Committee led by Jason Falinski calls for revamp of corporate bonds market

Australia’s fledgling retail corporate bond market has been held back by ‘regulatory failure and institutional obstructionism’, a parliamentary committee has found.

Committee chairman Jason Falinski. Picture: AAP

Australia’s fledgling retail corporate bond market has been held back by “regulatory failure and institutional obstructionism”, a parliamentary committee has told the federal government.

As a result the corporate bond market has less depth, breadth and liquidity than the same market in New Zealand, even though the latter’s capital markets and savings pool are much smaller, according to the committee’s report: “The Development of the Australian Corporate Bond Market”.

The committee called out this “neglect and obstruction” to help working Australians who were ­approaching retirement and needed to regularise their retirement incomes. It would help growing businesses that wanted to stay in Australia but had little or no access to venture capital and, like Atlassian, Afterpay and ResiMed, were forced to relocate overseas, taking their investment, intellectual property, best people and income with them, committee chairman Jason Falinski said.

Companies can issue bonds as a means of raising debt ­finance and governments have made amendments to the regulatory regime to facilitate a deeper and more active retail corporate bond market, but it remains small compared to similar countries and, in terms of amount of debt raised, Australian-based businesses make greater use of offshore bond markets.

After considering the tax treatment of corporate bonds, “related impediments” in the Corporations Act to the further development of the corporate bond market, and comparable policy settings in other jurisdictions, the committee made 12 recommendations to the government.

The recommendations dealt with information and education, the investment minimum, the licensing regime for credit rating agencies, disclosure requirements, allowing corporate bonds to be refinanced, changing the regulatory approach to financial ratios to give issuers more flexibility, amending the Corporations Act to increase the availability of trustees, reviewing the reforms implemented in New Zealand, and removing barriers to superannuation investment.

FIIG securities director, fixed income, Jonathan Sheridan said he welcomed the recommendations, particularly their focus on fully including retail investors in the Australian corporate bond market.

“The introduction of a $1000 minimum parcel size in practice and incentives for fixed income service providers to facilitate access will be significant steps towards achieving this, although more is needed in terms of implementation of the other recommendations, especially those addressing taxation inequalities between asset classes,” he said.

“This is required to continue opening the domestic bond market to provide greater access and choice for all investors, in line with that available in foreign jurisdictions, and especially for the investments of superannuants, who have a need to access stable returns to fund their retirements.”

From the corporate point of view, the report noted that bank loans had historically been the preferred solution for businesses to fund growth, productivity and innovation, but the global financial crisis exposed the absence of an alternative funding method to that of domestic bank loans.

The issuance of shares is another source of funding for a business although the attendant dilution of its ownership and decision-making powers can produce reluctance to pursue this funding avenue.

Corporate lawyers, Gilbert + Tobin, told the committee a “corporate bond market often becomes an attractive source of funding during or after a financial crisis, simply because banks limit their lending”, leading to the ‘spare tire’ theory, where the corporate bond market is seen as a risk mitigation strategy to lessen the impact of crises on the economy.

In its submission, FIIG Securities, said the financial crisis showed Australia needs to have prudent asset allocation, particularly against the background of an ageing population that has limited capacity to withstand a market correction.

A “distorted exposure to particular asset classes” in Australia meant “greater reliance on the Federal Government for protections when it comes to retirement savings” when a market correction occurs.

Stronger participation rate in Fixed Income Investment in Australia would “mitigate that and future proof the economy for misaligned investment allocations” across asset classes, FIIG said.

The report found that despite the benefits of corporate bond investments, there was “almost a complete absence of corporate debt accessible to retail investors”.

There was a “bias towards other forms of investment” like shares and real estate reflected in the regulations and that was an “impediment to the growth of the corporate bond market.”

Retail investors had “unbridled and incentivised access to the equity of an ASX-listed or an unlisted entity in the secondary market but cannot purchase a bond issued by the same issuer which is a lower risk investment”, FIIG said in its submission.

Mr Falinski said the recommendations would “act as a very powerful driver of the Australian bond market” and “remove barriers to the issuing of corporate bonds.”

“This is important given our savings, demographics and demand for venture capital,” he said.