Louise McCoach, special counsel at Gilbert + Tobin in Sydney – who appeared at the inquiry’s public hearings – is hopeful the latest attempt will be different, in part because of its focus on a single goal. Previous attempts have been part of larger examinations of the financial system, while the latest report has been able to undertake a more in-depth study of challenges specific to the bond market. “Past reforms have focused solely on the question of disclosure, while this one tackles a wider range of issues,” McCoach explains.

The report lists 12 recommendations (see box on p42) and is the product of an almost two-year process. Conducted by the House of Representatives’ standing committee on tax and revenue, the final recommendations are high level but wide ranging, covering issues from tax reform to regulation.
The report’s title suggests its goal is to improve the Australian corporate bond market as a whole. A closer reading of its recommendations reveals the focus is more tightly on promoting retail investment in corporate credit.

Past efforts to bring corporate-debt issuers and retail investors together have come to little. The Australian Financial Centre Forum’s 2009 report recommended easing regulatory requirements to facilitate retail corporate bond issuance. In 2010, the Australian Securities and Investments Commission (ASIC) introduced a class order to allow companies to issue vanilla bonds using a simplified prospectus process. This was later repealed as it did not simplify the process as expected.

Next came the 2014 Financial System Inquiry, which introduced the simple corporate bonds (SCB) regime. Similar to the 2010 ASIC class order, this aimed to reduce the administrative burden for issuers and introduced a streamlined disclosure process with eased prospectus requirements. But this was still insufficient to attract many corporate issuers to retail-format funding.

Although the latest report makes additional recommendations on areas similar to those covered by SCB – such as issuer disclosure requirements – it also makes proposals well beyond the area of disclosure. The first hurdle will be government acceptance and, in some cases, legislation of the recommendations.

Jason Falinski, the committee’s chair and federal member for Mackellar, says he would like to see all the recommendations enacted though he acknowledges there is no guarantee (see p38). He anticipates the government will respond to the report early in 2022 with actions to be outlined in the next federal budget, due in late March ahead of an expected May federal election.

There is a variety of views on the likelihood of promoting a vibrant retail corporate bond market in Australia, and even whether such a funding option is needed. An area of universal agreement, by contrast, is that progress will be incremental at best. “There is never going to be a quick fix. I think this will be evolutionary rather than revolutionary,” comments Philip Harvey, partner at King & Wood Mallesons (KWM) in Sydney – who also appeared at the public hearings.

For those who see value in the development of a retail market and believe one can be stimulated, the devil will be in the detail. For instance, some believe inquiry recommendations that seek to fix shortcomings of the SCB regime may help while others feel the more fundamental changes captured by the recommendations on tax incentives and superannuation asset allocation will likely be necessary to convince retail money to engage with corporate debt.

McCoach would like to see a focus on recommendations five, six and seven – at least initially. These look at improvements to the disclosure and SCB regime. “Recommendation five, which plans to improve the disclosure regime by removing burdensome requirements for listed entities – which are already subject to continuous disclosure obligations – would be most material,” McCoach argues. She hopes this would strike a balance the SCB regime failed to find.

Harvey agrees that, while the SCB regime was a welcome step, it is generally too burdensome for most issuers. He adds: “A disclosure mechanism that requires companies immediately to disclose anything material to the price of their equity, subject to certain carve-outs, provides a useful disclosure environment that should be leveraged to facilitate the issuance of corporate bonds.”

Nick Chaplin, head of hybrid and structured capital origination at National Australia Bank in Sydney, says he is a fan of reassessing the SCB regime and agrees there is an opportunity to make it easier. “Investors in a listed company also have access to a history of disclosure through the ASX. Issuers should be able to reference this rather than needing to put it in a prospectus.”

By contrast, recommendation six – which seeks to allow the early redemption of SCBs – may be impactful while also relatively easy to push through. “While a minor change, the availability of early redemption would do a lot to help smaller issuers manage their balance sheets,” adds Damian Pretty, director at Acacia Partners in Melbourne. “These borrowers need to manage refinancing risk more carefully than large companies.”

McCoach suggests recommendation seven – which proposes ASIC review its approach to financial ratios – is not necessarily as impactful as five and six but would nevertheless complement an improved SCB regime. It would offer protection for retail investors while also accounting for differences in capital structure and cash flow between issuers and industries.

