The Reserve Bank has decided $250 million worth of bonds issued by Kiwibank that provide the bank with regulatory capital, may not actually be capital after all.
In a statement Kiwibank says the Reserve Bank has concluded this in a retrospective preliminary view, which it has yet to finalise. The state owned bank says its regulator believes the Kiwibank Bonds in question "do not comply with certain requirements" in the Reserve Bank's capital adequacy rulebook.
"The issue relates to a technical interpretation matter and in Kiwibank's view does not in any way affect the quality of the capital represented by the Kiwibank bonds. Kiwibank is working urgently to resolve the issues with the Reserve Bank," Kiwibank says.
"While the issues continue to be discussed, Kiwibank has decided not to proceed with the settlement of a proposed AU$175 million [senior, unsecured] bond issue that was scheduled to settle on 15 March."
In an additional statement Kiwibank says its shareholders, NZ Post, the New Zealand Superannuation Fund and the Accident Compensation Corporation, confirm their support as long term shareholders.
"The Reserve Bank preliminary decision does not in any way impact the growth opportunities of the bank and all shareholders continue to support those opportunities. In the event that the Reserve Bank determines that the issuances to KCFL [Kiwibank funding vehicle Kiwi Capital Funding Limited] are not fully compliant, the shareholders will ensure that the bank will be in no worse capital position than if the Reserve Bank had not changed the treatment of the capital," Kiwibank says.
Two bond issues in question
The bonds in question are a $100 million, 10-year issue of unsecured subordinated capital notes dating from 2014, and a $150 million issue of perpetual capital notes dating from 2015. The latter are paying investors 7.25% per annum for five years and were issued with a BB- "junk" credit rating. The former are paying 6.61% per annum for the first five years and were issued with a BB+ credit rating, also "junk." See credit ratings explained here.
Aside from questions over whether these types of bonds actually really qualify as bank capital, the Financial Markets Authority has warned they may not be suitable for many investors. Both sets of Kiwibank securities could, potentially, be required to be converted into ordinary Kiwibank shares or written off. And they are not guaranteed by Kiwibank or any of its parent companies.
For regulatory capital purposes, the perpetual bonds have been classified as additional tier 1 capital, giving $147 million of capital. The subordinated bonds are classified as tier 2 capital. The convertible bond issue in question, plus a second $150 million issue dating from 2012, combined, provide $208 million of capital for Kiwibank.
As of December 31, Kiwibank had total capital of $1.336 billion. At the same date the bank's total capital ratio, expressed as a percentage of risk weighted assets, stood at 13.4% versus the minimum required 10.5%.
Credit rating agency expects new shareholders to top up capital if required
Credit rating agency S&P Global Ratings said its "A" rating on Kiwibank with a "stable" outlook remains unchanged. S&P said the perpetual bond in question represents about 13% of Kiwibank's capital base.
"The inclusion of this instrument in our capital analysis is also contingent on the instrument qualifying for inclusion in regulatory capital. Our current capital assessment and our long-term issuer credit rating on the bank would be lower by one notch if this capital instrument was excluded," S&P said.
Nonetheless S&P said it expect Kiwibank's credit ratings to remain unchanged even if the Reserve Bank's final position determines that the perpetual bond doesn't qualify as regulatory capital.
"This is because we are currently of the view that the bank will in this scenario pursue alternative capital raising initiatives to restore the bank's capital position to a level consistent with the current ratings."
"Such initiatives could include a capital injection from the bank's new shareholders - the New Zealand Superannuation Fund and the Accident Compensation Corp. To this end, we note existing shareholders have been supportive of the bank's growth and capital objectives, having more recently injected $90 million in October 2016. We also note the announcement today from Kiwibank reconfirming its shareholders' commitment to maintaining the bank's capital position," S&P said.
Kiwibank's credit ratings were recently downgraded by both S&P and Moody's following last year's ownership changes, which saw the Super Fund and ACC take 25% and 22% stakes, respectively. NZ Post owns the remaining 53%. S&P and Moody's both downgraded the bank by one notch, S&P to "A" from "A+" and Moody's to "A1" from "Aa3."
'We often review banks’ capital'
Meanwhile, a Kiwibank spokesman said the bank doesn't know when the Reserve Bank will make a final decision on whether its two bond issues do or don't comply with regulatory capital rules. A Reserve Bank spokesman said it has not yet been determined when the final decision will be made, and he declined to say what the regulator would expect from Kiwibank if the final decision is unchanged from the preliminary one.
"We often review banks’ capital, proactively or in response to new information," the Reserve Bank spokesman said.
In his recent speech announcing plans for a review of bank regulatory capital, Grant Spencer, Reserve Bank Deputy Governor and Head of Financial Stability, said the review will consider the roles of the different tiers of capital and whether more emphasis should be placed on simpler and higher quality forms of capital.
"We are particularly interested in reviewing the role of convertible capital instruments and will give this some priority in the review," said Spencer.