US Open: A mutual opportunity in corporate bonds

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Why don’t Australian investors buy more investment grade corporate bonds? The answer is that most Australian corporates turn to US markets to raise capital. The US is seen as a cheaper, deeper and a more efficient market to offer corporate debt. Many Australian corporate debt issuers set up their products in the US and do not offer their debt back home in Australia.

News has recently broken that ASIC Chairman Greg Medcraft is pushing US regulators to permit Australian companies access to US retail bond investors and vice versa for US corporate bond issuers. In other words, an Australian debt prospectus can be issued in the US, and a US prospectus can be used in Australia. By opening up to the US, this move could potentially enhance Australian and US retail investment into Australian corporate debt. A similar initiative has been operating between Canada and the US since 1991.

The Financial System Inquiry report lamented the under-developed Australian domestic bond market suggesting that a range of tax and regulatory constraints have “limited the market’s development”. This is evident in the asset allocation in Australia’s superannuation system which has approximately 15% allocated to bonds, compared to 25% in the US, 37% in the UK and 57% in Japan*.

This development follows a series of initiatives instigated by Chairman Medcraft, aimed at enhancing corporate bond investment. In 2010, ASIC granted relief to disclosure requirements for corporate bond issuers who issued “vanilla corporate bonds”. This initiative was a step in the right direction, but US mutual recognition represents a significant opportunity.

Perpetual Corporate Trust is a trustee for retail corporate bonds. As a bond trustee, Perpetual supervises over $15b in various trustee roles in debt capital markets.

*Source: Global Pensions Asset Study – 2015, Towers Watson, February 2015