Commonwealth of Australia Explanatory Memoranda Commonwealth of Australia Explanatory Memoranda[Index] [Search] [Download] [Bill] [Help]
2008 - 2009
THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA
HOUSE OF REPRESENTATIVES
Australian business investment partnership bill 2009
EXPLANATORY MEMORANDUM
(Circulated by the authority of the
Treasurer, the Hon Wayne Swan MP)
Table of contents
Glossary 1
General outline and financial impact 3
Chapter 1 Australian Business Investment Partnership 7
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The following abbreviations and acronyms are used throughout this
explanatory memorandum.
|Abbreviation |Definition |
|ABIP |Australian Business Investment |
| |Partnership Ltd, to be incorporated |
| |following the commencement of the |
| |legislation. |
|Commonwealth |Commonwealth of Australia. |
|Deed of |The Deed of Guarantee in respect of |
|Guarantee |money borrowed by ABIP for the |
| |purpose of entering into financing |
| |arrangements under section 8, |
| |executed on behalf of the |
| |Commonwealth, as the Deed is in |
| |force from time to time. |
|Corporations |Corporations Act 2001. |
|Act | |
|four major |Australia and New Zealand Banking |
|domestic banks|Group Ltd, Commonwealth Bank of |
| |Australia, National Australia Bank |
| |Ltd and Westpac Banking Corporation.|
General outline and financial impact
Liquidity support for viable commercial property assets
The global financial crisis raises the possibility that some
financiers, particularly foreign banks, may reduce their level of
financing of viable Australian businesses that require funding to
invest in growth and jobs.
The highly leveraged nature of the commercial property sector makes
this sector particularly vulnerable to liquidity constraints.
This Bill will provide for the incorporation of a company, called
the Australian Business Investment Partnership Limited (ABIP), to
address the risk of such a funding gap emerging in the commercial
property sector.
ABIP will be established as a temporary, contingency measure to
provide liquidity support for viable commercial property assets
where financiers have withdrawn from debt financing arrangements as
a result of the global financial crisis.
ABIP will be established under the Corporations Act 2001
(Corporations Act) and will be a public company limited by shares.
The members (shareholders) of ABIP will be the Commonwealth of
Australia (Commonwealth) and Australia's four major domestic banks;
Australia and New Zealand Banking Group Ltd, Commonwealth Bank of
Australia, National Australia Bank Ltd and Westpac Banking
Corporation.
ABIP's object is to provide refinancing for loans relating to
commercial property assets in Australia in situations where finance
relating to those assets is not available from commercial providers
(other than ABIP), and the assets would otherwise be financially
viable. Its further object is to provide financing arrangements in
other areas of commercial lending if circumstances necessitate and
provided those arrangements are agreed unanimously by the members
of ABIP.
The Government and the four major domestic banks will provide
initial loan funding to ABIP and an amount for working capital.
The Government will provide $2 billion and the major banks will
provide $500 million each. Accordingly, on its establishment, ABIP
will have access to $4 billion in undrawn loan facilities, less an
amount for working capital, expected to be $4 million. The
financing provided by the major banks will not be Government
guaranteed.
ABIP will re-lend the loan funding provided by the Government and
the four major domestic banks to commercial property assets that
meet ABIP's lending criteria, determined by its shareholders. ABIP
will only provide funding for commercial property where the
underlying assets, and the income streams from those assets, are
financially viable.
ABIP will only be able to enter into new refinancing arrangements
of commercial property assets for two years from the date of its
establishment.
If additional financing is required beyond the initial contribution
of $4 billion, ABIP will be able to issue up to $26 billion in debt
to raise that additional funding, subject to the unanimous
agreement of shareholders. This could provide ABIP with up to $30
billion in financing. Debt issued by ABIP will be Government
guaranteed.
A Deed of Guarantee will be executed after the enactment of the
legislation and will not be operative until such time as ABIP is in
existence and commences to issue debt. Debt will only be issued
when the initial loan facility provided by the Government and the
four major domestic banks has been exhausted and only if additional
financing is required beyond the initial contribution.
The Bill appropriates funds, firstly, for the Government's $2
billion investment in ABIP (comprising a line of credit for the
purposes of ABIP's lending criteria and the Government's
contribution to ABIP's working capital) and, secondly, for the
Government guarantee on any debt that ABIP issues.
