Corporates call for a bond market shake-up and say the current system isn’t good enough

Once bank AT1 notes leave the retail bond market, investors will be left with six options and more needs to be done to offer retirees alternatives for income, a joint industry working group says.

Retail bonds can be traded on the ASX. Picture: Gaye Gerard

Australia’s looming cancellation of more than $40bn in AT1 bank notes should be matched by an opening up of the nation’s corporate bond market to retail investors, or investors face being pushed into riskier assets, experts say.

In its pre-budget submission, a working group of some of Australia’s largest companies, law firms, and financial lobby groups said recent attempts to open up the nation’s bond market have fallen flat.

Despite decades of disparate attempts to open the door to retail participation in the corporate bond market, only a few companies are currently offering bonds to retail investors.

The Corporate Bond Reform Working Group’s submission says the ageing of Australia’s population intensifies the need to crack open the market to retail participation, noting the potential to offer retirees reliable sources of income.

The working group said opening up the market could also give businesses easier access to capital, pointing to 2013 reforms in New Zealand that supercharged that country’s corporate debt market.

In its paper, the working group says if Australia followed a similar model to New Zealand, simplifying disclosure requirements for companies seeking to issue bonds, it could result in the ­nation’s investable bond market rising to $1 trillion.

Corporate Bond Reform Working Group chair Louise McCoach said retail participation in Australia’s corporate bond market was “very limited”, with the market “undersized” compared to those of other countries.

“This has created issues in terms of options available to investors in the market, if they want to diversify away from equities,” she said.

Ms McCoach said the need for reform was further intensified by the Australian Prudential Regulation Authority’s move to kill AT1 “hybrid” bank notes, popular among retirees. APRA announced plans in December to force banks to move away from issuing the notes, in the wake of the collapse of Credit Suisse.

AT1 notes are supposed to offer capital “padding” to banks, and intended to absorb the first losses in a crisis.

Ms McCoach, also a partner at Gilbert & Tobin, said there was a need to keep the bond market “warm” in the wake of the withdrawal of AT1 notes, which would leave only six retail bonds on issue.

These six bonds, which can be traded on the ASX, have an aggregate market capitalisation of less than $1bn, with fewer than 5000 individual investors.

Ms McCoach said that if nothing was done, investors would instead be pushed into “riskier asset classes” or, searching for yields, would pile into alternative fixed income asset classes including private credit, many of which had “opaque disclosure”.

“It’s important to have that transparency and competition provided by that corporate market,” Ms McCoach said.

The Australian Securities & Investments Commission is currently probing the private credit market, amid concerns over disclosures to investors.

The bond working group calls for five key reforms, including allowing publicly listed companies issuing bonds to rely on an ASX-style “cleansing notice” regime.

In addition, the group says companies should be allowed to redeem bonds early or extend their maturation date (something barred under current rules), bringing the retail market in line with the wholesale market.

Credit ratings agencies would also be allowed to rate bonds, under the proposed reforms from the working group.

Ms McCoach said there had been previous impetus to open up the corporate bond market to investors, with a parliamentary committee in 2021 calling for barriers to be removed.

The most recent reforms were in 2014, when attempts were made to introduce a simpler disclosure program for corporate bond issuance.

But the Corporate Bond Reform Working Group report said that, despite these changes, the small number of companies that have entered the market shows “the right balance has not yet been struck and more is required to improve the attractiveness of the corporate bond market for both investors and ­issuers”.

Working group member Adam Vise, who is also Australian Unity group treasurer, said regulators had adopted a “conservative” approach in the past to implementing attempted reforms to the bond market.