The ASX has produced guidance on naming conventions for debt and hybrid to help retail investors understand and compare the features of the different instruments (download the full note here). At present there is no ‘third’ category in the ASX listing rules for hybrids: only debt and equity. Because of this limitation a debt instrument that can convert to equity is treated as an equity security. Debt securities like perpetual and subordinated notes are listed as debt securities, in spite of their equity-like features.
The Corporations Act 2001 has some rules on when debt securities may be called ‘debentures’ or ‘mortgage debentures’ and ASIC has issued a class order on when a debt security may be called a ‘secured note’. The Corporations Act otherwise leaves it to the issuer to determine the name or description it wishes to give to its securities, subject to the obligation not to call or describe them as something that is misleading or deceptive.
The new ASX guidance note takes effect in January 2015 and will not apply retroactively to securities already listed.
ASX is seeking submissions from investors on the proposed new Listing Rules Guidance Note 34 Naming conventions for debt and hybrid securities by 31 October 2014. ASX is particularly interested in feedback on the proposed descriptors it is suggesting be used for debt and hybrid securities and whether stakeholders consider there are better or clearer descriptors that could be used.
Bonds or notes
For a debt security to be a bond or a note it must be denominated in AUD, the principal must be required to be repaid at maturity, the face value of the security must not exceed $1,000, the tenor must be fixed and must be for 15 years or less.
Debt security
A security should only be described as a ‘debt security if it constitutes or evidences a debt owing by the issuer; it is classified as a debt security under the Listing Rules; it is not convertible at the option of the holder into an equity security (whether it is a share, unit or other form of equity security); and it does not have any other ‘equity-like features’.