Governments have been talking about the need for a retail bond market for some years now, but are investors and issuers really interested?
It’s a nice theory. Australian retail investors are too focused on equities and need access to some good quality fixed-income investments. Super funds of all sizes – industry and self-managed – should invest in bonds. Australian corporate issuers need to diversify their sources of funding outside of the offshore bond markets and bank funding. Let’s create a retail bond market and everyone will be happy.
The Gillard government has moved yet again to attempt to create the conditions for a retail bond market to flourish, by removing a pile of red tape and onerous regulatory requirements, as well as provisions on the liability of company directors.
In this day and age it is something of a novelty for a government to relax regulations, so that must be a positive. But now that some of the regulatory hurdles have been removed, it’s time for the market to do its bit – and this is where the big unknown is.
Australian retail investors are unfamiliar with corporate bonds. When they think of fixed income they think of government bonds and bank deposits. It’s all very different over in New Zealand, where the equity markets are shallow and the nation’s corporations are not as welcome in offshore bond markets as borrowers from Australia. New Zealand, as a result, has a reasonably well-developed retail bond market.
Australian corporations have a plethora of ways to raise funds, and probably at lower cost and with less effort involved than through the laborious process of rounding up retail investors. They can go to the US 144a markets, the US private placement markets, to syndicated loans or to plain old bank debt.
Retail bonds have often been more trouble than they have been worth, and there hasn’t been a huge incentive for issuers to go down that route. A treasurer at a big-four bank which issued a retail bond a few years ago explained to me that the bank had done it “because we felt we should be seen to be supporting that market”. As a response, it struck me as an admission of failure.
The boosters are pointing to the $13 billion in listed-income securities issued over 2012 as proof that the market will embrace retail bonds, but many of those were hybrids which comprised an equity component.
The single listed-corporate bond issue was the $195-million seven-year raising by the Tatts Group, which fell short of the target size of $200 million. The headline rate on offer was 6.6 per cent, a price that was a combination of attracting investors and the issuer not paying significantly more than they would elsewhere for other debt.
Tatts, of course, is unrated, which means its prospects of raising wholesale money are significantly lower. This points to the fact that if a retail bond market is to develop, it will be on the back of these unrated issuers.
There is a bit of tension with the banks here too. A mid-cap company like Tatts is making a statement of independence to its bank by going to the retail market, proving that it is not a hostage to bank lending.
Will the big super funds, which will be needed to give the market momentum, be happy with unrated credits? At this point no one can say because after years of talk, the retail market is still embryonic. The government may have done its part in helping the market along, but it remains to be seen if market forces can align.