Financial Services Alert: Prospectus relief for corporate bond market

In brief

ASIC has recently announced class order relief for certain offers of vanilla bonds. The reforms will make it easier for listed companies to make offers of bonds to retail investors by reducing disclosure requirements. The aim of this reform is to create a more active retail bond market in Australia.

Companies will be entitled to make offers of vanilla bonds using:

1. a short-form prospectus (vanilla bonds prospectus); or
2. a two-part prospectus.

This relief is subject to a number of conditions that relate to the type of bonds that can be issued, the issuer and disclosure requirements.

What is a vanilla bond?

Listed companies will only be able to take advantage of the reduced disclosure requirements where the offer is for “vanilla bonds” that will be quoted when issued. A “vanilla bond” is a bond that:

1. is denominated in Australian dollars;
2. has a fixed term of no more than 10 years, with principal plus accrued interest payable at the expiry of the term;
3. may provide for redemption before the end of the fixed term by the bond holder, or by the issuer in limited circumstances;
4. has a fixed rate of return, or a floating rate of return that comprises a reference rate plus a fixed margin; 
5. provides for interest to be paid periodically on the dates specified in the prospectus;
6. is not subordinated to any debt owing to unsecured creditors of the issuer;
7. is not convertible into any other securities; and
8. is issued at the same price under the vanilla bonds prospectus.

In addition, in order to ensure a liquid market for the bonds after they are issued, the minimum subscription amount for the vanilla bond issue must be at least $50 million. This requirement will not apply to offers made after 12 May 2012 (unless the requirement is renewed by ASIC).

Importantly, there is no requirement that a vanilla bond be rated by a ratings agency.

However, ASIC has not included any relief from the requirement that an issuer of bonds to retail investors must enter into a trust deed with an approved trustee.

Who can rely on the relief?

The issuer of vanilla bonds under a vanilla bonds prospectus is also required to meet certain requirements in order to rely on the class order. These include:

1. the issuer must be entitled to use a transaction-specific prospectus (under section 713 of the Corporations Act 2001) for an offer of existing continuously quoted securities;
2. trading in the issuer’s continuously quoted securities must not have been suspended for more than five days during the shorter of:

1. the period during which that class of securities was quoted; or
2. the period of 12 months before the day on which the offer of vanilla bonds is made;

3. the auditor's report on the most recent annual financial report, and any subsequent half-year financial report, must be unmodified; and
4. on the date of the prospectus, the issuer must lodge a copy of the vanilla bonds prospectus with the market operator, and publish the prospectus on the issuer’s website.

What must be disclosed in the prospectus?

Provided the issuer satisfies the requirements set out above, the issuer can rely on the class order to make an offer of vanilla bonds using a vanilla bonds prospectus.

The class order sets out a number of specific matters that must be set out in the vanilla bonds prospectus, including:

1. key features: the key features of the offer including details of the bonds and significant taxation implications;
2. risks and benefits: information about significant risks of investing in the bonds and benefits of the bonds;
3. business and key financial disclosures: brief details of the business of the company and key financial disclosures, including the company’s gearing ratio, working capital ratio and interest cover, and details of whether the company has materially breached any loan covenants or debt obligations in the previous two years;
4. investor information: statements that the issuer will make available certain information to investors – including updated key financial disclosures, annual and half-year reports and continuous disclosure notices; and
5. general information: any information that has been excluded from a continuous disclosure notice in accordance with the listing rules that is information that investors and their professional advisers would reasonably require to assess:

1. the assets and liabilities, financial position and performance, profits and losses and prospects of the issuer; and
2. the rights and liabilities attaching to the vanilla bonds.

Listed companies can also take advantage of two part prospectuses which allow the issuer to make several offers over the life of a base prospectus. A two-part prospectus consists of:

1. a base prospectus which may be used for a number of different offers; and
2. a second part prospectus which will relate to a particular offer.

Whilst the class order is not prescriptive in terms of division of material between the two documents, the two parts taken together must satisfy the content requirements for a vanilla bonds prospectus.

Ordinarily, a prospectus has a maximum term of 13 months (section 711(6)). However the class order extends the life of a base prospectus for vanilla bonds to two years.

What does this mean for you?

For issuers of vanilla bonds, the time and expense involved in complying with the full prospectus disclosure requirements of the Corporations Act 2001 will be reduced through the use of vanilla bonds prospectuses.

In addition, using a two-part prospectus, issuers can offer multiple tranches of vanilla bonds over an extended period of two years.

Copies of Class Order CO 10/321 Offers of Vanilla Bonds and Regulatory Guide 213 Facilitating Debt Raising can be found on the ASIC website at http://www.asic.gov.au/.

How we can help

DibbsBarker has extensive experience in acting on bond issues, for the issuer or the trustee. We can help you structure the issue, coordinate the due diligence program and prepare the prospectus and trust deed.

For further information about these reforms or our services, please contact: