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ANZ NZ raises 500 mln euros (NZ$866.4 mln) through its 1st covered bond offer backed by '100% prime NZ residential mortgages'

Posted in Bonds Updated October 14, 2011 - 08:39am, Gareth Vaughan

ANZ New Zealand has become the third New Zealand bank to issue covered bonds with the group, owner of both the ANZ and National banks, making a five-year, 500 million euro (NZ$866.4 million), offer in Europe overnight backed 100% by "prime New Zealand residential mortgages."

ANZ said the offer was priced at 95 basis points over the euro interest rate swap rate. Rick Moscati , ANZ's Group Treasurer, said the bank was pleased to have executed its first covered bond transaction for ANZ NZ despite a backdrop of volatile market conditions.

"The transaction generated a very high quality order book, with over 75% distributed to real money investors (long-term investors such as pension funds and fund managers) primarily across Europe. The introduction of covered bonds further extends the range of funding alternatives available to our New Zealand balance sheet and follows benchmark senior unsecured transactions executed in NZD, USD and CHF (Swiss franc) over the last 12 months," Moscati said.

"Our funding position is strong, and we are well in excess of all Reserve Bank of New Zealand requirements."

The offer was managed by ANZ itself, Barclays, BNP Paribas and UBS with DZ Bank co-manager. The bonds are expected to be rated Aaa/AAA by credit rating agencies Moody's and Fitch, Moscati added.

ANZ's covered bond issue is part of a 5 billion euro covered bond programme the bank put together earlier in the year. Both BNZ and Westpac New Zealand have already issued covered bonds to institutional investors, with BNZ doing so in Europe New Zealand and Australia and Westpac in Europe.

ASB has established a 7 billion euro covered bond programme but hasn't yet issued any.

Covered bonds are senior debt instruments backed by a dedicated group of home loans assigned to provide security for the debt known as a “cover pool.” Popular in Western Europe, they are usually issued for terms of five to 10 years. The way they're structured means if the issuing bank defaults, the assets in the cover pool are carved off - or ring fenced - from the bank issuer’s other assets solely for the benefit of the covered bondholders.

This ring fencing of a chunk of a bank’s balance sheet is why covered bonds have been banned by the Australian Prudential Regulation Authority as, in the event of a default by the bank issuer, depositors’ claims are diluted. However, the Australian government decided last December to change the law, and has introduced legislation that will allow Australian banks to issue covered bonds, possibly as soon as this year.

Unlike with residential mortgage backed securities (RMBS), covered bond cashflows are funded by the issuer and not by the cashflows of the mortgage pool. Covered bond investors have dual recourse to the bank and mortgage pool collateral while senior bank bond investors can only claim on the bank, and RMBS investors can only claim on the collateral. Therefore covered bonds typically carry AAA credit ratings.

(Update adds further detail).

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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3 Comments

by Yoda | 14 Oct 11, 9:34am

Yet another 'NZ' bank for

Yet another 'NZ' bank for depositors to add to their AVOID LIKE THE PLAGUE list.

by Roob | 16 Oct 11, 8:14am

Agree with that. Doesn't this

Agree with that. Doesn't this sort of defeat the governments new system for avoiding Deposit guarantees.

by Iain Parker | 16 Oct 11, 9:26am

This puts the insider few at

This puts the insider few at the core of the international banking system at the head of the queue to take ownership of assets over locals when receivership occurs.

Receiverships repeatedly occur because the system they orchestrate is insolvent by design.

http://www.wealthmoney.org/articles/Critical-Math-Flaw.html 

http://www.positivemoney.org.uk / the videos at head of - PROBLEM and SOLUTION - are excellent. As is the book they have recently completed - http://www.positivemoney.org.uk/where-does-money-come-from-book/

Not relevant to New Zealand you say, read this if you will;

Office of Hon Bill English
Deputy Prime Minister Minister of Finance
Minister for Infrastructure
1 8 JAN 2010
Dear lain Parker
Thank you for your Official Information Act request, received on 27 November 2009. You asked a”number of questions about the nature of government bonds; as well as about the nature of money and the banking system.
 

4. Could you please tell me what they use to buy our government bonds and if that medium of exchange existed before we pledged to pay it back with attached interest out of the future taxes of the nation or was it an electronic debt book entry, not anyone’s existing savings, but an electronic book entry that brings into circulation new money?

People purchasing government bonds must do so with New Zealand dollars. Settlement of the transaction between the purchaser and the Crown is by electronic cash transfer rather than physical cash. All else being equal, bond purchases result in a reduction in settlement cash balances of the banking system (either at commercial banks, the Reserve Bank or both) as cash is transferred to the Crown.
An explanation for how this cash may originally be created is included in the answer to question 5 below.
 

5. Is it true that in excess of 90% of the money supply in circulation in New Zealand entered circulation as interest bearing debt owed to the banking network?

It is correct that most of the money supply in New Zealand has been created by the banking sector. This is done through the process of financial intermediation. Commercial banks, and other financial institutions, take deposits from members of the public and firms who wish to hold cash in the form of bank deposits. They then lend to individuals and firms who want to borrow — in the form of mortgages or business loans. This process serves to channel funds between savers and borrowers. It also shifts the risk of lending from individual savers to the banks, thereby reducing the risk of lending.
 

This process of intermediation involves the commercial banks lending a greater value of funds than the cash they reserve to meet expected deposit withdrawals. This is done because at any one time only a fraction of depositors will want to withdraw their funds. Banks therefore need to keep only a fraction of their deposits in reserve in order to meet those demands. Because the banks lend more than the total amount of cash held in reserve in the system, credit is created – thus increasing the money supply.
 

The exact proportion depends on the definition of the money supply. Using the most common definition of the money supply as M2 (i.e. currency held by the public + balances in cheque accounts + all other business or personal deposits that are available on demand), the October 2009 data show that the part not accounted for  by currency held by the public is 95%.