Educating corporate Australia a market task

A further rationale for the development of a retail corporate bond market is to increase the range of debt funding options available to corporate Australia and decrease reliance on the banks for debt funding. It was reliance on the banks that contributed to the death of some companies, the near death of others and the rush of heavily discounted equity issuance seen during the GFC.

Intuitively, it makes sense that corporate Australia should have access to the one-third of superannuation savings, as well as the other savings of retail investors held outside of superannuation, that are largely inaccessible at present.

However, as appealing as this prospect may be, it ignores a glaring feature of the existing wholesale corporate bond market - corporate Australia doesn't use it.

If corporate Australia does not use the wholesale market with its easy access to large volumes of debt funds without the need for a prospectus, it is unlikely to bother with a retail market, with lower volumes and a requirement for a prospectus to be prepared, even if it is in a short form.

This begs the question of why corporate Australia does not use the wholesale corporate bond market, especially when it is considered that this is a market that readily finances the debt requirements of many international issuers.

In 2006 and 2007 international issuers, referred to as kangaroo issuers, accounted for 52 per cent of total issuance in the market and at the present time kangaroo issues account for more than one third of total outstandings.

By contrast, corporate outstandings currently stand at just A$35 billion or 13 per cent of total outstandings. There has been just A$2.4 billion of corporate issuance this year, including retail issues, in a market that has seen record total issuance of A$83 billion so far.

The wholesale corporate bond market has been steadily falling out of favour with corporate Australia since 2002, when corporate outstandings peaked at 40 per cent of total outstandings. By the end of 2008 this proportion had fallen to 17 per cent and as just mentioned, is now down to 13 per cent.

Batten, Hogan & Szilagyi in their 2009 paper, "Financial market development and the role of foreign bond issuance: The case of Australia", note the stock of external financing provided by the bond and equity markets in Australia remains among the smallest, relative to GDP, of the major developed economies. This places Australia's dependence on bank financing more in line with civil law and bank-based Europe.

Moreover, Thailand and Korea have larger bond markets than Australia at 37.4 per cent and 82.5 per cent of GDP, respectively. They say Australia's bond market should be larger and better developed given the sophistication of the financial market infrastructure and the savings that are channelled into superannuation. However, since the 1980s, Australia's largest companies have accessed international markets for funding, particularly the Euromarket, US and, more recently, Japan.

This is true up to a point but even outstanding international bond issuance by corporate Australia amounts to only 26 per cent of total outstanding international bond issuance by Australian entities, excluding governments. Corporate Australia has issued approximately A$23 billion of bonds in international markets this year out of total issuance of A$138 billion. However, issuance in international markets this year by corporate Australia is almost double what has been seen in prior years.

The inescapable conclusion from all this is that corporate Australia is very reliant on bank funding and this has been to its detriment throughout the GFC. Clearly, there is also a need to educate corporate treasurers, CFOs and even board members on the benefits of corporate bonds markets and the need for diversified sources of debt funding and long debt maturity profiles.