Financial services group Australian Unity has tapped the little-used simple corporate bond market, launching two new series bonds on the Australian Securities Exchange.
The health insurer, fund manager, banker and retirement living group is seeking to raise a total of $250 million, with a minimum issue of $50 million, with the launched of Series C Australian Unity Bonds and Series D Australian Unity Bonds.
For many investors the simple corporate bond market will be a complete mystery. It was introduced in 2013 following law reform that introduced a simplified disclosure regime and changes to directors’ civil liability provisions with respect to bonds issued to retail investors.
The changes were made as a way of opening up a retail corporate bond market. The bonds are designed to be listed on the Australian Securities Exchange to provide greater liquidity.
The concept has had only limited take-up. The ASX is currently home to a small number of corporate bond issuers, including real estate developer Peet Ltd, Mercantile Investment Co, US Master Residential Property Fund, Villa World, litigation funder IMF Bentham and business lender Axsesstoday.
Proceeds from Australian Unity’s bond issue will be used to refinance an earlier issue, Series B Australian Unity Bonds, and for general corporate purposes.
The floating rate bonds, which have a face value of $100, are unsecured notes which have been assigned a BBB+ credit rating by Australia Ratings.
Series C notes will mature in December 2024 and are expected to pay a margin between 200 and 220 basis points over the 90-day bank bill swap rate (currently around 1 per cent).
Series D notes will mature in December 2026 and are expected to pay a margin between 215 and 235 bps.
The offer will open on September 17, with ASX trading expected to start on October 18.
Many of the companies that use simple corporate bonds for fund raising are small, as the list above shows, so investors have to accept a degree of uncertainty.
In June last year small business lender Axsesstoday raised $55 million through an issue of simple corporate bonds. They were sold on a floating rate yield of 490 basis points above the 90-day bank bill swap rate.
The bonds are unsecured debt obligations with a maturity date of July 2013.
The bond issue was part of a significant capital expansion for the company, which included a new $200 million senior bank funding line.
Unfortunately, Axsesstoday mis-managed its expansion. Last November, it disclosed that it had breached covenants under several of its funding facilities. In April, it went into voluntary administration after senior lenders told the company they were not prepared to support it with ongoing waivers of breaches of loan terms.
The business has been sold to US private equity firm, Cerberus Capital Management. Under the terms of the deed of company arrangement, secured creditors will be paid in full, while unsecured creditors will receive between 33.9 cents and 34.9 cents in the dollar. Shareholders were unlikely to receive anything from the sale.
The Axesstoday simple corporate bonds are unsecured notes.
Australian Unity was one of the first companies to use the simple corporate bond market and has been a repeat issuer. It a well-established, diversified business.
There is no suggestion that an investment in its bonds represents the same level of risk as an investment in Axsesstoday’s bonds (the different margins on the securities indicate the different risk levels).