12 May 2010

Retail bond and convertible note disclosure relief

ASIC last night released its much-anticipated disclosure regime for retail bonds.

As well as facilitating a retail corporate bond market in Australia, the suite of changes aims to ease disclosure requirements for convertible notes.

In brief, the package:

  • allows vanilla bonds to be issued under a special prospectus, modelled on transaction-specific prospectuses;
  • allows vanilla bond prospectuses to be in two parts (with the general idea being that one part would be a base prospectus for several offers and the other would contain information specific to a particular tranche);
  • allows the base prospectus to have a life of two years (the issue-specific prospectus would have a 13 month life);
  • allows the on-sale of securities that have been issued on conversion of a convertible note without a cleansing statement (provided that a special cleansing statement was issued when the notes were first issued).

ASIC's final position differs in some respects from its original proposals in December last year. The major change is that it has dropped the minimum subscription from $100m to $50m, and proposes to drop it completely in two years time.

Vanilla bond prospectus conditions

There are, of course, a lot of conditions attached to the vanilla bond disclosure relief. These include:

  • vanilla bond prospectuses can only be used by an issuer who is qualified to use a transaction-specific prospectus (although there may be case-by-case relief to allow issues through special-purpose subsidiaries);
  • vanilla bonds have to be quoted on issue and each issue must have a minimum subscription of $50 million (although the minimum will be abolished in two years time);
  • the bonds must have a fixed term of no more than 10 years;
  • there is a special list of investor-friendly information that must be included in a vanilla bond prospectus;
  • key information will have to be updated periodically on the issuer's website.

In addition, it's important to note that vanilla bond prospectuses cannot be used:

  • for subordinated bonds (although ASIC will revisit that issue over the next year);
  • by foreign issuers listed on a foreign exchange.

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 has moved to simplify things by allowing on-sale of the underlying quoted securities where the issuer has issued a special 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. This relief only applies to sales of the underlying securities - not the convertible notes themselves - and is conditional upon additional disclosure being made in the issuer's annual reports.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.