High time for corporate bond action

Stephen Bartholomeusz13 Dec 2011, 12:46 PM5

Malfunctioning of Europe's markets makes the case for a proper retail corporate bond market even more compelling today than when Wayne Swan first announced it.

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The most significant aspect of Wayne Swan’s announcement of the release of a discussion paper on reforms aimed at developing a proper retail corporate bond market today was actually announced a year ago.

Last December, among a rather motley collection of banking ‘reforms', Swan announced the federal government would facilitate the trading of Commonwealth government securities on a securities exchange. He did it again today.

It is unclear why a year has passed and nothing has happened to realise the potential of last year’s promise but there is little doubt that while making it easier and quicker for companies to issue bonds to retail investors, the most important prerequisite for a functioning retail bond market is the ability to buy and sell Commonwealth government securities on an exchange.

The ASX, which does, of course, have a vested interest in expanding the range of securities traded on its platforms, has been making the case to Treasury and the government for creating a retail market for listed CGS for more than two years.

Giving retail investors access to CGS and the ability to freely trade them would capitalise on the dramatically increased appetite of retail investors and DIY funds for fixed interest securities post-crisis but more importantly create a foundation and benchmark pricing framework for a broader and deeper bond market.

The absence of a corporate bond market in this country is the glaring deficiency in what is otherwise an exceptionally sophisticated financial system. Most other major jurisdictions have developed the secondary markets for trading corporate debt that facilitate corporate debt issuance.

There is an appetite for securitised debt, as the demand for recent bond issues by Commonwealth Bank, Bendigo Bank, Woolworths, Origin Energy and Australian Foundation Investment Company have illustrated. That interest could be leveraged into the creation of a proper corporate bond market if the government both makes it easier and more efficient for companies to issue debt into the market and provides the transparent risk-free benchmark against which they can be priced.

There is a need for a deep and liquid domestic corporate bond market and some of the potential flow-on effects from creating one would undoubtedly appeal to Swan.

The most obvious early issuers into an efficient retail bond market would be the major banks, which are now acutely aware that the US and European markets from which they have traditionally raised term funding can’t be relied on and therefore represent a significant source of vulnerability. A domestic bond market of consequence would help diversify their funding sources and reduce their reliance on those volatile offshore markets.

Similarly, it would create an alternate source of funding for other Australian corporates that now raise funding in the US, UK and Europe or in a somewhat limited domestic wholesale market.

Given the problems in those markets, particularly in Europe – where sovereign and bank issuers will probably need to raise trillions of euros of funding next year from markets that are malfunctioning today – a domestic market for corporate debt becomes even more compelling.

It would also be timely. There has been considerable discussion since the financial crisis emerged in 2008, not only about the dramatic increase in the appetite of retail investors for low-risk fixed interest investments, mainly bank deposits, but of the over-exposure of superannuation funds to equities and other relatively high-risk investment classes.

A developed corporate bond market might help release some of the funds locked up in equities within the superannuation system for domestic lending, lowering the level of latent risk in the super system and helping fill the structural gap within the broader financial system.

There is something of the order of $50 billion of Australian corporate debt maturing next year that will have to be refinanced along with any new borrowings, with a big chunk of the refinancing task related to the A-REIT sector which the banks are now wary of lending to. The continuing withdrawal of the foreign banks from this market, and the careful management of balance sheet growth by the majors, creates the potential for a credit shock.

From Swan’s perspective, encouraging the development of a truly deep market for corporate debt would not only help reduce the refinancing risk in the system for banks and companies and reduce, to some degree, the exposure of the economy to offshore debt markets but would also create a significant source of competition to the major banks for deposits and lending. That ought to be appealing to him.

In terms of the disclosure requirements for corporate bond issues to retail investors, it shouldn’t be that hard to simplify the requirements for listed companies, which already operate within a continuous disclosure environment, while ensuring the investors are made aware of the particular features and risks of the debt securities being issued.

If the disclosure requirements for equities can be streamlined then it ought to be possible to have an even simpler and more efficient regime for listed debt, particularly vanilla issues.

If we are still talking about this issue next December, the failure to attempt to create a market that has been talked about for decades may not just represent a missed opportunity to capitalise on the risk aversion and strong appetite of retail investors for high-quality yields but a failure to create some insurance against the risk posed to the stability of the domestic system by the disturbing developments in debt markets offshore.

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Jorge Browne, Fri, 2013-02-22 08:50

Let's hope Wayne Swan reads this (High time for corporate bond action, December 13). Is it possible that there are vested interests in having a minimal corporate bond market? Who has been putting obstacles in the way of action?

Paul Crane, Fri, 2013-02-22 08:50

As a treasury manager of a finance company 20 years ago, I issued securities into the corporate bond market. There was always a demand from super funds (mainly corporate /staff funds) and private nominees. However ,the investment banks (remember them?) were concerned about liquidity and so (understandably) not prepared to make a two-way market at reasonable spreads, something an exchange listing can overcome to some extent? But for buy and hold strategies a supply of bonds and debentures from a range of corporates can only be a positive. Though all this will be undone the minute the next crisis hits and our government rushes to guarantee bank debt whilst depositors get a return well above the risk free rate (High time for corporate bond action, December 13).

Jeffrey O'neill, Fri, 2013-02-22 08:50

I've been waiting for a loooong time for a decent bond market to be available in Australia (High time for corporate bond action, December 13). Super funds in Austria have probably 200-300 to invest in decent corp bonds. I'm sure this figure will only increase as the boomers hit retirement and start to worry more about keeping their money safe than going after the highest returns.

Ben O'grady, Fri, 2013-02-22 08:50

The Australian financial market has been a strange backwater in at least two ways for many years...no bank deposit insurance [now corrected even though first recommended to the government over 20 years ago] and a functioning retail bond market [long time overdue]. If Swan creates it he might well be a step closer to deserving the 'world's best treasurer' accolade. Time will tell if his future actions warrant the title. Let us hope so, for all our sakes (High time for corporate bond action, December 13).

Andrew Stabback, Fri, 2013-02-22 08:50

There are only a few real obstacle to a local bond market and the main one is our major banks themselves (High time for corporate bond action, December 14). While the top listed and rated companies have been able to get term funding for 5 or 7 years in the US, Europe and Asia for at least 100 points lower than here in Australia with help from the capital markets teams within the Aussie banks in partnership with their international counsins, there is no point going local for a corporate treasurer or CFO.
If we see however shocks in Europe resulting in further significant price movement and most importantly capital shortages globally putting capital restraints on our own banks then we may see the balance shift in favour of a local bond market.
A lot has to happen to make this a reality, however, a lot may happen in Europe over the next few weeks and months to change the global capital markets as we know them. It's good to know that there is another funding source available if our corporates need it and it is also about time our equity centric super investors realised there are alternatives to equities.
Finally, our asset consultants need to get their collective heads out of their collective equities bias as well. Less than 20 per cent to fixed income of which half goes offshore is not what I called balanced let alone defensive!
One more thing. They have a local bond market in New Zealand and it's working!

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