Changes in the law to facilitate easier retail debt fundraising took a step forward this morning, when the Government introduced its Simple Corporate Bond legislation into Parliament.
The main features are:
- there will be a defined category of "simple" retail bonds:
- maximum face value of $1000
- a maximum term of 10 years
- not subordinated to unsecured creditors;
- the bonds will be offered via a two-part prospectus, consisting of a base prospectus with a life of three years and a tranche-specific prospectus (which will be similar to a cleansing notice);
- directors of companies issuing the bonds will not be personally liable under s 729 unless they were involved in the relevant contravention; and
- the bonds will be tradeable as depository interests.
Retail corporate bonds have not been a popular fundraising mechanism in Australia for a number of reasons. Two legal issues which have been blamed were:
- the requirement to issue a full prospectus; and
- the personal liability of directors for the content of that prospectus.
In 2010, the Federal Government announced its commitment to addressing these concerns. This was followed by the issue of a discussion paper in late 2011 and draft legislation earlier this year.
The Bill introduced today closely follows the draft legislation. One significant change is a modification of the original requirement that each offer have a minimum subscription of $50 million. Today's Bill requires the $50 million minimum subscription only for the first offer under a base prospectus; subsequent offers under that prospectus will not have a minimum subscription amount. Today's Bill also indicates that simple retail bonds need not be secured, which would have been the technical consequence of the drafting that was originally proposed. Today's Bill simply requires that the bonds are not subordinated to unsecured creditors.
The only entities which will be able to issue these bonds will be listed entities or their wholly-owned subsidiaries. Trading in the entity's listed securities must not have been suspended for more than five trading days in the 12 months preceding the offer and the issuer's most recent auditor's report must have been unqualified.
Bonds issued by wholly-owned subsidiaries must be guaranteed by the parent.
The bonds themselves will have to satisfy a number of criteria:
they must be "debentures" as defined in the Corporations Act;
they must be quoted;
they must be denominated in Australian currency, with a face value not greater than $1000;
they must have a fixed term of no more than 10 years, and only can be redeemed before that in specified circumstances (such as at the holder's option or if there is a change of control of the issuer);
the principal and accrued interest must be repaid at the end of the fixed term;
the interest rate must be fixed or floating (ie, a reference rate and a fixed margin), and cannot be reduced (although it can be increased);
the issuer cannot defer or capitalise interest payments;
the debt to bondholders cannot be subordinated to unsecured creditors;
the bonds cannot be convertible; and
the offer price must be the same for everyone who accepts the offer.
Clearly this will not accommodate hybrids which have been popular over the last few years, many of which are subordinated, deferrable and/or convertible. In fact few offers of late (with the possible exception of the Tatts Bond offer Clayton Utz acted on) would fall within this regime - but of course that is the Government's point.
On the basis that retail bonds are less complex and lower risk than other securities, they will be able to be issued using a simplified, two-part prospectus.
The two part prospectus will consist of:
- a base prospectus, which will have a life of three years;
- an offer-specific prospectus, which will have a life of 13 months.
Most of the prescribed contents of the base and offer-specific prospectus are not yet available, since they will be set out in Regulations. Both will be able to include by reference information that has been lodged with ASIC.
The Government originally proposed that each offer made under an offer-specific prospectus would have to have a minimum subscription of $50 million. However, the Bill introduced into Parliament only imposes this requirement on the first offer made under a particular base prospectus. Subsequent offers made in reliance on the same base prospectus will not have this requirement. Curiously, this would appear to mean that a continuous issuer would have to make a minimum $50 million issue at least every three years, every time it refreshes its base prospectus.
Until now we haven’t felt there were real efficiencies to be gained by using a 2 part prospectus - but this is something we will keep looking carefully at with issuers.
To encourage entities to issue retail bonds, the Bill will give directors some relief from personal liability for retail bond prospectuses.
Under the existing law, directors can generally be sued for damages for prospectuses which contravene the prohibition against misleading or deceptive statements in (or omissions from) prospectuses even if they are not involved in the particular contravention. The Bill will relieve directors from liability for retail bond prospectuses unless they are actually involved in the contravention.
Clayton Utz will keep a watching brief on these reforms and publish further information when the reforms become law.