NZ's big five banks have almost NZ$11 billion worth of covered bonds on issue

By Gareth Vaughan

New Zealand's big five banks have almost NZ$11 billion worth of covered bonds on issue, which is just under one-third of the amount the Reserve Bank says they're allowed to issue.

A review of the banks' latest General Disclosure Statements shows the five - ANZ, ASB, BNZ, Kiwibank and Westpac - with a combined NZ$10.759 billion borrowed through covered bonds as of March 31.

BNZ, the first bank to issue covered bonds back in 2010, remains far and away the biggest user of them. BNZ has borrowed NZ$4.2 billion, or 39%, of the combined total.

The Reserve Bank has imposed, as a condition of banks’ registration, a 10% limit on the proportion of a bank’s assets that can be encumbered in favour of covered bonds. Based on the five banks' combined total assets, they could issue NZ$35.2 billion worth of covered bonds between them. That means thus far, combined, they're at 31% of their limit. 

Again BNZ has used the biggest slice of its allowable limit, sitting at the equivalent of 6% of its NZ$72.798 billion worth of total assets.

Covered bonds are dual-recourse securities, issued from between three and 10 years, through which bondholders have both an unsecured claim on the issuing bank (should it default on the bonds), plus a secured interest over a specific pool of ring fenced assets - residential mortgages - called the cover pool.

Covered bonds are different to senior unsecured debt instruments issued by banks, where the bondholder is simply an unsecured creditor of the bank, and also from mortgage-backed securities, where the bondholder has a secured interest in the cover pool but has no claim on the issuing bank.

Due to their dual recourse security, covered bonds generally attract the highest possible AAA credit rating (which is higher than the bank issuer's own ratings), and are therefore a cheaper form of funding for banks than standard bank bonds. (See credit ratings explained here).

The covered bonds issued by New Zealand banks have been to institutional investors. Although some have been issued within New Zealand, and some in Australia, most have been issued in Western Europe, including in Switzerland.

ANZ says it has NZ$5.548 billion worth of residential mortgages pledged as security for covered bonds. BNZ says it has underlying collateral for the guarantee of housing loans and other assets with a face value of NZ$5.467 billion. Westpac says it has NZ$2.8 billion of housing loans securing covered bonds. 

Earlier this month, when Fitch Ratings assigned a AAA credit rating to Kiwibank covered bonds, the credit rating agency said Kiwibank's cover pool consisted of 2,308 loans secured by first-ranking mortgages on residential properties with a total outstanding balance of NZ$315.8 million. And Fitch has also said ASB's cover pool consists of 26,040 loans secured by first-ranking mortgages over residential properties with a total outstanding balance of NZ$3.86 billion.

Also see: What covered bonds mean for ma & pa.

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