Pretty is more sceptical. He agrees ASIC’s approach needs to be reviewed but is not sure whether amendment will be sufficient to convince borrowers to engage with the retail market while the baseline regime is still a standardised approach. “Standardisation is a nice idea but in practice all businesses are different,” he says. “We need a regime that requires issuers to use ratios relevant to their business – if at all. A standardised approach could create unnecessary confusion.”

Ken Chapman, head of strategic delivery, capital markets at ASX in Sydney, adds: “The inclusion of ratios in retail disclosure is really unhelpful. I cannot see standardisation working because of the different circumstances of each issuer.”

Some market users believe even a fairly extensive overhaul of disclosure requirements will not be sufficient to kick-start the retail corporate bond market. Their view is that SCB had limited success not because it did not calibrate its rules well enough but because there is insufficient issuer or investor impetus to make any regulatory regime work in practice.

For instance, Allan O’Sullivan, managing director, frequent borrowers and syndicate at Westpac Institutional Bank in Sydney, says: “The success of the SCB legislation was always going to be marginal. The fact the regime has not had cut-through success is not just because of the idiosyncratic challenges of early redemption, standardised financial ratios or the more onerous disclosure requirements compared with alternative issuance programmes or formats.”

However, O’Sullivan thinks equalising tax incentives with those of equity – recommendation 10 in the report – is an important proposal. “This continues to be a structural point of difference between Australia and other markets when it comes to asset allocation and portfolio construction,” he comments.

O’Sullivan also supports recommendation 12, which proposes the government investigate barriers inhibiting superannuation investment in the bond market. “Growth of superannuation funds and the ageing demographic – which supports a shift of assets from accumulation to retirement phase – means there should be ample demand. It comes down to asset allocation.”

The key questions from this perspective are what priorities will be adopted from the report and how plausible a positive political response to the most impactful recommendations is. Equalising tax incentives for retail fixed-income investment likely implies either removing imputation for equity investments – an unlikely prospect in an election year – or offering a similar tax break for bond coupons with consequent foregone Treasury revenue.

Harvey tells KangaNews: “The fact the inquiry was conducted by the tax and revenue committee could help stimulate debate about dividend imputation credits – as there are no similar concessions for interest earned on bonds – and other impediments to the bond market, in a manner that meets the needs and interests of all market participants including regulators.”

The inquiry’s original terms of reference outline three key areas for examination. These are the tax treatment of corporate bonds for issuers and investors, including any existing impediments, related barriers within the Corporations Act 2001 and how these intersect with the tax system, and comparable policy settings in other jurisdictions.

While the final recommendations addressed all terms of reference, Falinski confirms there was an evolution between what the inquiry set out to do and what it concluded in its report. “As the inquiry went on [tax] became third-order... compared with the bigger corporate governance and legal framework issues we uncovered,” he comments.

Even with the chequered history of attempts to drive retail corporate bond issuance, the report has support from market users. If adopted, Harvey says the recommendations, as a package, could give impetus to market development. KWM has joined a working group of market participants studying how the recommendations can be implemented, with a view to making suggestions to the government and encouraging adoption.

The key question for market participants is whether the incremental progress that could be achieved from implementing just some of the report recommendations – such as enhancing the streamlined path to market promised by SCB – would in and of itself have value, or whether the government will have to tackle the more challenging report recommendations, such as tax overhaul, to achieve a real impact on retail issuance.

Chaplin thinks the recommendations are bold and clearly set out. He also believes the lessons learned from past attempts will bode well for the success of the latest bid. “We have something to react to. Last time the SCB regime was the solution, but this time it is part of the question. So far I like what I see,” he comments.

For Chapman, this means full implementation may not be necessary. “Even if we can only get a few of these recommendations done, it will be better than nothing,” he says. “There are so many facets to market reform and we hope the government responds positively to the key recommendations. It would be terrific if the government can get moving quickly on some of the low-hanging fruit and work on the more challenging recommendations later.”

O’Sullivan is less convinced, at least by the disclosure-related recommendations. He says: “I do not think the retail overlay through an enhanced SCB regime, or any other form of streamlined disclosure, is going to move the dial – certainly not compared with other recommendations in the report.”