Debt capital markets in Australia: regulatory overview
A Q&A guide to debt capital markets law in Australia.
The Q&A gives an overview of main debt markets/exchanges, regulators and legislation, listing requirements, offering structures, advisers, prospectus/offer document, timetables, tax, clearing and settlement, continuing obligations and reform.
To compare answers across multiple jurisdictions visit the Debt capital markets country Q&A tool.
This Q&A is part of the global guide to debt capital markets law. For a full list of jurisdictional Q&As visit www.practicallaw.com/debtcapitalmarkets-guide.
Legislative restrictions on selling debt securities
Main restrictions on offering and selling debt securities
In general, debt securities must be offered and sold in Australia pursuant to a prospectus that complies with Chapter 6D of the Corporations Act 2001 (Cth) (Corporations Act).
Certain additional requirements apply if the debt securities are to be listed on the Australian Stock Exchange as operated by ASX Limited ABN 98 008 624 691 (ASX). For debt securities listed on the ASX a number of further requirements/restrictions apply, as set out in the sections "Listing" (see Question 7) and "Continuing disclosure" (see Question 9).
In addition, a trustee must be appointed on behalf of the noteholders.
However, for wholesale issues of debt securities there are exemptions from the requirement to produce a prospectus and appoint a trustee (see below).
Restrictions for offers to the public or professional investors
Wholesale issues of debt securities are exempt from having to comply with Chapter 6D of the Corporations Act and the requirements to produce a prospectus if a relevant wholesale exemption applies. These wholesale exemptions apply to debt securities that are issued to professional or sophisticated investors (see Question 14) and that either:
Are subject to a minimum aggregate consideration payable of A$500,000.
Do not require disclosure to investors under Parts 6D.2 or 7.9 of the Corporations Act.
Market activity and deals
Bonds/notes issued under programmes
Corporate bonds. Non-financial corporate bond issuance reached around A$10 billion in the Australian financial year 1 July 2014 to 30 June 2015 (the 2015 financial year). Recent high-profile domestic issuances by major corporates included:
SABMiller raising A$700 million in July 2015.
BHP Billiton raising A$1 billion in five-year notes in March 2015.
Telstra raising A$500 million in seven-year notes in September 2015.
Apple raising A$2.25 billion in four- and seven-year notes in August 2015.
Airservices Australia raising A$400 million in seven-year notes in May 2016.
Financial institution issuance. Financial institution issuance has long been the backbone of the Australian debt capital markets and has remained robust throughout 2014 and 2015. Financial institution issuances include:
Domestic issuances, by Australian entities into Australian markets.
Kangaroo issuances, by non-Australian entities into the Australian markets.
Government bonds. Total Australian Commonwealth Government securities on issue rose from A$319.5 billion to A$370 billion in the 2015 Australian financial year. The outstanding amount was a larger proportion of GDP than that in the US. Australia's Federal Reserve Bank lowered the official cash rate to a historic low of 1.75% in May 2016, placing downward pressure on Australian Government bond yields. With borrowing rates low, there is speculation the Australian Government will accelerate infrastructure spending and possibly begin issuing long term bonds to support this.
High yield. Despite a downturn in the high yield market in 2015, following a strong performance in 2014, there is a sense from participants that market fundamentals remain robust. Relative and absolute values of high yield are quite strong as of early 2016. In addition to large coupons and short maturities on offer, the overall credit quality of the high yield market has steadily improved over the last couple of years. Credit profiles of issuers and leverage ratios remain stable, and global interest rates remain low.
Debt securities with an equity element
The ASX hybrid securities market includes convertible notes, capital notes and preference shares. According to the Australian Financial Markets Association's annual report, during the 2015 Australian financial year the total value of hybrid securities traded exceeded A$6.9 billion, up 23.1% on the previous year (Source: Australian Financial Market Annual Report 2015 (www.afma.com.au/data/AFMR) Total market capitalisation for the sector exceeded A$28.6 billion, up 8.7%.
