the infrastructure entity’s investment decision. 
7. Performance and forecast – this benchmark applies to operating assets and addresses whether performance for the first two years of operation equals or exceeds the original publicly disclosed forecasts. 
8. Distributions – this benchmark applies only to infrastructure entities that are unit trusts and addresses whether distributions will be paid from scheme borrowings. 
9. Updating the unit price – this benchmark applies only to unlisted infrastructure entities that are unit trusts and addresses whether the infrastructure entity has, after finalising a new valuation for an infrastructure asset, reviewed and updated the unit price before issuing or redeeming units.

Disclosure principles

Specific disclosure principles (which are also required to be disclosed against (albeit not in an ‘if not, why not’ basis)) are also provided for.

ASIC expects infrastructure entities to clearly and prominently disclose information outlined in these principles.

The eleven principles are:

1. Key relationships – disclose key governance and voting arrangements in the structure, and of the key stakeholders and participants in projects under development.
2. Management and performance fees – disclose and justify all fees and related costs payable out of the entity, and disclose whether performance fees (if any) are payable only out of operating cashflow (or, for assets under development, how performance fees will be funded).
3. Related party transactions – disclose the details of related party transactions as well as associated governance processes, and provide details (or preferably full documentation) of management arrangements, including details of any ‘entrenchment’.
4. Financial ratios – if target financial ratios are disclosed (which is not mandatory), disclose performance against them, as well as what the ratios mean in practice.
5. Capital expenditure and debt facilities – disclose planned capital expenditure (and funding plan) for the next 12 months, and provide a table of debt maturities showing – in respect of a range of specified time periods – matters such as the drawn and undrawn amounts, the percentage of variable interest rate risk, the weighted average interest rate, the percentage of debt that is not limited recourse to a particular asset, and whether the debt is fully amortising or requires principal and interest payments. 
6. Foreign exchange and interest rate hedging – disclose any hedging policies, and confirm whether the entity complies with these policies.
7. Base-case financial model – disclose, in respect of the base-case financial model for any material acquisition, matters such as the key assumptions (and whether directors consider the assumptions to be reasonable and what process – including independent expert opinion – has been undertaken to support that view), and tabular disclosure of up to the five most material assumptions. Also disclose a reasonable estimate of the operating capacity of significant infrastructure assets, and any material discrepancies between the assumptions contained in the base-case financial model used to raise any debt and the model used to raise any equity, respectively, within six months of each other in the current financial year.
8. Valuations – disclose details on valuations policy. Also disclose whether valuations are publicly available and – if not – provide a summary of valuations disclosing maters such as the scope, purpose, methodology, key risks, assumptions, discount rate, and the income, capital expenditure and capital growth rates over the forecast period.
9. Distribution policy – for infrastructure entities which are unit trusts, disclose the distribution policy, the source of distribution payments and the risks associated with distributions being paid from sources other than operating cash flow. 
10. Withdrawal policy – for infrastructure entities which are unlisted unit trusts, disclose various details of the entity’s withdrawal policy.
11. Portfolio diversification – if the infrastructure entity has a portfolio diversification policy, disclose it and confirm whether it is being complied with.

What do infrastructure entities need to do now?

When assessing how to meet ASIC’s new requirements by 1 July 2012, infrastructure entities need to consider:

• What they need to say –  and whether they currently have the necessary information available.
• When they want to say it – which might be impacted by capital raising plans over the coming months.
• How they want to say it – that is, what form of investor communication is likely to be most appropriate.
• How they will go about updating their disclosures in future, both when specific events occur, and on a periodic basis.

This article was written by Simon Haddy, Partner, Melbourne.

Endnotes

1. Regulatory Guide 231: Infrastructure entities: Improving disclosure for retail investors (January 2012)
2. Consultation Paper 154: Infrastructure Entities: Improving disclosure to retail investors – Further consultation (8 April 2011). See also Freehills’ earlier articles, ‘Further consultation on ASIC’s proposal relating to disclosure requirements for infrastructure entities’, ‘Proposed changes to disclosure requirements for infrastructure entities’ and ‘ASIC’s infrastructure proposals – the sector suffers, investors aren’t helped’  

More information

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