Date of effect: The measures in the Bill will take effect on the
commencement of the legislation. ABIP will be incorporated soon
after the commencement of the legislation and will be operational
from the date of its registration as a Corporations Act company.
Proposal announced: The proposal was announced by the Prime
Minister on 24 January 2009 in a Media Release, 'Building
Australia's future - a $4 billion Australian Business Investment
Partnership to support Australian jobs'.
Financial impact: The Bill will require an appropriation totalling
$2 billion, consisting of a loan facility to ABIP ($1.998 billion)
and an equity contribution to meet the Commonwealth's share of
ABIP's operating costs ($2 million). It will also require an
appropriation for claims covered by the Government guarantee on any
debt that ABIP issues up to a maximum of $26 billion, plus any
interest that may be payable in relation to the principal debt
issued.
The loan facility and equity contribution themselves will have no
impact on the underlying cash balance. However, interest received
on the loan facility and dividends on the equity contribution will
improve the underlying cash balance, and these will be offset by
interest costs paid on financing the loan and equity contributions.
Non-repayment of loans (or equity) can impact on the underlying
cash balance and fiscal balance depending on the circumstances
under which it occurs.
The Government guarantee on any debt that ABIP issues up to a
maximum of $26 billion will create a contingent liability. If the
Guarantee is called upon, there will be an impact on the underlying
cash balance. The guarantee fee will improve the underlying cash
balance.
The final financial impact of the arrangements will depend on a
range of factors including: the value of loans approved; the extent
of defaults; the amount of dividends paid by the company to
shareholders; and the fees and charges associated with the
financing and guarantee arrangements, including (if the guarantee
is required) the guarantee fee and interest costs on the
Commonwealth borrowings.
Compliance cost impact: Low. Applicants for financing from ABIP
will not incur additional compliance costs over and above those
they would have incurred had they applied for refinancing from
another commercial lender.
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Outline of chapter
1. The Bill establishes an appropriation for the Government's initial
$2 billion contribution to the operations of the Australian
Business Investment Partnership (ABIP) and an appropriation to
support the Government guarantee on any debt that ABIP issues. It
establishes and supports the operations of ABIP and outlines its
mandate. It sets out ABIP's governance and reporting arrangements.
Context of amendments
2. On 24 January 2009, the Government announced the establishment of
ABIP to provide liquidity support for viable commercial property
assets where financiers have withdrawn from debt financing
arrangements as a result of the global financial crisis.
Summary of new law
3. The Bill provides for the incorporation of a company, named
'Australian Business Investment Partnership Limited', under the
Corporations Act. The members (shareholders) of ABIP will be the
Commonwealth of Australia and Australia's four major domestic
banks; Australia and New Zealand Banking Group Ltd, Commonwealth
Bank of Australia, National Australia Bank Ltd and Westpac Banking
Corporation.
4. The primary object of the company is to refinance loans relating to
commercial property assets in Australia where finance cannot be
obtained elsewhere, and the assets would otherwise be financially
viable.
5. The Government and the four major domestic banks will provide
initial loan funding to ABIP and an amount for working capital.
The Government will provide $2 billion and the major banks will
provide $500 million each. On its establishment, ABIP will have
access to $4 billion in undrawn loan facilities (less the amount
for working capital). The financing provided by the major banks
will not be Government guaranteed.
6. Additional funding may be required beyond the initial $4 billion
and accordingly, there will be scope for the initial $4 billion
loan funding to be supplemented by the issue of Government-
guaranteed debt of up to $26 billion, to permit up to $30 billion
to be available for refinancing. The issuing of any debt by ABIP
will be subject to the unanimous agreement of shareholders.
7. Government guaranteed debt will only be issued once the initial
loan funding is exhausted. As debt issued by ABIP will be
Government guaranteed, it will attract an appropriate fee (on a
sliding scale, increasing to 150 basis points) to be reflected in
the pricing of the issue. The level and timing of the fee will be
agreed by shareholders, having regard to risk and liquidity factors
and general market conditions at the time any such debt is issued.
Detailed explanation of new law
Appropriation
8. The Consolidated Revenue Fund is appropriated for two purposes.
First, for the purpose of subscribing for shares in ABIP and
providing a loan to ABIP [Clause 13]. Second, for the purpose of
paying any claims under the Deed of Guarantee and repaying a
borrowing and interest on a borrowing by the Minister under clause
15 [Clause 14].