Inclusion of Article 55 BRRD provisions. Further to the implementation of Directive 2014/59/EU on Bank Recovery and Resolution (BRRD) after January 2016, the inclusion of Article 55 provisions has become necessary, where relevant, in the terms and conditions of:
Most Australian debt securities and issue documents are governed by Australian law. If an issuer or dealer/lead manager or agent is a financial institution incorporated in the EU then it has become necessary to include Article 55 BRRD recognition of bail-in language in the terms of the debt securities and/or issue documentation, as relevant.
It is current practice to use the International Capital Market Association (ICMA) standard Article 55 language for other obligations in issue documents and more tailored bail-in recognition language in the terms of the debt securities themselves, subject to local (EU) counsel's advice.
Increasing tenors. While investment grade bonds with five- to seven-year tenors continue to make up a large portion of the corporate bond market, there has been increasing interest in ten-year bonds. Notable recent bond issuances with a ten-year tenor include:
A$200 million 3.98% fixed note issue by the Australian National University.
A$200 million 3.25% fixed rate note issue by Airservices Australia.
Developing asset class. In addition to strong domestic issuance volumes in 2015, the Australian market has exhibited growth in the asset class itself, with successful high yield, hybrid and green bond issuance over the past 18 months or so.
The global development of the green bond market is of particular interest to Australian issuers and investors. This is in line with landmark international political and market developments in 2015, such as the Paris Agreement under the United Nations Framework Convention on Climate Change 2015.
Increasing global appetite for green bonds in 2015 saw roughly A$2 billion in onshore green bond issuance in Australia. This followed the first ever green bond issued by an Australian company in the Australian market in December 2014 (National Australia Bank's A$300 million climate bond).
As appetite for onshore green bonds continues to rise, issuers and investors are expected to become more diverse. Clean Energy Finance Corporation analyses indicate that the local market has already attracted interest from investors such as local councils, corporates and insurance companies.
Simple corporate bonds. The Australian government recently introduced legislation to reduce the disclosure requirements for a prospectus for certain corporates wishing to issue bonds to retail investors. Known as the Simple Corporate Bond Regime, this development seeks to:
Encourage more issuance and trading of retail corporate bonds to retail investors.
Reduce the associated regulatory burdens.
The requirements for a simple corporate bond offering include:
Issuer. The issuer must be listed on the ASX and have continuously quoted securities currently on issue.
Term. The maximum term is 15 years fixed, repayable at maturity.
Denomination. The issue denomination must be Australian dollars.
Interest. Restrictions on interest are:
there must be no deferral or capitalisation of interest;
interest coupons must be either fixed or floating rate.
Face value. The face value of a note is limited to a maximum of A$1,000.
The most significant deals over the past year
The most significant deals over the past year include the following kangaroo bonds:
Apple A$2.25 billion on four- and seven-year notes in August 2015.
KfW Bankengruppe A$750 million fixed rate notes in January 2015.
Asian Development Bank A$700 million fixed rate notes in January 2015.
World Bank A$700 million fixed rate notes in July 2015.
Structuring a debt securities issue
Wholesale and retail debt securities issuances tend to be structured differently.
Wholesale issuances are most commonly structured under a debt issuance or Australian medium term note programme. There is very little wholesale stand-alone issuance in the Australian capital markets. Most wholesale debt issuance programmes are unlisted.
A wholesale debt issuance programme is structured using the following documents:
Information memorandum: a marketing document that is not approved by any regulatory authority if the programme is unlisted.
Agency and registry services agreement.
Note deed poll.
Guarantee deed poll, if the programme is guaranteed.
A dealer panel is appointed, along with a paying agent and registrar.
Drawdowns are conducted under the programme in a similar way to those conducted under a listed Euro medium term note (EMTN) programme, with a pricing supplement and subscription agreement agreed at the time of issuance.
Retail issuances must comply with the statutory provisions of the Corporations Act relating to an offer of securities to the public and the requirement to appoint a trustee.
A retail offer will be structured in accordance with a prospectus and trust deed, and offers will be made directly to retail investors in accordance with the information and instructions set out in the prospectus.
One or more investment banks will be selected as arranger and manager(s) of the offer. There is typically no subscription agreement between the issuer and the arranger/manager(s). There will be an offer management document instead, that sets out the roles of the arranger/manager(s) in helping to structure the offer.
