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