The evidence for the perversity of Sarbanes-Oxley costs keeps mounting. Public companies are losing the most capable executives to privately held firms offering better compensation, less regulatory oversight and less risk of criminal prosecution for business failure. Capital markets are seeing companies exit public markets in favor of ownership by firms funded by pooled private capital. And now the world of company debt is getting darker and less public thanks to Sarbox.
Sarbanes-Oxley, the U.S. law designed to stamp out corporate fraud, is prompting more companies to keep secrets in the bond market.
Siemens AG, Australian retailer Woolworths Ltd., Miller Brewing Co. of Milwaukee and at least 100 other companies are selling bonds that aren't registered with the Securities and Exchange Commission instead of debt that requires more disclosure. The securities increased 50 percent in the past two years, five times faster than the rest of the U.S. market, according to data compiled by Lehman Brothers Holdings Inc.
``It's a darker world of the bond market,'' said Matthew Eagan, who helps oversee $97 billion in fixed income, including unregistered bonds, at Loomis Sayles & Co. in Boston. ``It's off the radar.''
The private bond sales are flourishing because companies face almost no penalty for keeping their finances away from the public. The millions of dollars in costs to comply with the Sarbanes-Oxley Act of 2002 can wipe out savings from public debt because investors demand only 11 basis points more in yield to buy unregistered securities, Lehman data show.
That is to say, as the cost of compliance with Sarbox and other regulations on public debt approaches the interest-rate difference between private, unregistered debt and public debt, the incentives to have a registered offering vanish.
Sarbanes-Oxley Backfires in Unregistered Bond Sales [Bloomberg]