This article appeared in the December 2011 edition of the Listed @ ASX newsletter.
Growing retail investor demand for bonds, more corporate debt issuance, and the expected quoting of Commonwealth Government Securities, bodes well for the ASX Interest Rate Securities market next year. Listed @ ASX asked Ken Chapman, ASX General Manager, Interest Rate Securities, Options and Futures, about the outlook.
Listed @ ASX: Ken, why should ASX-listed companies issue listed debt to retail investors?
Ken Chapman: There are four main benefits. First, issuing debt on ASX helps companies diversify their funding exposure from bank lending and offshore markets. This is a key issue at all times but even more so now given the uncertainty of access to offshore markets as a result of the continuing financial crisis in Europe.
Second, reduced prospectus requirements and costs have made it easier for companies to issue plain-vanilla bonds.
Third, having debt securities listed on ASX provides a potentially larger market for a company’s debt issue, and greater flexibility as to the borrowing term enabling companies to match their borrowing requirements with investor demand. Finally, there is rising retail investor demand for fixed income investments in general and ASX-listed fixed interest rate securities specifically because of an aging population and growth in self-managed super funds.
Listed @ ASX: Why have Australian companies typically looked offshore to issue debt?
Ken Chapman: It’s a good question. A major reason is the sheer size and depth of the US debt markets which typically affords borrowers easy access and attractive rates. A key lesson, however, from the global financial crisis was the need to diversify debt-funding sources and manage associated capital risk. Having only one source of funding creates risk. US debt markets closed at a moment’s notice during the GFC.
There is a good argument for well-known Australian companies to borrow from Australian retail investors, who have a rising appetite for such debt and are also looking for longer dated investments. Another issue has been what is perceived as the onerous prospectus requirements for issuing debt locally. Although these requirements have improved and prospectus costs have fallen, there can still be considerable effort required to issue listed debt.
The biggest issue however is simply that of the perceived small domestic market size. There are some significant developments occurring here which I expect will transform the market and create the necessary critical mass of intermediaries and investors. In particular, the quoting of Commonwealth Government Securities on ASX, expected for mid next year, will assist in developing investor interest in the market as a whole.
Listed @ ASX: Ken, there was a strong response to Woolworths’ $500-million hybrid issue and ANZ’s $1.25-billion Australian-dollar convertible preference shares issue this year. Origin Energy has also launched a $500-million hybrid offer, and the Commonwealth Bank’s $500-million retail bond issue last year was well supported. Why do you think retail investor interest in ASX-listed interest rate securities issues is rising?
Ken Chapman: It is clear there is latent retail demand for listed debt from well-known Australian companies. So clearly there is an opportunity for companies to meet that demand, diversify their funding, and attract long-term retail investors who are ideal holders of their debt. Australian retail investors have typically been overweight equities and property, and underweight to fixed and floating interest rate products. The volatility and uncertainty in both of these asset classes makes the imperative to diversify even more pressing for retail investors. Fixed income returns, therefore, are very attractive in the current environment. In the broader context, an ageing population means more investors needing greater certainty of cash flow, with less focus on capital gain.
So the demand is there but the market over the past few years has been characterised by varying product consistency, inconsistent supply, poor term structures, poor liquidity and varying credit quality. There has not been the product consistency that creates a mass retail market for interest rate securities. In addition, most companies have raised debt through hybrid issues, which have debt and equity characteristics. My sense is retail investors are eager for more plain-vanilla investments, which are straight fixed or floating-rate debt products that provide liquidity and a higher annual return than bank term deposits. The strong growth in term deposits last year demonstrated the retail investor demand for fixed-interest products, even though holding term deposits is arguably an inferior asset choice, given the lack of liquidity and lower returns.
Listed @ ASX: How will the expected quoting of Commonwealth Government Securities next year stimulate a much bigger ASX-listed corporate debt market?
Ken Chapman: Commonwealth Government Securities (CGS) used to be able to be bought and sold on ASX but this has not been possible since the 1980s. Quoting CGS on ASX will allow people to buy government bonds in the same way they do shares and, in the process, build up a degree of knowledge around interest rate securities in general. That means a better-educated investment market and a more diversified investment portfolio. Government bonds will give important depth, range and volume to the market, effectively providing a foundation stone on which a more sustainable and active corporate bond market could grow. The Federal Government recognises that a corporate bond market has an important role to play in Australia’s long-term economic competitiveness, by giving local companies more options to raise debt capital, which is generally cheaper than equity capital. The development of an active listed corporate and government bond market therefore addresses a number of very significant issues for both investors and corporates.
Listed @ ASX: How can companies learn more about raising funds by issuing debt securities on ASX?
Ken Chapman: The Simple Guide to Listing Debt on ASX is a good starting point. We recommend companies talk to ASX at an early stage regarding listing as a debt issuer. We are happy to discuss what is involved on a strictly confidential basis and review draft documentation to help ensure smooth passage of any proposal. You can call ASX on +61 2 9227 0133.
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