Seeking results from deal process scrutiny

While execution practice in the Australian corporate debt market may not be optimal, it is certainly the subject of a good deal of care and attention. Some of this comes from a regulatory desire to avoid the risk of insider dealing and front running. But market bodies are also exploring the process with the goal of improving outcomes.

The primary reason for regulatory scrutiny of the deal process in Australia is the potential for information transfer to fuel insider trading and front running. The challenge is that while debt market transactions clearly benefit from healthy conversations about pricing prior to formal execution, such signals can provide investors with privileged trading information.

The straightforward response is wall crossing: effectively bringing investors who provide early information into the deal group. But this is far from a perfect solution. Wall-crossed investors are restricted from conducting swathes of normal business for what could be a protracted period. Monitoring and enforcement is also difficult.

The goal of regulatory and market efforts has therefore been to maximise permitted disclosure before the official launch of a transaction while keeping the most price sensitive information within the execution process. This has had the knock-on effect of extending execution timelines and increasing the volume and frequency of disclosure that happens during the process.

An early but significant development came in 2016, when the Australian Financial Market Association (AFMA) introduced a pre-deal disclosure regime. It set out a new standard execution timeline that added an indications of interest (IOI) period typically the day before the official launch.

AFMA also produced guidelines for handling inside information and market soundings with institutional investors, stipulating wall crossing, information barrier policies and procedures to be followed if market sounding involves the disclosure of inside information to potential investors.

AFMA is an industry body and its practice guides are generally followed. But it has no enforcement power. In 2020, the Australian Securities and Investments Commission (ASIC) – following two years studying selected deals – published Allocations in Debt Capital Markets Transactions. This included a raft of proposed practices for Australian financial services licensees.

The report explored potential conflicts of interest and use of inside information, bookbuild information, supervision and monitoring, and post-deal statistics relating to debt capital market transactions.

ASIC said the conduct of licensees in relation to debt capital raising was an “ongoing focus area” and noted that a “fair and efficient approach to the allocation of securities promotes market integrity, improves market efficiency and
increases investor confidence”.

AFMA followed up in December 2021 with updated guidelines, as well as a reminder that market participants are “generally expected to observe and adhere to market standards and conventions… when conducting market transactions”.

General discussions relating to trends, conditions and developments in the debt market are permitted as long as they are “general and routine discussions to gauge [investors’] level of interest in securities of an issuer in the absence of any knowledge or confirmation as to an actual or imminent debt capital transaction”.

More recently still, AFMA has been actively exploring a formal set of guidelines for intradeal disclosure – specifically the publication of regular book updates, including volume of bids and price guidance, during the deal process. Things are changing: as of early August, it has become normal practice for lead managers to disclose multiple book updates during the execution process for Australian benchmark transactions.

Some dealers already provided this information and some issuers were also proactive about making it a component of their bookbuilds: South Australian Government Financing Authority was an early mover, for instance. But proliferation marks a major change from when Australian corporate deals were executed with far less public disclosure than is the case in the euro market, for instance.

The goal of AFMA’s work is to ensure all parties are provided equal access to key deal information and thus to reduce the very real complaints that things like upsizes and margin revisions can be sprung on investors with little or no warning.