BNZ makes rare offer to pay brokerage on bond offer

The BNZ has resurrected a five-year senior bond offer it pulled a month ago to avoid competing with a more generously priced ANZ offer and, in a rare move, is offering to help pay brokerage fees as it targets retail investors.

BNZ is looking to raise between NZ$100 million and NZ$200 million through the offer. The bonds will pay interest set at 160 basis points above the five year swap rate with the rate due to be set this Friday. The bonds will be issued on August 13 and will mature on August 13, 2015. Based on where the five-year swap rate was at last Friday (4.73%), the bonds would pay 6.33% interest annually.

Currently BNZ is offering 6.75% for a minimum 5 year regular term deposit, but this is limited to a maximum of NZ$1 million. See all bank term deposit rates here.

The offer was a follow on from one BNZ pulled in early July. That offer had been made after retail brokers told the bank, when it was marketing its recent covered bond issue solely to institutional investors, that they were interested in standard BNZ bonds, said Mike Faville, BNZ director of capital markets.

In the new offer BNZ will pay brokerage fees to approved institutions and financial intermediaries, including BNZ Wholesale Banking and BNZ Private Banking, of 0.50% of the bonds allocated to investors.

 Faville suggested that effectively gave a margin of 170 basis points.

He said he believed BNZ had paid brokerage on one previous bond issue, and other banks including ANZ had on occassions too. However, doing so wasn't a common move.

"This offer is more targeted at retail [investors] than we would otherwise target a senior bond issue," Faville said. "Hence the idea of paying brokerage."

The minimum subscription to the bonds has been set at NZ$5,000.

A month ago BNZ was looking to tap into additional investor interest in a seven-year bond it launched last September that matures in September 2016, offering investors’ interest of 155 basis points over the swap rate. However, these plans were shelved when ANZ came out with a five-year bond offer paying investors’ 165 basis points over the five-year swap rate and BNZ decided against going head to head on price.

Faville said the pricing of the new offer does, however, reflect the subsequent impact of ANZ's pricing on the market.

"ANZ came out with their five year deal and paid out a little bit more so that does re-price the market and we need to respond to that," Faville said.

ANZ's previous five-year bonds, issued in March, pay a rate of 135 basis points over the swap rate. But with international wholesale funding markets tightening, banks are facing renewed funding pressures.

The latest rates reinforce a trend towards higher funding costs for banks in the wake of the Global Financial Crisis (GFC). Before the crisis, margins to swaps for longer term New Zealand bank debt ranged from 25-30 basis points. They blew out to over 250 basis points over swaps in the months after the crisis, but had appeared to be headed under 100 basis points earlier this year. However, the European Financial Crisis reversed that move.

The major banks are also looking to bolster their funding sourced from the retail market to help meet the Reserve Bank's core funding ratio (CFR).

Introducted on April 1, the CFR requires banks to fund 65% of their loans from either retail deposits or long-term wholesale funding with maturities of more than one year. The Reserve Bank is aiming to reduce New Zealand banks' reliance on ‘hot’ international wholesale money markets following the GFC.

Meanwhile, BNZ, which has a bond already on issue due to mature in September, is offering to switch investors out of that one early and reinvest their money into its new bonds.

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