9. The Deed of Guarantee will guarantee any debt issued by ABIP up to
$26 billion. The maximum amount that ABIP is authorised to raise
is $26 billion [Clause 9]. The Deed of Guarantee will also
guarantee any interest that may be outstanding in relation to any
borrowing by ABIP.
10. The Minister may, on behalf of the Commonwealth, borrow money for
the purpose of paying claims under the Deed of Guarantee [Subclause
15 (1)]. This power is provided because money may need to be
borrowed if there are insufficient funds in the Consolidated
Revenue Fund to pay claims at the time those claims are to be paid.
Borrowed money is paid into the Consolidated Revenue Fund.
11. Any borrowing for this purpose must not be for a period exceeding
24 months [Subclauses 15 (2)]. Borrowing includes raising money or
obtaining credit, whether by dealing in securities or otherwise.
Incorporation of ABIP
12. As soon as possible after the Bill receives Royal Assent, the
Australian Government Solicitor on behalf of the Commonwealth will
apply to the Australian Securities and Investments Commission to
register the company as a public company limited by shares. Its
company name will be 'Australian Business Investment Partnership
Limited'.
Governance
13. To ensure that ABIP is accountable, operates within constitutional
limitations, has an appropriate legal structure and is subject to
appropriate governance and reporting arrangements, the Bill applies
special features to the company.
14. The powers of ABIP are strictly limited to entering into financing
arrangements in accordance with clause 8 and borrowing money in
accordance with clause 9 for the purposes of entering into such
arrangements, and doing such other things as are incidental to the
exercise of these powers.
15. The object of ABIP is to provide refinancing of loans relating to
commercial property assets in Australia where finance is not
available from commercial providers other than ABIP, and the assets
would otherwise be financially viable.
16. A further object of ABIP is to provide financing in other areas of
commercial lending through financing arrangements of a kind agreed
to by the shareholders of ABIP in accordance with Clause 8 (3) (b).
17. Commercial property assets are assets that typically require high
levels of investment and are institutionally owned, managed or
maintained by listed or unlisted managed investment schemes,
stapled securities groups, superannuation funds, investment trusts
or property syndicates. They include, but are not limited to,
retail shopping centres, commercial office buildings and industrial
property.
18. Property located outside Australia, land banks, speculative
development assets and rural property would fall outside the scope
of ABIP's lending criteria.
19. Features that ensure ABIP will be appropriately governed in the
exercise of its powers and functions include:
. The Commonwealth's nominee will be the Chairperson of the
Board of ABIP.
. The directors of ABIP will be required to give the
Minister a copy of ABIP's financial report, directors'
report and auditor's report for each financial year.
. ABIP's auditor will be the Auditor-General.
. The Minister will have to table the reports in each House
of the Parliament [Clause 12].
. Board resolutions, apart from resolutions to commence
enforcement processes in relation to property of a
borrower, must be unanimous. Resolutions to commence
enforcement processes may be passed by four of the five
directors. The director nominated by the Commonwealth (or
its alternate) must be one of the directors supporting the
resolution.
. The directors of ABIP will be required to establish and
maintain an audit committee with functions that include:
assisting ABIP and its directors comply with obligations
under the Corporations Act; and providing a forum for
communication between the directors, the senior managers
of ABIP and the auditors of ABIP [Clause 10 (1) (h)].
. The audit committee must be constituted in accordance with
any regulations made for the purposes of subsection 44(2)
of the Commonwealth Authorities and Companies Act 1997.
Shareholders' Agreement
20. The shareholders of ABIP will enter into a Shareholders' Agreement
which will outline, among other things, the operation, control,
management and funding of ABIP. To provide greater transparency
for ABIP's operational arrangements this agreement, and any
amendments to it, will be made public as soon as practicable after
it is entered into.
21. Under the Shareholders' Agreement, the Commonwealth will provide $2
billion in initial funding, with the four major domestic banks
providing $500 million each. The Commonwealth will hold 50 per
cent of the equity in ABIP and the four major domestic banks will
hold 12.5 per cent each. The contribution to ABIP's working
capital is expected to be $4 million, of which the Commonwealth's
contribution will be $2 million.
22. If ABIP has profits available for distribution, it will pay half
year and full year dividends.
