RDP 2012-09: A History of Australian Corporate Bonds 4. 1950 to 1980: Regulation and Transition Towards Private Issuers

In line with strong economic growth during the 1950s and 1960s, the stock of corporate bonds outstanding increased at a rapid average annual growth rate of 12 per cent. However, this was from a low base and the corporate bond market remained relatively small at less than 10 per cent of GDP. At the same time, the corporate bond market began to shift towards a larger share of private issuance. The share of corporate bonds outstanding that were issued by publicly owned entities fell from over 80 per cent to around 40 per cent over this period (Figure 3).

The shift toward private bond issuance largely reflected two factors:

• The need to fund an increase in private investment, in particular mining investment. Private investment rose from 10 per cent of GDP to 17 per cent of GDP over the 1950s and 1960s. This was in an environment of strong domestic and international economic growth, with ongoing industrialisation and urbanisation in Australia and its major trading partners (particularly Japan).
• Corporations seeking to increase gearing from pre-war levels. For much of this period, banks' ability to lend to corporations was constrained by banking regulations, which originated from the imposition of war-time controls.^[5] As a result, an increasing proportion of corporate investment was financed through the issuance of bonds, as well as intermediated through non-bank financial institutions (NBFIs).^[6] NBFIs' share of total financial institutions' assets had increased from 10 per cent prior to introduction of the war-time banking controls to around 36 per cent by the end of the period of banking controls. NBFIs' share of the bond issuer base also increased from 2 per cent in 1950 to around a quarter in 1960. In contrast, banks accounted for less than 10 per cent of the issuer base prior to the 1980s, and only 3 per cent during the period of regulation.

The share of public issuance increased sharply from 35 per cent in 1974 to 75 per cent in 1982, although the trend towards private issuance re-emerged soon after. Higher inflation and less favourable macroeconomic conditions in the 1970s made fixed-coupon corporate debt securities a less attractive investment option and private corporations consequently scaled back issuance during this period. This coincided with an increase in issuance by PTEs, particularly those owned by state and local governments, to fund investment in public infrastructure. The increase in borrowing by state and local government authorities was due in part to the relaxation of Australian Loan Council restrictions by the Australian Government during this period (Grewal 2000).^[7] These developments, along with strong issuance by the newly created Telecom Australia (now privatised and known as Telstra), led to the increase in the share of the stock of bonds outstanding accounted for by government corporations.

Footnotes

The controls included limits on interest rates for bank lending and borrowing and on terms to maturity of different types of deposits and loans. There were also quantitative and qualitative controls on bank loans in aggregate and to particular types of borrowers. [5]

Several NBFIs were also owned by foreign banks seeking a financial presence in Australia, but were precluded from establishing a formal banking operation by the effective moratorium on new foreign banking authorities prior to 1985 (Edey and Gray 1996). [6]

The Australian Loan Council is a body that coordinates the borrowing arrangements of the Australian and State and Territory governments. [7]