The Australian Government’s plans to overhaul the corporate bond market is good news for ASX hopeful Australian Bond Exchange (ABE), which describes its proprietary technology as a way to “level the playing field” for all investors.
The House of Representatives Standing Committee on Tax and Revenue this week released a report which makes 12 recommendations to support the development of a more active corporate bond market in Australia.
Entitled The Development of the Australian Corporate Bond Market: A Way Forward, the report highlighted the need to remove barriers and raise awareness about the benefits of corporate bonds (a type of debt security issued by companies to finance their business operations) for both investors and issuers.
This endorsement of a more active Australian market is an exciting development for ABE, which has developed a “direct, efficient and cost-effective” system and method that automates the transaction and settlement of over-the-counter (OTC) bonds.
It claims to offer a fair opportunity to all investors, regardless of portfolio size and sophistication, by seamlessly integrating into the world’s financial market platforms, eliminating many traditional barriers to entry for private investors.
Recommendations for the corporate bond market
The committee’s inquiry followed a referral from the federal treasurer Josh Frydenberg in February 2020.
Its recommendations include ensuring that investors have access to timely and useful information and that transparency is increased around corporate bonds trading, including high yield bonds, to improve access to a wider range of investors.
This includes engagement with universities and the financial advisory industry to “educate and raise awareness about the benefits of corporate bonds, and retail corporate bonds in particular”.
The committee also recommends lowering the minimum investment parcel to $1,000 and for the government to provide incentives for fixed income service providers to act as intermediaries for retail investors.
The report proposes a review of the licencing regime for credit rating agencies with a view to minimise access barriers for small and medium enterprises, issuers and retail investors, and reform to streamline and regularise disclosure requirements for the issuing of simple corporate bonds. This streamlining is intended to ensure there is no duplication for listed entities that are already subject to continuous disclosure requirements.
Other recommendations include: amendments to regulations to allow for the early redemption of simple corporate bonds prior to their maturity date; the Australian Securities and Investment Commission (ASIC) to review its approach to financial ratios, introduce more flexibility for bond issuers; and a review of Chapter 2L of the Corporations Act and other regulatory obligations with the aim of increasing the availability of trustees for the retail bond market.
The committee said the government should review the regulatory reforms implemented in New Zealand and investigate the impact of increasing tax incentives to support the development of Australia’s corporate bond market to create alternative sources of funding. This would include engaging with mature and sophisticated international capital markets “to determine how Australia could adjust its taxation system to further enhance domestic and international investment through the growth of the corporate bond market”.
Finally, the report recommended the government investigate options to remove barriers inhibiting the investment of superannuation in the Australian corporate bond market.
Committee chairman Jason Falinski advocates for regulatory changes in this space.
“It is the hope of this committee that the government will commence implementing recommendations as soon as possible as each recommendation will result in unleashing the considerable power of the corporate bond market in Australia,” he said.
Providing a level playing field for all investors
Established in 2015, ABE aims to create a bridge between the institutional OTC bond market and the public. It has since incorporated subsidiaries to manage operations, broking services and settlements activities, as well as a Singapore-based subsidiary to support trading outside of Australia.
ABE holds an ASIC financial services licence and describes its objective as “levelling the playing field” of the bond market while creating greater transparency.
Some features of its platform include pre-trade price signalling of OTC market products for all investors in real time, automated and “virtually instantaneous” trade settlement, as well as a self-service portal that allows for Australian private investors who may be without brokers or financial planners to trade bonds directly.
The company also notes the bond pricing does not have hidden, trailing or custodial fees.
Planned ASX listing
The company is aiming to raise up to $10.4 million through an initial public offering (IPO) to retail and wholesale investors priced at $0.65 per share and hopes to hit the ASX in early December.
Upon listing, it expects to have a market capitalisation of $71-76 million.
ABE previously scooped up $8.4 million via the issue of 16.8 million shares at $0.50 each in a pre-IPO raising.
Almost half of the IPO proceeds are earmarked for sales and marketing and the continued development and intellectual property protection of its new technology.
Funds will also go towards acquiring further bond inventory that will be available for sale to private investors.