Simple Corporate Bonds

One of the curiosities of the Australian economy is that, while we have a vigorous share market with many companies big and small listed on it, we have only a fairly thin corporate bond market, particularly at the retail level. By contrast, in markets like the US, lots of companies issue bonds to retail investors.

This has a couple of adverse consequences.  One is that corporates wanting to raise debt finance have few alternatives to borrowing from the banks; there is not a deep and liquid market into which they can do an issue of corporate bonds.

The other is that small investors find it hard to source debt investments.  The standard advice for investors is to diversify your holdings across the major asset classes: cash; fixed interest (bonds); equities (both domestic and international) and property.  But for a small Australian investor, while there are plenty of opportunities to hold equities directly – and with as little as $1,000 you can buy shares on the market – it is much harder to find corporate or government bonds that you can purchase in small quantities.

This probably contributes to what many experts say is an excessive allocation to equities by Australian investors.  As we saw with the 2008 crash, when the ASX 200 index fell from over 6,000 to just above 3,000 at its lowest point, investors must expect significant volatility with equity investment.  For people who were just about to retire, having 60 or 70 per cent of their superannuation balance in equities (as opposed to the much less volatile fixed income) when the market fell so far was very serious. 

For these reasons, policy measures to encourage the creation of an active retail debt market are welcome.  The Corporations and Financial Services Committee, on which I serve, is presently examining the Corporations Amendment (Simple Corporate Bonds and Other Measures) Bill.  This contains some regulatory changes which will make it simpler for companies to issue what are to be called ‘simple corporate bonds’; it also sets some requirements for a bond to qualify as a simple corporate bond.  (For example, it must have a face value no higher than $1,000 – that is, an amount accessible to a retail investor.)

The Committee will make its formal recommendation shortly.  In my view, the measures in the Bill make sense.  I am less sure whether, on their own, they will be sufficient to make a difference. 

The assumption underlying the Bill is that the current regulatory requirements are the main reason why corporates do not issue retail bonds.  If the Bill passes into law, we will soon find out whether that assumption is correct.   Let us hope it is – if so, both corporates wanting to issue bonds, and retail investors looking for a simple way to invest directly in corporate debt, could soon have an attractive new option.