The House of Representatives Standing Committee on Tax and Revenue has presented 12 recommendations aimed at removing barriers while issuing corporate bonds as well as raising awareness about the benefits of corporate bonds for both investors and issuers.
The Committee’s recommendations in the report, The Development of the Australian Corporate Bond Market: A Way Forward, include ensuring that investors have timely and useful information about corporate bonds, lowering the minimum investment parcel for corporate bonds to $1,000 to improve access to more investors.
Mr Jason Falinski, Member of the Parliament, and Chair of the Committee called for regulatory reforms in this area. “It is the hope of this Committee that the government will commence implementing recommendations as soon as possible as each recommendation will result in unleashing the considerable power of the corporate bond market in Australia,” he said.
What are Corporate bonds?
Corporate bonds are a type of debt security issued by companies to fund their operations. A company issues the bond and sells it to investors.
The company receives the capital it requires, and the investor receives a predetermined number of interest payments at either a fixed or variable interest rate. When the bond reaches maturity, the payments stop, and the original investment is returned.
What are the Committee’s recommendations?
The Committee’s recommendations include proposed amendments to relevant regulations to allow for the early redemption of simple corporate bonds, a review of the licensing regime for credit rating agencies to reduce access barriers, streamlining disclosure requirements for the issuer, and a review of Chapter 2L of the Corporations Act 2001 to increase trustee availability for the retail bond market.
In addition, the Committee proposes a review of the regulatory measures undertaken in New Zealand’s corporate bond market in order to further develop and make Australia’s corporate bond market more liquid.
Here are the Standing Committee’s list of recommendations:
- The Australian Government ensures that investors have access to timely and useful information about corporate bonds to make informed decisions, and increases the transparency around corporate bonds trading, including non-rated bonds, to improve access to a wider range of investors.
- The Australian Government engages with universities and the financial advisory industry to educate and raise awareness about the benefits of corporate bonds, and retail corporate bonds in particular, both for investors and issuers.
- Lowering the minimum investment parcel to $1,000 for corporate bonds to improve access to more investors and recommends that the Australian Government provides incentives for fixed income service providers to act as intermediaries for retail investors.
- The Australian Government reviews the licensing regime for credit rating agencies with a view to minimise access barriers for small and medium enterprises, issuers and retail investors.
- The government takes further steps to streamline and regularise disclosure requirements for the issuing of simple corporate bonds. This should ensure there is no duplication of requirements for listed entities that are already subject to continuous disclosure requirements.
- The government amends relevant regulations to allow for the early redemption of simple corporate bonds to enable issuers to refinance bonds prior to their maturity date.
- The Australian Securities and Investment Commission reviewed its approach to financial ratios to maintain investor confidence in a standardised approach, while introducing more flexibility for bond issuers.
- The Australian Government reviews Chapter 2L of the Corporations Act 2001 (Cth) and other regulatory obligations applicable to trustees with the aim of increasing the availability of trustees for the retail bond market.
- The government reviewed the regulatory reforms implemented in New Zealand’s corporate bond market to further develop, broaden, deepen and make Australia’s corporate bond market.
- The government investigates the impact of increasing tax incentives to support the development of the corporate bond market to create alternative sources of funding and increase opportunities for investors to diversify their investment portfolios.
- The government further engages with mature and sophisticated international capital markets to determine how Australia could adjust its taxation system to further enhance domestic and international investment through the growth of the corporate bond market.
- The government investigated options to remove barriers inhibiting the investment of superannuation in the Australian corporate bond market.
Australian bond market
The Australian corporate bond market has grown by more than 40% since 2010. According to Deloitte Access Economics’ Corporate Bond Report, this is more than two-thirds the size of the Australian stock market. In June 2017, total bonds on the issue by Australian banks was around $540 billion, with another $460 billion on the issue by other financial institutions, and $255 billion by non-financial corporates.
Four years later, in July 2021, the Australian bond market was valued at almost $2 trillion, with over 3,000 listed bonds, the majority of which were unavailable to private investors.
Almost half (47%) of outstanding bonds are owned by Australian companies, governments, and individuals, with the remaining 53% owned by overseas investors.
Low private investor participation
The Deloitte Access Bond Report also found that Australian investors’ direct market participation is low in comparison to other countries: private investors hold less than 1 per cent of all corporate bonds on the issue in Australia, compared to nearly 20 per cent in the United States, and Australian superannuation funds hold only 10 percent of their assets in bonds and bills, compared to an Organisation for Economic Co-operation and Development’s (OECD) average of 40 per cent.
As fixed-income assets, corporate bonds provide capital stability and regular interest payments. But they offer higher yields than other fixed income securities such as government bonds and deposits, in order to compensate investors for the additional risks associated with corporate issuers.
The fundamental driver of corporate bond investing is that they provide a reliable income stream and relatively good returns given the risk profile. “Around three-quarters of HNWIs [high net worth individuals] with corporate bonds provide a reliable income stream and relatively good returns given the risk profile, and corporate investors cite similar reasons for holding corporate bonds,” the report said.
“But they offer higher yields than other fixed income securities such as government bonds and deposits, in order to compensate investors for the additional risks associated with corporate issuers.
“Given these drivers, corporate bonds can be well-suited to the investment preferences of private investors transitioning to retirement,” the report added.
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