ASX moves to clear up debt and hybrid 'alphabet soup'
With a growing number of corporate bonds being listed on the Australian Securities Exchange and modifications to the structures of debt and hybrid securities resulting from regulatory change, the ASX has decided to clear up the "alphabet soup" of descriptions for listed securities.The ASX has worked with the Australian Securities and Investment Commission to produce a guidance note on naming conventions for debt and hybrid securities, released this week.The ASX's concern is that the multiplicity of names and descriptions used by issuers of securities makes it difficult for retail investors to compare their features.The ASX listing rules currently recognise two main categories of securities - debt and equity. The rules do not recognise hybrid securities as a separate category. A debt instrument that is convertible into equity is characterised as an equity security.Other debt securities, such as perpetual and subordinated notes, are classified as debt securities, even though they have equity-like features.The Corporations Act includes rules about when a security can be called a debenture or a mortgage debenture. ASIC has issued a class order about the use of the term "secured note."Otherwise, it is up to the issuer to decide what description to give a security, subject to the obligation that the label is not misleading or deceptive.The guidance note is to take effect in January next year and will not apply retrospectively to securities already quoted on the ASX. The ASX is seeking comment from stakeholders on the descriptions:• Debt security: A security should only be described as a debt security if it constitutes a debt owing by the issuer and is not convertible at the option of the holder or the issuer into equity. It cannot be perpetual or subordinated. Interest payments cannot be at the discretion of the issuer or be deferred, capitalised or suspended. Debt securities cannot have loss absorption features.• Convertible debt security: A security should only be described as a convertible debt security if it constitutes a debt owing by the issuer and it is convertible into equity at the option of the holder. It cannot have any of the equity-like features referred to in the previous point.• Hybrid security: Any security that constitutes a debt owing by the issuer and has equity-like features must be described as a hybrid security rather than a debt security. Preference shares may be referred to as hybrids or equity securities but not debt securities.• Bonds or notes: A debt security may only be a bond or a note if it is denominated in Australian dollars and the principal is to be repaid at maturity. The face value of the security must not exceed A$1000 and the term must be fixed and not exceeding 15 years. The fixed rate or fixed margin component of a floating rate must not decrease over the term. Interest payments must be made at fixed intervals or at maturity, but are not able to be deferred or capitalised. The debt holder must not be subordinated, the securities must not be convertible and