Main debt capital markets/exchanges
The two main regulators of the debt capital markets are:
Australian Securities Exchange (ASX).
Australian Securities and Investments Commission (ASIC).
The main debt capital markets legislation is:
Corporations Act 2001 (Cth).
Australian Securities and Investments Commission Act 2001 (Cth).
Australian Consumer Law (Schedule 2 to the Consumer and Competition Act (2010) (Cth)).
Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth)
Banking Act 1959 (Cth).
ASX Listing Rules.
Listing debt securities
The issuer must be one of the following:
A public company limited by shares.
A government borrowing authority.
A public authority.
An entity approved by the Australian Stock Exchange (ASX).
An issuer that is a foreign entity must register as a foreign company with the Australian Securities and Investments Commission (ASIC) and can be required to provide ASIC with legal opinions on its recognition as a legal entity in Australia and the status of the debt securities under the Corporations Act.
Minimum size or grade requirements
The issuer must satisfy one of the following requirements:
Have net tangible assets at the time of admission of at least A$10 million.
Have the listed debt securities guaranteed with a guarantor with net tangible assets at the time of admission of at least A$10 million.
Have ensured that the listed debt securities are:
rated by at least one credit rating agency as investment grade or above;
not listed by any credit rating agency as below investment grade.
Trading record and accounts
The issuer/guarantor must provide the ASX with any accounts together with any audit report or review for the last two full financial years. This is not, however, required for investment grade debt securities.
The minimum aggregate face value for the securities is A$10 million.
The listing requirements referred to in Question 7 are only in relation to securities classified by the Australian Stock Exchange (ASX) as debt securities. Securities classified by the ASX as equity securities are subject to requirements relating to:
Trading record and audited accounts.
Minimum size requirements
Equity securities listings must satisfy either one of the following tests:
Profit test. A$1m net profit over the past three financial years and A$400,000 net profit over the past 12 months.
Assets test. A$3 million net tangible assets or A$10 million market capitalisation.
Trading record and accounts
Entities seeking an equity securities listing must both:
Be a going concern or a successor of a going concern.
Have the same main business activity as during the previous full three financial years.
An entity seeking listing under both the profit test and the asset test must provide the ASX with audited accounts for the last three full financial years.
If an entity seeks admission under the profit test, the entity must have a minimum of either:
500 shareholders, each holding a minimum parcel of A$2,000 of shares.
400 shareholders, each holding a minimum parcel of A$2,000 of shares, with at least 25% being held by unrelated parties.
Foreign companies are subject to the same obligations as domestic companies unless they operate under a foreign exempt listing. A foreign exempt listing exempts the entity from having to comply with certain specified ASX listing rules provided it complies with the listing rules of its home jurisdiction. To qualify as a foreign exempt listing, an entity must satisfy both of the following minimums:
1000 holders of securities with a minimum value of A$500.
A$2 billion net tangible assets at the date of admission;
A$200 million operating profit for the past three financial years.
Continuing obligations: debt securities
Companies with listed debt securities are subject to continuing disclosure obligation requirements listed in the Australian Stock Exchange (ASX) listing rules. These rules have their statutory foundation in section 674 of the Corporations Act 2001. The main requirements for an issuer include:
Immediate disclosure of any information concerning the issuer that a reasonable person would expect to have a material effect on the price or value of the debt securities.
Immediate disclosure of any information relating to a proposed issue of securities, the lodging of any disclosure documentation, or any issue of securities that has been made.
Prompt disclosure of any annual reports and accounts lodged with regulatory authorities in its establishment jurisdiction.
Prompt disclosure of any draft proposed amendments (and subsequent amended terms) of any debt securities.
The continuing disclosure obligations apply to both domestic and foreign companies with listed debt securities, unless the foreign company operates under a foreign exempt listing. A foreign exempt listing exempts the entity from having to comply with certain specified Australian Stock Exchange listing rules as long as they comply with the listing rules of the exchange on which their securities are listed in their home jurisdiction.
