Listed market back on the agenda as retail demand scatters post-AT1

Australian retail investors – who tend to be represented by a network of wealth managers, financial advisers and brokers – can also gain exposure to fixed income via exchange-traded products and funds. There are signs of growing interest in this space, as fixed-income exchange-traded funds (ETFs) assets under management reached approximately A$29 billion (US$18.1 billion) by January 2025 – nearly fourfold growth in the past five years.

Even so, the cessation of the additional tier-one (AT1) product leaves a gap in the market and in investment strategies. Not all the A$43 billion of AT1 outstanding at the start of this year was held by ‘true’ retail investors – the market also contained significant volume of sophisticated individual investor, middle market and even institutional money. But there is a weighty retail component, which in theory will be seeking reallocation over the coming years as AT1 notes are called.

AT1, with its appealing combination of higher yield than most bonds and the tax efficiency of franked coupon payments, is traditionally the only fixed-income product Australian retail investors buy directly.

Proponents of a more developed retail bond market say now is the right moment to renew efforts to improve market functionality. The Corporate Bond Reform Working Group (CBRWG) – an industry group of around 30 members, including corporate issuers Telstra and Wesfarmers – this year picked up a number of recommendations from a 2021 Senate inquiry in a pre-budget submission on Retail Corporate Bond Market Development, published on 31 January this year. The focus is primarily on smoothing the pathway by which issuers can tap direct retail liquidity.

For instance, when it comes to disclosure, the group suggests that listed companies rely on a “cleansing notice” regime for retail bond offerings, supplemented by transaction-specific termsheet disclosure, instead of the current prospectus-level disclosure requirement. The group describes the latter as “costly and duplicative” for listed entities already subject to continuous disclosure in Australia.

The path to progress appears clearer should there be a change of government in May. In particular, Coalition shadow treasurer Angus Taylor signalled support for the retail market in a 19 February speech.

He said: “Australia’s corporate bond market is badly underdeveloped. Retail investors, particularly retirees, miss out on stable fixed-income options, while businesses face higher borrowing costs due to a lack of competition. We will streamline disclosure regimes, allow more flexible bond terms and reduce the burden on service providers.”

The success of a drive to ease the pathway between bond issuers and retail demand will inevitably depend on both sides of the equation: the existence of a decent retail liquidity pool that is not available to issuers in other formats, and borrowers seeing value in taking the steps necessary to access it. The CBRWG believes the liquidity is there and that issuers will access it if doing so is less onerous.

There is good evidence to support confidence in the demand side. Retail investors are increasingly seeking credit exposure via ETFs and funds. Some providers have sought to make this a proxy for direct access to individual debt securities. For instance, asset managers such as Income Asset Management have launched single bond ETFs, which wrap individual bonds into a managed investment scheme.

Fees on these products can be high – KangaNews understands sometimes around 25-30 basis points – so there may still be a rationale for direct investment in underlying securities.

On the other hand, retail investors who are used to allocating to AT1 securities will also likely lose one of the additional benefits the structure offers them: franking credits. Sector advocates argue, however, that even in the absence of franking credits there would still be a retail investor bid for listed corporate bonds because of the hunt for yield and because bonds are less risky than equity.

“They would also provide an income stream that investors in or nearing retirement may have more appetite for than high-growth equity assets,” Louise McCoach, partner at Dentons in Sydney and chair of the CBRWG, comments. “We are also currently heading into an uncertain financial market backdrop fraught with geopolitical risk. More than ever, retail investors will be turning to instruments that offer more certainty.”

Time may be of the essence. “The AT1 market will leave behind an infrastructure of advisers that have been advising on structured, listed product,” says Adam Vise, Melbourne-based group treasurer at Australian Unity. “This infrastructure supports nearly A$50 billion of AT1 assets and I understand it is already starting to move into credit investment trusts – to generate an appropriately yield-generating risk profile.”

There is also the private credit option, which is increasingly connecting retail investors with higher-yielding debt product via listed funds. Two more private credit funds issued recently on the ASX in closed-ended fund format: Dominion Income Trust, managed by Realm Investment House, raised A$300 million on 4 March 2025 and MA Credit Income Trust, managed by MA Financial, raised A$325 million on 5 March 2025.

Overall, Vise says retail demand tends to be strong at levels from about 150-200 basis points over swap for five-year plus funding. He adds that, despite some enthusiasm from a handful of leading corporate credits that would have strong appeal to retail investors, he is doubtful about incremental demand for listed paper substantially below this margin.

“There is a considerable market of high-net-worth investors and institutions that congregate around the retail bond market,” Vise says. “But in the absence of a wholesale rating, the market of investors is narrow and cost of funds can be wider.”

There are precedents for easing the path to retail liquidity. The Reserve Bank of New Zealand implemented reforms to its bond market in 2013 under the Financial Markets Conduct Act, which replaced the requirement for issuers to prepare a pre-deal prospectus and investment statement with a single product disclosure statement (PDS) customised to retail investors. The bulk of corporate issuance in New Zealand now comes to market under retail documentation and deals often see most distribution go to retail.

But New Zealand retail investors have a longstanding engagement with fixed income in a way that is not mirrored in Australia. According to Australian Taxation Office data, “debt securities” had just a 1.1 per cent allocation in Australia’s A$1 trillion self-managed superannuation fund pool at the end of 2024 (see table).

Source: Australian Taxation Office, Superguide April 2025

Past efforts to get a listed bond market off the ground in Australia have not amounted to much. Most significantly, in September 2014, the Corporations Amendment Act – Simple Corporate Bonds and Other Measures aimed to streamline the regulatory process for issuers to come to market, particularly on disclosure.

While the measures included in the act were welcomed by market participants, the reality is that there has been little issuance under the simple corporate bonds (SCB) framework: only Australian Unity, Peet, Villa World and Axsesstoday have brought deals to market and outstanding volume on issue never rose much past A$800 million in aggregate (see chart). Sector advocates believe the main reason for the SCB’s failure is that it did not go far enough.

Although disclosure requirements for issuers were lightened as part of the 2014 reforms, the cost of bringing a retail-format deal to market in Australia remains onerous and burdensome for borrowers, according to McCoach.

Requirements include a lengthy two-part prospectus procedure consisting of a base document that is refreshed every three years and an offer-specific prospectus for each issue. Meanwhile, residual director liability remains problematic due to the requirement for directors to consent to the prospectus. Other barriers for issuers include restrictions on early redemptions, prescribed financial ratios in disclosures and onerous obligations on trustees and rating agencies.

“The retail corporate bond market has been underperforming global and international peers for a long time,” McCoach says. “The SCB regime was introduced to address this underperformance but it does not go far enough, which is reflected in the fact that just four issuers have brought deals to market since it was introduced.”

Nick Chaplin, director and senior portfolio manager at Seed Funds Management in Sydney, agrees. He tells KangaNews: “Retail-format issuance is a costly exercise. If the prospectus requirements were simplified, the market for listed corporate bonds would be enormous.”

The obvious demand for higher-yielding income-producing assets from retail savers does not appear likely to prompt deal flow under the current regime. “Issuers are not willing to go down that pathway,” says Andrew Campion, general manager, investment products at ASX in Sydney. “But we continue to see strong retail investor appetite for fixed income generally – buyers can lock in term, unlike with deposits, and yields on mid-cap companies remain attractive.”

Even more than demand, the challenge may be that issuers simply do not feel compelled to add the retail liquidity pool to their funding options.

The challenges are not just those that relate to disclosure. Another key barrier for issuers and investors, sector advocates believe, is the unavailability of credit ratings in the retail space in Australia – the consequence of a post-financial-crisis licensing issue – which Vise says has an impact on pricing outcomes and the size of the listed market.

The outlook for direct-to-retail corporate supply faces further headwinds in the context of an increasingly dynamic institutional market. Issuers are able to access funding fairly easily and at an attractive cost, which – combined with a robust bank debt market – means corporate issuers have plenty of options for home-currency borrowing.

“We are focused on the wholesale market,” says Fiona Trigona, executive general manager, group treasurer at NBN Co in Sydney. “More work needs to be done to develop the retail bond market in Australia, to make retail bonds more compelling for investors and to ensure they are able to access benefits.”

Similarly, Alastair Watson, treasurer at AusNet in Melbourne, tells KangaNews the issuer is also not currently considering issuing in the retail market, either in senior or hybrid format, in part because there is ample capacity to meet its funding needs in wholesale format.

AusNet’s latest wholesale hybrid issue, which priced on 5 February, demonstrates the extent to which this part of the market has grown in recent years. The deal was five times oversubscribed with final orders amounting to A$4.8 billion. Watson says preparing a retail transaction remains a lengthier process because of the prospectus and disclosure requirements involved.

There is one scenario in which AusNet might consider tapping the retail market: if the wholesale hybrid market were to shut and retail pricing was cheaper than heading offshore. But Watson adds: “Given the associated fees [of retail issuance], pricing would need to be considerably cheaper than the wholesale market in order for a transaction to be attractive.”

These views, however, do not take into account potential gains from the type of overhaul the CBRWG is proposing. The biggest unanswered question – assuming demand is sufficient, as many are confident it is or at least could come to be – is whether corporate issuers’ primary rationale for not wanting to access retail liquidity is challenges that can be alleviated or ones that are inherent to incorporating retail investor relations in the debt book.

There is also the fact that conducive market conditions may not last forever. Volatility has spiked since Trump’s trade war kicked off in earnest in March, and issuers are facing increasingly tough decisions about coming to the primary market in any format. For instance, on 28 March, Worley Financial Services made the unusual decision to delay the launch of a seven-year senior transaction, citing market volatility as its reason for not proceeding.

It remains to be seen how long and how significant the turbulence will be for credit issuers. But proponents of a listed bond market say times like these could prompt issuers to consider adding retail to their toolkit. New Zealand corporate borrowers have historically been able to source local retail money even when other markets are closed, for instance.

Even in Australia, retail bond issues have reopened the corporate market on at least one occasion. After the 2008 financial crash, Tabcorp and AMP re-opened the bond market with retail transactions, which McCoach describes as a “key moment in history” for the asset class and “demonstrates how important the retail bond market is for diversification”.

She adds: “It is a robust format that corporate borrowers should have access to when there are liquidity issues affecting the wholesale markets.”