Australian Unity's perspective is especially unique given it also issued notes under the old legislation in 2011, allowing it to compare and contrast its issuance experience.
" The SCB enabled us to not only refinance the notes but provide ongoing access over three years to go back to the market with relative simplicity."
Kevin McCoy, Australian Unity CFO
Adam Vise, Head of Equity Capital Markets at ANZ
A working retail corporate bond market has been a long time coming in Australia. Few have doubted its worth but just as many wondered if it would ever happen.
Given it has historically been a complex process, the success of Australian Unity's SCB (pricing at the lower end of the margin range, almost two times oversubscribed) marks a significant development and shows the regulations have delivered simplified, lower-cost access to retail capital.
With term-deposit rates at record lows, retail investors demand yield, but without drastically higher risk. Simple Corporate Bonds fit the bill.
Sophisticated investors are also looking to further diversify their portfolios of bonds from non-traditional issuers without global credit ratings, evidenced by the strong cornerstone support in the Australian Unity transaction where institutions made up 36 per cent of demand.
Issuing bonds on the ASX brings together this wide spread of investors to maximise market depth and delivers numerous benefits for issuers. Under the SCB regime no formal credit rating is required for the issuer or the bond itself. Access to longer tenor is typically available (up to 15 years under the regulations), which can reduce refinance risk by lengthening the debt maturity profile, with the added benefit of freeing up bank lines for at-call liquidity.
In addition, the SCB format offers issuers the unique ability to access additional capital via a 'tap issuance' which only requires a term-sheet style 'Offer Specific Prospectus'. This is available over a three-year period from first issue and is particularly relevant for issuers pursuing a growth agenda.
ANZ believes rather than being a passing fad, the success of the Australian Unity bond signals the market is open to prospective issuers and will trigger a new wave of retail bond issuance in this country.
While the regulation is targeted foremost at listed corporates, the Australian Unity Bond also demonstrates SCB can also be a relevant option for not-for-profit or other types of organisations that may take up listing just for debt securities and not equities.
For both corporates and not-for-profits, access to alternative capital to support funding diversity is especially valuable and utilisation of the Simple Corporate Bond regime opens up an entirely new funding source.
When helping the government to draft the SCB regulations, ANZ sought to maximise simplicity. We adapted our process and experience in the wholesale medium term note (MTN) transactions for the purposes of issuing bonds to retail investors.
Along with ASIC, ANZ worked with the department of treasury to draft an offer document that is much shorter than a typical capital raising prospectus and therefore faster to execute. As a result there is no requirement to include financials such as those presented in the last annual report or half year results.
In addition, reduced civil liability for directors has simplified the due diligence process, with only criminal liability retained. The aim of these process improvements has been to reduce the legal and accounting costs of undertaking a transaction.
The terms of SCB's offer a well-structured balance of protection between the issuer and investor. The bonds must rank pari passu (equal) with other senior unsecured debt making them a relatively low risk investment option compared with ordinary equity or hybrid instruments – but with a return above that of a standard term deposit. Interest payments are mandatory and not deferrable (non-payment is an event of default) and gearing covenants can be incorporated to further support the credit worthiness of the instrument if required.
The pool of ongoing potential investor demand is deep and transparent and is supported by the growth of over $A400 billion in bank deposits since 2009 (which is on par with the value of the commercial loan book of all major banks).
For unrated corporates looking for an alternative source of capital to bank debt, issuing a bond via SCB legislation may indeed be the simple solution.
BlueNotes' contributing editor Sophie Wilson spoke with Australian Unity CFO Kevin McCoy about the insights the company gained from its experience of the legislation in practice.
SW: Why did you choose to issue under the SCB regulations?
KMcC: I was mindful of the fact we had to replace our existing notes, and an SCB would enable us to not only refinance the notes but provide ongoing access over three years to go back to the market with relative simplicity. We hoped this would really support our strategy and growth program.
SW: What were the key learnings for you as you went along the process of issuing the bond?
KMcC: I found the process really good actually. At the outset, I reached out into the legal network to find which law firm and which individual was most involved with the Australian Securities and Investments Commission (ASIC) and Treasury on drafting the regulations. We ended up engaging Shannon Finch from King & Wood Mallesons.
There was really only one issue which was the prescribed ratios in the prospectus. When ASIC and Treasury came up with the simple corporate bond and the prescribed ratios, they didn't expect to have a corporate with an ADI tucked in the wings and benefit funds that distort those prescribed ratios.
So we left the prescribed ratios in but then we gave an explanation as to why they didn't work for us in their standard form, and the adjustments required for them to make sense – which was fair enough because I think it would have been a challenge for ASIC to have to start making wholesale changes for the first SCB issue to what is essentially a standard document.
SW: How did you find the process from a cost perspective compared to the 2011 offer?
KMcC: I'm not sure there was a massive cost saving in this first issue but I think there will be in subsequent taps.
I think it's also worth noting I value a stable balance sheet above the cost of capital. With a bond, once you issue it you really only have to manage the company and pay the coupon for five years and it becomes less of a distraction than bank debt.
With debt you have to look at Bloomberg every morning and wonder what is happening in Portugal or Greece - there is a whole bunch of world economic events that could result in bank liquidity disappearing and funding being withdrawn.
SW: Do you think you got a longer tenor with the SCB compared with what the bank market would have offered?
KMcC: I think so. I know we would have gotten three years at an attractive margin in the bank market but bank debt comes with a lot of covenants which are much tougher than the ones we've got on the bond. Additionally, you would have more scheduled reporting on a monthly basis than what we typically do.
SW: Do you think a Simple Corporate Bond is ideal for companies who do not have a rating from one of the global rating agencies such as S&P?
KMcC: We have thought about an S&P rating, the pros and cons. We spend a lot of time with S&P as they rate Australian Unity's Authorised Deposit Taking Institution and the health company.
I'm undecided yet in what circumstances we pursue an S&P rating because in the issue process we had three very strong institutions backing the $A80 million that made up the cornerstone.
I am pretty confident we could go to any of those institutions and do an over-the-counter private placement if required. Having said that there are institutions that dropped out along the way given we don't have an S&P rating.
I guess that is something Treasury and ASIC need to think through because it is potentially a constraint on getting a bond market happening, for example, if you have some institutions that won't participate if there is not an S&P rating.
SW: How did you manage the execution risk with respect to timing of the bond and the additional funding requirement?
KMcC: The way we were able to manage the bond execution risk with the support of our banking partner was great – we used a bridge loan facility because you know an acquisition and an issuance don't always line up magically.
Sophie Wilson is Associate Director, Equity Capital Markets at ANZ
The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.
15 Jul 2015
11 Jun 2015