To qualify as a foreign exempt listing, an entity must satisfy the following minimum requirements:
1,000 holders of securities with a minimum value of A$500.
A$2 billion net tangible assets at the date of admission; or
A$200 million operating profit for the past three financial years.
If an entity breaches the continuing disclosure obligations under the Australian Stock Exchange (ASX) listing rules, the ASX can at any time suspend the breaching entity's securities from trading or remove the entity from the official list.
Breach of the continuing disclosure obligations can result in serious civil and criminal sanctions under the Corporations Act 2001, including compensation orders and in extremely serious cases, fines, and imprisonment. Persons affected by breaches of the continuing disclosure obligations can also make claims for compensation against a breaching entity for losses suffered.
Advisers and documents: debt securities issue
Advisers – wholesale issuance
The following advisers are customary in a wholesale listing of debt securities:
Bank. One or more banks will act as dealer in the establishment of a debt issuance programme. A manager for each drawdown under the programme will be selected from each bank or other banks who may become "dealers for a day".
Agent. A paying agent and registrar must be appointed by the issuer.
Issuer's counsel. It is customary in Australia for the issuer's counsel to draft programme documents and drawdown documents.
Dealer's counsel. A dealer's counsel will review the establishment or update of a debt issuance programme. Generally, they are not involved on drawdowns.
Advisers – retail issuance
The following advisers are customary in a retail issuance:
Issuer's counsel. It is customary in Australia for the issuer's counsel to draft the note terms and conditions and the trust deed.
Trustee. A trustee must be appointed to represent the noteholders.
Trustee's counsel. The trustee's counsel will review the trust deed, note terms and conditions, and prospectus.
Banks. One or more banks will act as manager in the arrangement of the offer. Generally, a bank's counsel will prepare the prospectus, in conjunction with the issuer and issuer's counsel.
Agent. A paying agent and registrar must be appointed by the issuer.
Bank's counsel. A bank's counsel will perform a review role.
Auditors for the issuer. The issuer must provide the issuer's audited financial statements to the trustee. The issuer's auditor must also provide or verify any financial information included in the prospectus if a comfort letter is required.
To issue wholesale debt securities under a programme, the following main documents are required:
Information memorandum (for wholesale issuances).
Note deed poll.
Guarantee deed poll (if relevant).
Agency and registry services agreement.
Legal opinion of issuer's counsel.
Standard corporate conditions precedent.
Signing and closing agenda and relevant settlement instructions to the paying agent.
To issue retail securities, the following main documents are required:
Trust deed, including the note terms and conditions.
Offer management agreement.
Due diligence memorandum.
Application forms for listing and/or quotation of securities.
Legal opinion of issuer's counsel.
Standard corporate conditions precedent.
Debt prospectus/main offering document
Unless the issue and sale of a security falls under an exemption (see Question 14), Chapter 6D of the Corporations Act 2001 requires the issuance of a disclosure document and sets out different types of disclosure documents that can be used (see Question 15 for content and disclosure requirements). These include:
Prospectus. A prospectus is the most common type of disclosure document used for an issue, offer, or sale of securities that requires disclosure.
Short-form prospectus. A short-form prospectus is a reduced length disclosure document intended to be useful to retail investors. It enables information to be incorporated by reference to information lodged with Australian Securities and Investments Commission (ASIC).
Transaction-specific prospectus. A transaction-specific prospectus can only be provided by disclosing entities offering continuously quoted securities, as they are already subject to the continuous disclosure regime.
Offer information statements. Offer information statements can be used for disclosure if the amount raised by the issuer does not exceed A$10 million (taking into account all previous amounts raised by the issuer and its controlled or related entities under earlier offer information statements).
Two-part simple corporate bonds prospectus. A two-part simple corporate bond prospectus can be used as a disclosure document for securities if both:
the securities are or will be quoted on a prescribed financial market;
the issuer is a body (or a wholly owned subsidiary of a body) that has issued continuously quoted securities that guarantee repayment of principal and interest or has agreed to do so.