23. The Shareholders' Agreement will provide that ABIP's Board will
consist of five directors, one being appointed by each of the
shareholders. The Commonwealth nominated director (or its
alternate) will act as the Chairperson of the Board.
24. The ABIP Bill provides that decisions of the board must be
unanimous apart from resolutions to commence enforcement processes
in relation to property of a borrower. This provision protects all
shareholders by ensuring that commercial property assets are only
supported where all directors consider that the asset is
financially viable.
25. Resolutions to commence enforcement processes may be passed by four
of the five directors. The director nominated by the Commonwealth
(or its alternate) must be one of the directors supporting the
resolution.
26. To protect shareholders' interest, any major domestic bank that is
an existing participant in a financing arrangements before ABIP,
must maintain at least their existing level of financing in
percentage terms. This will provide a safeguard to ensure that
ABIP only lends on fully commercial terms.
27. To further protect the initial funding of $4 billion provided by
the ABIP shareholders, the Shareholders' Agreement also provides
that ABIP cannot issue any debt unless all shareholders agree to do
so.
28. The Shareholders' Agreement will provide for provisioning within
ABIP. A cash flow provisioning policy will be adopted by ABIP
which reflects an appropriate (but conservative) approach, being:
. until an aggregate of $500 million has been borrowed
from ABIP, a cash-flow provision of 50 basis points will
be applied; and
. once more than $500 million has been borrowed from ABIP,
a dynamic provisioning policy will be adopted to take
into account economic conditions and risks at the time.
29. Under Australia's prudential framework, as ABIP issues debt the
banks' contributions could be increasingly treated as equity by the
Australian Prudential Regulation Authority, impacting on the banks'
own lending more generally. To limit this impact, a small
proportion of the Government guaranteed debt (up to around 5 per
cent) is likely to be subordinated to the initial $4 billion of
loans. The Commonwealth will receive an appropriate return on this
subordinated debt.
30. Under these arrangements, any 'first loss' will always be to ABIP's
equity, including the provisions for bad and doubtful debts. After
that the following arrangements occur:
. If ABIP issues no debt, any subsequent losses will be
borne by the four major domestic banks and the
Commonwealth, proportionate with their initial
contributions.
. If ABIP issues Government guaranteed debt, after equity,
the order of any loss is as follows:
- the subordinated debt;
- the shareholders' initial contribution; then the
- non-subordinated Government guaranteed debt.
31. The Shareholders' Agreement obliges ABIP to provide its
shareholders half year accounts (as soon as practicable by not
later than 90 days after each half year), audited annual accounts
(as soon as practicable by not later than 90 days after each
financial year) and any other information the shareholder may
reasonably require. Arrangements to deal with conflicts of
interest, as well as the confidentially of sensitive information
obtained by ABIP, are also set out in the Shareholders' Agreement.
Powers and objects of ABIP
32. The powers of ABIP will be limited to entering into financing
arrangements, borrowing money for the purpose of entering into such
arrangements and anything incidental to the exercise of these
powers, as outlined in ABIP's constitution.
33. The object of ABIP will be to provide refinancing for loans
relating to commercial property assets in Australia where financing
is not available from commercial providers other than ABIP and the
assets would otherwise be financially viable. ABIP will be able to
provide financing in other areas of commercial lending through
financing arrangements of a kind agreed to unanimously by all
shareholders of ABIP [Subclause 7(2)].
Interaction with the Trade Practices Act 1974 (Trade Practices Act)
34. To remove any uncertainty about the operations of ABIP, the Bill
specifically authorises the activities undertaken by ABIP, its
shareholders, Directors, officers, agents and employees in
furtherance of ABIP's objects to be exempt from the competition
provisions of the Trade Practices Act [Clause 16].
Borrowing
35. ABIP will be able to borrow up to $26 billion for the purpose of
providing refinancing for loans relating to commercial property.
All the members of ABIP must agree, in writing, to the borrowing
[Subclause 9 (b)].
Other provisions
36. The Act may be cited as the Australian Business Investment
Partnership Act 2009. [Clause 1]
37. The Act commences on the day after it receives the Royal Assent.
[Clause 2]
38. The Bill will include a power to make regulations prescribing
matters required or permitted by this Act to be prescribed; or
necessary or convenient to be prescribed for carrying out or giving
effect to this Act. [Clause 17]
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