By Gareth Vaughan
The bank issuers of NZ$1.07 billion worth of subordinated callable bank bonds held by thousands of retail investors face a more tricky than usual decision when the call dates come up this year because this particular type of bond is unlikely to be regarded as capital under the Reserve Bank's localised version of the Basel III global capital adequacy requirements.
The bonds at issue are a NZ$350 million BNZ issue, currently paying 8.42% per annum with a call date of June 15, a NZ$350 million ANZ NZ issue paying 8.23% with a call date on July 23, and a NZ$370 million ASB issue paying 8.77% callable on November 15.
All three bonds are currently regarded by the Reserve Bank as Tier Two Capital for the bank issuers. However, under the Reserve Bank's Basel III proposals, which it plans to phase in over the next few years, they won't qualify as capital and will be regarded as debt. (There are further bonds on issue in the same boat not set to be called or to mature until beyond 2012, see our bond issuer page for further details).
In normal circumstances the general market expectation would be that these bonds - the ANZ, ASB and BNZ issues - would be called and replaced with a similar type of issue by the banks. However, given the probable new regulatory treatment, the picture's not so clear.
"It's clear the existing instruments won't comply with their (the Reserve Bank's) view of Tier Two Capital in a Basel III environment," one market source told interest.co.nz. "They'll simply be debt to the extent they're kept on foot, but I think you can take it as an absolute certainty that no bank is not going to call those. Some will refinance them with a compliant instrument, others may simply refinance as senior debt or just let them be called and returned."
The Reserve Bank is currently consulting with the banking industry over the introduction of Basel III and says it doesn’t have a finalised date for the release of its final Basel III standards yet. In terms of Tier Two Capital, the picture appears more clear in Australia. In late March the ANZ Banking Group raised A$1.5 billion of Tier 2 Capital, with ANZ saying in its offer document the Australian Prudential Regulation Authority (APRA) had confirmed the ANZ subordinated notes were eligible for inclusion as Tier 2 Capital.
Kiwibank calls, doesn't replace
The uncertainty surrounding the ANZ, ASB, and BNZ bond issues comes after Kiwibank recently called a NZ$75 million unsecured subordinated bond, that was paying 7.72% per annum, on its March 20 call date and hasn't yet revealed plans to replace it. A Kiwibank spokesman has said only that Kiwibank continually reviews its funding options.
As for the NZ$1.07 billion worth of ANZ, ASB and BNZ subordinated callable bonds, as interest.co.nz reported in early March, investors' will be in for a low interest rate environment reality check if the banks do call and replace, or reset the bonds, given any rollover or new offer will pay significantly lower interest rates given today's much lower interest rate environment compared with the one of 2007 when these bonds were issued.
The Australian owned local banks are also keen that what's regarded as capital under Basel III by the Reserve Bank here, is also regarded as capital - for their parent banks- in Australia with differences in Basel III adoption between the Reserve Bank of New Zealand and APRA causing concern. Here the Reserve Bank is proposing that under Basel III all non-common equity securities would have to be converted to equity, rather than written off, either following a Reserve Bank direction, or if a bank is placed in statutory management. In contrast APRA is giving banks the option of conversion to equity or principal writedown. However, APRA says equity must be listed which wouldn't work for equity in ASB, BNZ, ANZ NZ or Westpac NZ.
Westpac goes to Switzerland
Meanwhile, Westpac NZ has become the second New Zealand bank to issue covered bonds in Switzerland secured by New Zealand residential mortgages, raising 325 million Swiss francs (about NZ$436 million) in a floating rate, three-year issue. The issue was outed by credit ratings agencies Moody's and Fitch, who issued reports rating the covered bonds Aaa and AAA, respectively. Westpac's Swiss issue comes after ANZ raised 500 million Swiss francs through two covered bonds issues in February.
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