There are a number of exemptions from the requirement to issue a disclosure document. These exemptions are listed in the Corporations Act and include:
Sophisticated investors. Offerees of debt securities issued with a minimum payable amount of A$500,000 are deemed to be sophisticated investors. Issuers of these debt securities are exempt from the requirement to issue a disclosure document (section 708(8)). This is the most commonly relied upon exemption.
Professional investors. If every offeree of a debt security qualifies as a professional investor, the issuer of the debt security is exempt from the requirement to issue a disclosure document under section 708(11). The definition of a professional investor includes (section 9):
Australian financial services licence holders;
investors that control at least A$10 million;
listed entities (or related body corporates of listed entities);
body corporates and unincorporated bodies that carry on investment-related businesses;
foreign entities that, if established or incorporated in Australia, would be covered by one of the above criteria.
All disclosure documents will contain:
Terms and conditions of the debt securities.
Information on taxation.
Information on any relevant selling restrictions.
Disclosure documents will also provide additional information, according to type of disclosure required.
The content of a prospectus must meet the general disclosure test set out in section 710 of the Corporations Act, meaning that it must contain all the information that investors and their professional advisers would reasonably require to make an informed assessment of the rights and liabilities attaching to the securities offered, and the financial situation of the issuer. Section 711 also requires the disclosure of specific information including the:
Terms and conditions of the offer.
Details of the interests and fees of certain people involved in the offer.
Details of quotation (if the securities are to be traded).
A short-form prospectus can refer to information lodged with ASIC. It must both:
Identify the document lodged with ASIC that contains the information.
Provide a description of the information that was lodged with ASIC.
A transaction-specific prospectus must set out all of the following:
All information investors and their advisers would reasonably require and expect to find in a prospectus to make an informed assessment of rights and liabilities of the offer.
A statement that the issuer is subject to the continuous disclosure regime.
Copies of the most recently lodged financial reports and statements (or a statement that these are freely available from ASIC).
Any prejudicial or confidential information withheld under the continuous disclosure regime that investors and advisers would reasonably require.
Offer information statements
An offer information statement must include:
Information about the body and the offer of securities.
A financial report that is for a 12-month period that has a balance date within six months before the securities are first offered, prepared in accordance with accounting standards and audited.
Two-part simple corporate bonds prospectus
A two-part simple corporate bonds prospectus must consist of:
A base prospectus with a life of three years. This must include general information about the issuer that is unlikely to change over the three-year life of the document (and may be released in advance of an actual offer of simple corporate bonds).
An offer-specific prospectus for each offer, which must include details of the offer and may update information contained in the base prospectus.
The issuer has primary responsibility for a prospectus, along with the guarantor, if there is one.
A person is liable for the contents of a prospectus or other offer document if they contravene or are involved in contravening statutory requirements by offering relevant securities with a prospectus or disclosure document that contains:
A misleading and deceptive statement.
An omission of required information.
An undisclosed new circumstance(s) that has arisen.
The following parties may also be liable for loss or damage from a defective disclosure document, even if they did not commit and were not involved in the contravention:
The company or person making the offer.
Each director, or named proposed director of the body making the offer.
Any underwriter that, with their consent, is named in the disclosure document.
Any person who, with their consent, makes a statement included or relied on in the disclosure document (only liable for their statement).
Timetable: debt securities issue
Listing debt securities on the Australian Securities Exchange (ASX) is a two-step process. First the issuer must be admitted to the official list of the ASX. The procedure is:
The issuer must discuss the matter with the ASX Listings Compliance department and provide initial drafts of the issue documents.
Drafts of the listing documents are sent to the ASX.
Final executed issue and listing documents are sent to the ASX with any additional information requested by the ASX in relation to the admission application.
This process typically takes around four to six weeks from the time the documents are lodged by the issuer to when the ASX makes decisions on whether to list the issuer and to quote its securities.
Debt securities are often issued before the admission process is complete.
Tax: debt securities issue
Debt or equity
For tax purposes it is important to determine whether the securities will be considered:
This will impact on the issuer's ability to either claim tax deductions for the interest or attach imputation credits to the return. It will also impact on the issuer's thin capitalisation position (potentially limiting the ability to claim interest deductions). Care must be taken with convertible securities and any securities issued with unusual terms, as they may be considered to be equity despite their legal form as debt. This classification is also relevant in determining whether the securities are considered interests in a landholding entity for duty purposes.
