ASIC consults on improved disclosure for unlisted, unrated debentures

ASIC has released a consultation paper Unlisted, unrated debentures – improving disclosure for retail investors on proposals to improve disclosure to retail investors in the $8billion unlisted and unrated debenture market.

Comments on the consultation paper are due 1 October 2007. ASIC will consider submissions before publishing a regulatory guide in October 2007. New fundraising documents are expected to comply with the new ‘if not, why not’ benchmarks from 1 December 2007.

The improved disclosure measures (for consultation) are based on an ‘if not, why not’ basis of reporting. That is, issuers would report to investors against certain principles and benchmarks, which they should follow or explain why they may not have followed those principles and benchmarks.

The benchmarks that are proposed serve as the basis for enhanced disclosure. They cover credit ratings, adequate equity capital, adequate liquidity, lending principles (loan to valuation ratios), loan portfolio diversification, valuations, related party transactions and rollovers.

ASIC is proposing reporting on an ‘if not, why not’ basis against these benchmarks:

1. Issuers should have their debentures rated for credit risk by a recognised agency, and have that rating disclosed in the prospectus and advertising.
2. Issuers should have a minimum of 20 per cent equity where funds are directly or indirectly lent to property development. In other cases, the equity should be a minimum of 10 per cent.
3. Issuers should estimate their cash needs for the next three months and have cash on-hand to meet this need.
4. Issuers lending money to property development should be required to maintain a 70 per cent loan to valuation ratio on ‘as if complete’ valuations and 80 per cent on the basis of the latest market valuation.
5. Issuers should disclose how many loans they have, or expect to have, over the coming 12 months by number, value, location, activity and percentage of secured loans.
6. Valuations should be provided. Development property assets should be valued on a cost, ‘as is’ and ‘as if complete’ basis with all three disclosed.
7. Issuers should disclose how many loans they have, or expect to make, to related parties over the next 12 months and what assessment and approval process the follow for such loans.
8. Issuers should disclose their approach to rollovers, including default rollovers.

ASIC’s consultation paper also proposes that advertising for these products should not use words such as ‘secure’ and ‘safe’ and should either disclose a credit rating on repayment of principal or state that no rating exists and there is risk an investor may lose some or all of their capital. For retail investors, ASIC plans to produce an Investor Guide to aid their understanding of disclosure documents and conduct an education campaign to improve understanding of such matters as the need for investment diversification.

The paper also contains "expectations" of participants involved with unlisted, unrated debentures such as Trustees, Auditors, Valuers, Advisers and Publishers/media.

ASIC’s consultation paper provides an appendix which contains market research and lists issuers of unrated and unlisted debentures. The appendix is a listing only and does not signify any particular level of risk with those debentures. It is simply a list of unlisted and unrated debentures.

UPDATE 1 November 2007: ASIC issues RG 69