“If we felt that was properly open to us, that would be one of the options we would consider, particularly because we value diversity in our investor base.”
‘Market failure’
Retail investors in Australia can buy corporate bonds issued by companies in a public offering or trade them on the secondary market through the Australian Securities Exchange.
But perceived tax and regulatory hurdles mean few bond issues are made available to regular investors, in what has been described as a ‘market failure’ by critics such as former Liberal MP Jason Falinski .
Meanwhile, volatility in global markets has increased the cost of raising funds overseas for Australian businesses through both borrowing and currency hedging costs. Tapping into the domestic retail market could prove less costly for businesses as they face rising inflation.
For retail investors, a thriving direct corporate bond market would help reduce risk by diversifying portfolios – which have traditionally been heavily weighted in equities – and provide a potentially cheaper option than buying units in a professionally managed corporate bond funds (the primary way retail investors now invest in the asset class).
Adding to the new impetus to encourage corporate bond sales, the public is more likely to invest in corporate bonds, which offer the highest yields in decades.
A wholesale Australian dollar Wesfarmers bond maturing in June 2028 is now yielding 5.5%, down from 1.5% in mid-2021. A Telstra bond maturing in April 2027 yields over 5% but trades below 2% until early 2022.
If Telstra were currently issuing five-year bonds, it would expect to pay a yield of around 5%.
Ms. Ho-Hudson is part of an industry task force that advocates reducing the red tape associated with selling bonds to the public.
This follows recommendations made by a government-led inquiry to develop the corporate bond market chaired by Mr Falinski in 2021, after a year-long process.
Examination by the House of Representatives Standing Committee on Taxes and Revenues found that the total value of bonds issued by Australian companies domestically was approximately $1.1 trillion.
However, less than 1 percent of that market was controlled by personal investors, according to testimony from the tax inspector general’s review. In contrast, personal investors in the United States would control 20% of the domestic corporate bond market. Corporate bond issuance in Australia has been much weaker than in the United States, Europe or New Zealand.
“Complex Hoops”
The group wants legislative changes to allow companies with established institutional bond programs to rely on this documentation to sell bonds to mom and dad investors.
“Documentation requirements are essentially what holds us back in the [retail] market,” Ms. Ho-Hudson said.
“If…we could produce that more easily, that would be ideal, and then you would see a lot more corporate issuers being able to get into the market.”
Telstra treasurer Guy Wylie said the telecoms company was ready to invest time and effort to pave the way for a retail bond issuance program and would work with regulators to consider simplify the investment process.
“We would like to be an issuer in the market if the price made sense, but we will need a bit of simplicity to do so.
“For us, it would be great to give retail investors a little more choice, but for big companies to do that, we need to cut the complex hoops to be able to issue.”
Telstra Treasurer Guy Wylie said the telecoms company was once one of the largest issuers of retail bonds.
Telstra was one of the largest issuers of retail bonds at the time of government ownership as Telecom Australia.
Mr Wylie said that when he took on the role of treasurer there was still a phone in the office which was the dedicated hotline for investors in these securities, and until recently some were still on hold.
He said Telstra had not considered retail bonds in recent years for two reasons.
The first was that the current low and even negative interest rate environment meant wholesale markets were supportive. The second was that the cost of issuing retail bonds was prohibitive.
“From a documentation and regulatory perspective, the added complexity and risky process made it unattractive compared to offshore markets,” he said.
“However, given recent interest rate hikes and market volatility, we believe that over the next 12 to 24 months it should be an attractive product for retail investors.”
“Regulated and easy”
Under the proposed changes, an issuer such as Wesfarmers would make its bond documents and information available to the public and produce additional information specifically for retail investors to list corporate bonds on an exchange.
Ms Ho-Hudson said a $300 million bond issue would be “completely justifiable” in this scenario. The intention would be to issue periodically across multiple maturities to create bond lines at different maturities, rather than issuing a single large transaction.
Coalition financial services spokesman Stuart Robert said the opposition had responded to calls from businesses to support the recommendations of the 2021 parliamentary review.
“Retail customers – mums and dads – should be able to invest in corporate bonds to support Australian companies with a minimum bond amount set at $1,000,” Robert said. “It should be regulated and easy.”
Financial Services Minister Stephen Jones was not immediately available for comment.
The latest push comes amid several stalled attempts to revive a retail corporate bond market.
The government passed legislation in 2014 to facilitate the issuance of senior bonds by companies holding ASX-listed securities that already met continuous disclosure requirements by reducing the disclosure requirements usually associated with securities offerings.
The so-called simple corporate bond scheme only encouraged a handful of borrowers to take advantage of the reduced disclosures, one of whom defaulted before the first interest payment.
Ms Ho-Hudson said the reduction in disclosure requirements did not prevent lawyers from setting up a “big insurance program” around the required documentation, which delayed issuance and increased the costs associated with the sale of debt securities to the public.
“This is a time when we should think about how we make corporate bond opportunities more widely available to investors,” she said.
Hidden notes
Large Australian companies tend to access multiple major bond markets based on relative cost and seek to maintain a presence in major markets.
But those with Australian dollar operations tend to prefer, all things being equal, raising funds in the local currency to reduce the cost of hedging derivatives, which also require collateral.
Ms Ho-Hudson said even top-rated companies have been frustrated by their efforts to raise funds in international wholesale markets.
“We all took meetings overseas, but then came back from those meetings feeling that there were too many global themes that we couldn’t stand out on,” she said.
“Australian issuers have been at the mercy of international bond markets, and many issuers have not felt the conditions are right to issue overseas.”
Wesfarmers and Telstra have A- quality credit ratings, just three notches below those of the big Australian banks. However, credit ratings are another issue hampering the growth of the retail corporate bond market.
After the global financial crisis, the three largest credit agencies, S&P Global, Moody’s Investor Services and Fitch have canceled the licenses required to provide their ratings to the public due to the increased risk of liability under the new legislation.
This created a situation where only institutional investors could be told about a company’s credit ratings.
There is also greater recognition that more investor education is needed so that the public understands the basics of bonds – such as the inverse relationship between price and yields – so they can better assess market rates. compared to other alternatives.