It may be necessary to consider withholding tax implications for both of the following, depending on their circumstances:
Australian tax must generally be withheld from payments of interest and dividends to:
Non-residents that are not holding the securities in carrying on business through a permanent establishment.
Residents holding the security in carrying on business through a permanent establishment outside of Australia.
Unless an exemption is available or a lower rate is specified under a relevant tax treaty, tax must be withheld at a rate of:
10% for interest.
30% for dividends.
Exemptions from withholding tax can be available for various publicly offered or syndicated debt interests.
Goods and Services Tax (GST) is not payable on:
Issuing debt securities.
Listing debt securities.
This is because these activities constitute input taxed financial supplies for GST purposes.
However, consideration must be given to whether the issuing entity can claim GST credits on its expenses associated with the transaction.
Clearing and settlement of debt securities
Debt securities are typically cleared and settled through the domestic clearing system, Austraclear. Debt securities settled in Austraclear must be issued in Australian dollars and in dematerialised registered form.
Austraclear can also act as paying agent and registrar for the securities, if appointed by the issuer.
Austraclear has links with Euroclear and Clearstream, so that investors who only hold accounts in Euroclear and Clearstream can purchase products settled through Austraclear without having to have a separate Austraclear account.
Austraclear has also recently introduced a settlement service for the Chinese Renminbi, which is the only foreign currency that Austraclear approves.
Commonwealth Consolidated Acts
Description. A website containing Australian statutes and maintained by the Australian Legal Information Institute.
Australian Stock Exchange (ASX)
Description. The official website of the Australian Stock Exchange sets out the listing rules.
Jamie Ng, Partner
Professional qualifications. Australia, New South Wales, 2003; Queensland, 2003.
Areas of practice. Structured finance; debt capital markets; securitisation; derivatives; project & infrastructure; real estate finance.
Non-professional qualifications. Queensland University of Technology (LLB hons), 2000; College of Law New South Wales (graduate diploma in legal practice), 2003; University of Queensland (master of business administration – executive), 2003; Queensland University of Technology (BA, justice studies – distinction), 2000.
- Advised the Australian National University in relation to the establishment of an Australian medium term note programme and debut issue of A$200 million.
- Advised the Clean Energy Finance Corporation as cornerstone investor in National Australia's Bank's landmark A$300 million climate bond issuance.
- Advised the project company responsible for developing the State of Victoria's desalination plant in respect of its award-winning refinancing, including establishing its A$1 billion Australian debt issuance programme and issuing fixed rate guaranteed senior secured notes under that programme; and the issuance of two tranches of secured notes into the US private placement market, with a combined issuance size of approximately US$400 million.
Languages. English, Mandarin (novice).
Professional associations/memberships. Law Society of New South Wales.
- Spotlight on a nascent market, IFLR, February 2014.
- Co-author of receivables financing chapter in Personal Property Securities in Australia - Your guide to the new scheme. Are you complying with the new PPS regime?, Lexis Nexis, 2012.
Caroline Smart, Senior Foreign Associate
Professional qualifications. Admitted to practice in England and Wales, 2008.
Areas of practice. Debt capital markets.
LLB, King's College, University of London, 2005; LPC, BPP Law School, 2006.
- Advised Crown Resorts Limited on its $600 million subordinated retail notes offer (hybrid securities).
- Advised Rabobank (Australia branch) on the issuance of various fixed and floating rate notes valued in excess of A$1.75 billion.
- Advised Credit Suisse (Sydney Branch) on various transactions including the update of its A$1.25 billion debt issuance programme; issuance of A$750 million floating rate notes, and dual-tranche issuance of A$175 million fixed rate notes and A$325 million floating rate notes.
- Advised Airservices Australia in relation to its A$400 million issuance of ten-year fixed rate notes under its A$975 million medium term note programme.
- International Debt Capital Markets Handbook, Australian debt capital markets: Strong, stable and growing, November 2015.