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NZDMO nears appointment of up to 6 banks to manage its NZ$1 bln CPI linked bond programme

NZDMO nears appointment of up to 6 banks to manage its NZ$1 bln CPI linked bond programme

Treasury says about 15 banks are in the running for about six roles in its syndicate to manage the Crown's first inflation indexed bond issue in 11 years. The successful bank applicants should be announced within about three weeks.

Philip Combes, Deputy Secretary of the Treasury and Head of the New Zealand Debt Management Office (NZDMO), told a request for proposal had been sent to about 15 potential members of the banking syndicate. Issuing debt via a syndication is a new step for the NZDMO, which typically issues bonds via a tender process.

It had yet to be decided how many banks would be in the syndicate, Combes said, but the NZDMO was looking closely at the model adopted by the Australian Office of Financial Management in its consumer price indexed (CPI) bond programme. Last year the Australians appointed Deutsche Bank, RBS Group and UBS as joint lead managers of its A$4 billion programme with Citigroup, JP Morgan and Westpac co-managers.

“We’re keeping our options open but a reasonable starting point would be a similar panel size to that,” Combes said.

That meant five or six of the 15 or so banks asked to express an interest were ultimately likely to form the syndicate.

Speaking on Friday, Combes said the NZDMO expected to get expressions of interest back from the banks within two weeks. After that it was likely to announce who was in the syndicate within about a week.

Combes told in July the first issue in a CPI linked bond programme was likely in October or November. He now says November is looking more likely.

NZDMO hasn’t yet finalized the size of the bond programme and will discuss this with its banking syndicate once the appointments are made. However, Combes says the size could be between NZ$800 million and NZ$1 billion based on the A$4 billion size of the Australian issue.

Combes says the inflation linked bonds should be available to retail investors if banks buy them and sell them down in retail sized parcels.

The NZDMO flagged possible CPI linked bond issues in May’s Budget as part of an issuance of up to NZ$12.5 billion worth of bonds in the 2010-11 financial year. It hasn’t issued such bonds since 1999 with just one remaining on issue with a face value of about NZ$1.17 billion. It matures in February 2016. The move comes as Treasury forecasts inflation to almost treble to 5.9% next year and follows the government’s Capital Markets Development Taskforce recommendation and Australia’s reintroduction of indexed debt last year.

In May Transpower became the first New Zealand company to issue CPI linked bonds. Its 10-year bonds pay interest of 4.115% on the principal on each quarterly payment date with the principal ratcheting up by reference to CPI meaning, therefore, the cash interest amount payable is also increased.

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FYI, I have asked IRD for an answer to the question you raised on my previous story on these CPI bonds which was - would punters be taxed on the cpi adjustment as well as the interest payment?

Will let you know when I get an answer.


Nice of you GV...I like the look of them as safe earners if there is no tax on the cpi part. I expect the banks to suck off the cream in any case.


Better still, ask them twice and get two different answers:)


Wolly, and anyone else interested, here is IRD's reply to your question at last.

The tax treatment of inflation-indexed bonds (IIBs) depends on whether or not the investor is a cash basis holder. 

Investors who are cash basis holders

Generally, whether an investor is a cash basis holder for an income year depends on whether they are a natural person who, in that income year:

  • holds financial arrangements (debt-like investments) worth less than $600,000 in total; or
  • derives less than $70,000 as income from these financial arrangements. 

For investors who are cash basis holders, an increase in the CPI means an increase in the amount accrued to the investors’ accounts (later referred to as “inflation-linked increase(s)”).  Under the taxation law, the inflation-linked increase is treated as having been credited or paid to these investors.  This occurs on the day immediately after the CPI at the end of the investors’ current income year becomes publicly available.  The inflation-linked increase is treated as interest received by the investors, despite no actual receipt.  Both inflation-linked increases and other coupon interest payments are taxable in the tax year in which they are received or deemed to have been received.  Resident withholding tax or non-resident withholding tax, whichever is applicable, is deducted.

Where there is deflation, investors are not allowed to claim losses in respect of a decrease in the amount accrued to their accounts.  Any subsequent recovery of that decrease will be treated as “excluded income” to the investors.

In addition, these investors are required to perform a cash base price adjustment under the old financial arrangements rules when the IIBs mature or are sold.  This is because these IIBs were financial arrangements entered into before 20 May 2009.  The cash base price adjustment may include items such as premium paid or discount received on the acquisition of the IIBs.

Investors who are not cash basis holders

For investors who are not cash basis holders, the inflation-linked increases are not treated as credited or paid to the investors when there is an increase in the CPI at the end of the investors’ current income year. 

These investors must calculate their income from IIBs on an accruals basis under the old financial arrangements rules.  When the IIBs mature or are sold, these investors must perform a “base price adjustment”.  This calculation effectively compares the net overall gain from the IIBs to the amount of income already returned.

Further information on the tax treatment of IIBs is available in the Tax Information Bulletin, Volume 7, Number 9 (February 1996).


Thanks it's all a big load of crap then!

I'll stick with the fully imputed shares and Aussie capital gains to go with the fx bonus. Bugger govt bonds.