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Listed Security vs Unlisted Security

In credit markets, both listed and unlisted securities allow investors to buy an asset and potentially earn a return. Listed securities are usually traded on an exchange platform (such as the ASX) whereas unlisted securities’ trading generally takes place in an over-the-counter (OTC) market.

This article provides a basic comparison between the two types of instruments in terms of quality and liquidity risks.

Figure 1. Listed securities v unlisted securities

Source: BondAdviser

Due to substantial transparency in exchange markets a listed security is often viewed to be of higher quality. More specifically, to be publicly listed the security needs to meet a variety of criteria including issuer (company) structure, net tangible asset value, parent entity guarantee etc as well as to go through a more rigorous disclosure process, particularly so for retail investors. For example, the ASX broadly requires issuers to hold net tangible asset of at least $10 million to potentially quote their issuances. Although standards like this significantly reduce the capacity of issuers of smaller sizes to raise capital in public markets, it should in theory ensure a base, high quality of listed securities.

Another main difference between listed and unlisted securities is liquidity risk. Due to the nature of private and public markets, these two types of securities are subject to different levels of liquidity risk. Exchange-traded markets are accessible for a wider range of investors including individual and institution investors and due to the larger number of traders and low, efficient transaction processes, liquidity risk in exchange markets is considered to be small. In contrast, the wholesale market is primarily dominated by institutional investors (and a few significant private investors) and the transactions among them (often in large volumes) are generally slower and cannot be made until two parties reach full agreement, which may include other terms than just price and volume. For this reason, securities in OTC markets often offer a premium to investors for the inconvenience and difficulties to exit the market (the “liquidity premium”).

The above point can be further demonstrated by examining two of NAB issuances. On the 21st of September 2016, NAB issued floating rate notes (AU3FN0032470) to wholesale investors at an issue margin of 2.40% p.a. above the 90 Day BBSW. In comparison, NABPE, which was issued publicly around half year later (20th of March 2017) with a similar underlying risk profile was offered at a lower margin of 2.20%. Even though the Tier 2 market compressed significantly, and with a 1.5-year longer tenor (which increases interest rate and extension risks), the 0.20% premium reflects the illiquidity in private markets.

Overall, even though listed and unlisted instruments possess different features and risk profiles, the yield (and price) on both are still driven by multiple factors (not only limited to liquidity and perceived quality) including fundamental credit profile, technical supply-demand conditions and the wider macroeconomic environment.