RDP 2012-09: A History of Australian Corporate Bonds 2. Description of Long-run Bond Data and Structure of the Market

The analysis in this paper draws on a new long-run unit-record dataset that has been compiled for bond issuance by Australian corporations. It covers bond issuance onshore since 1917 and includes offshore issuance since 1983.^[2] Prior to the floating of the Australian dollar and capital controls being lifted in 1983, most capital inflows were equity rather than debt; debt inflows were typically bank lending or direct loans from parent corporations rather than bond issuance.

Bonds are defined as debt securities with a maturity at issue of at least 12 months. This includes debentures (which are typically secured using a fixed or floating charge over a company's assets), asset-backed bonds and unsecured bonds. Private placements are included where the information is available, while hybrids are excluded. The bonds are recorded at their face value; foreign currency bonds are valued at the Australian dollar equivalent face value, including the costs of swapping foreign currency to Australian dollars at the time of issuance. As unit-record data were unavailable between 1983 and 1993, aggregate data on bond issuance has been substituted instead.

In most cases, the detail available for each bond include: the issuer name, amount raised, tenor, price at issuance (face value), the coupon rate, whether fixed or floating, and the market of issuance.

The Australian corporate bond market is divided into three categories for the purposes of this paper:

• Bonds issued by Australian financial institutions, which includes banks (private and government-owned) and non-bank financials.
• Bonds issued by Australian non-financial corporations (as well as private corporations, this includes PTEs).
• Asset-backed securities (ABS) issued by Australian-domiciled special purpose vehicles (SPVs), which include private and government-owned entities.

Australian dollar-denominated issuance by non-resident entities (onshore and offshore) is discussed below. These issuers are natural swap counterparties for Australian resident issuers of foreign currency-denominated bonds who wish to use the funds domestically.

Bonds issued by PTEs and government-owned banks and SPVs are included as corporate bonds because these entities were commercially operated and financed the bulk of their operations from internal revenue sources and debt raisings. As these issuers have since been privatised, their inclusion throughout the sample period ensures a consistent sample over time. Examples of these entities are the Commonwealth Bank, the State Government banks (NSW, WA and SA), Telstra, Qantas, and a number of electricity and gas utility corporations. Bonds issued by publicly owned corporations have typically been government-guaranteed.

The data have been compiled from a number of sources. Prior to the 1980s, corporate bonds were mostly listed on a stock exchange. Bond issues were typically marketed to investors (including households) and underwritten by brokers.

In the early 20th century, of the six state capital city exchanges, most bonds were listed on the Melbourne and Sydney exchanges. It was uncommon for bonds to be dual listed in the early 20th century; the extent of dual listing increased through time. The lack of integration early on reflected the fact that the state stock exchanges served different issuers (for example, mining corporations typically issued bonds on the Melbourne exchange), and high listing costs generally deterred issuers from dual listings. In 1937, the Australian Associated Stock Exchanges (AASE) was established, with representatives from each of the state capital exchanges. The AASE was the precursor to the Australian Stock Exchange (ASX). It established uniform listing rules, broker rules, and commission rates during the 1950s and 1960s.^[3] A decline in listing fees and the convergence towards uniform listing rules made it more attractive for issuers to list their securities on multiple exchanges (Adamson 1984). In addition, in 1972 a policy of ‘national listing’ was implemented, under which an application for the listing of a company's securities was made to all six stock exchanges.

The tendency for issuers to list bonds on stock exchanges started to decline from the 1950s – though listing remained prevalent at this time – alongside the growing importance of institutional investors relative to retail investors (discussed in Section 5.2). The trend towards issuing and trading corporate bonds in the over-the-counter (OTC) market accelerated during the 1980s. Today, more than 95 per cent of corporate bonds are launched through a book-build process that is almost always restricted to wholesale investors, and subsequent trading is done OTC. The retail bond market – that is, bonds marketed directly to households – accounts for less than 5 per cent of the stock of corporate bonds issued domestically. Around one-third of these (by number) are listed on the ASX, while the remainder are unlisted.

Bond issuance data prior to the early 1980s was sourced from the following publications: The Stock Exchange of Melbourne Official Record; Sydney Stock Exchange Official Gazette; and the Australian Stock Exchange Journal. Reflecting the trend away from exchange listing, from the 1980s onwards our data series has drawn on the following publications: Reserve Bank of Australia Bulletin Supplement: Company Finance; Australian Bureau of Statistics ‘Financial Accounts’; and the Bank's internal unit-record bond database, which has been compiled from a range of sources including commercial data providers and market liaison.

Our dataset utilises all available historical data but there are some coverage issues to be aware of. First, offshore issuance prior to 1983 is not captured, meaning we are unable to generate an estimate of the size of the offshore bond market over this period. Second, bonds issued OTC prior to the early 1980s are not captured, meaning our estimate of total issuance between the 1950s and early 1980s is probably understated.

Footnotes

While our corporate bond data for the period prior to 1983 only includes bonds issued domestically, Australian corporates are likely to have issued offshore prior to 1983. As far as we are aware there is no complete record of these issues. [2]

The ASX was formed in 1987 by legislation that enabled the amalgamation of the six state-based exchanges. In 2006, the Australian Stock Exchange merged with the Sydney Futures Exchange (SFE) to become the Australian Securities Exchange (also known as the ASX). In 2010, ASX Group became the overarching name, replacing Australian Securities Exchange, which remains the name of the listings and trading arm of the ASX Group. [3]