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).