BNZ raises 1 billion euros (NZ$1.75 billion) in European covered bond issue

BNZ raises 1 billion euros (NZ$1.75 billion) in European covered bond issue

The Bank of New Zealand says it has raised 1 billion euros (NZ$1.75 billion) in a seven-year euro denominated issue of covered bonds.

BNZ's Treasurer, Tim Main, described this first offshore issue of covered bonds by a New Zealand bank as an "excellent result" given the European sovereign debt crisis.

The issue was priced at a spread of 0.62% per annum over Euro mid swap.

It is part of a NZ$3 billion covered bond programme announced by the BNZ earlier in the year and follows a NZ$425 million domestic issue done by the bank in June.

Covered bonds are senior debt instruments issued by a bank, usually of five-to-ten year durations, and backed by a dedicated group of home loans known as a “cover pool.” If the issuing bank becomes insolvent, the assets in the cover pool are carved off from the 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 are banned by the Australian Prudential Regulation Authority as, in the event of a default by the bank issuer, depositors’ claims are diluted.

Here the Reserve Bank has allowed covered bonds and recently issued a consultation document suggesting it would be happy with banks issuing covered bonds worth up to 10% of their total assets. It's also hoping to get legislation introduced to enshrine covered bond holders' rights in law.

Main said BNZ's European transaction followed a European investor update, involving meetings with investors from nine countries.

"Covered bonds are to become an important element of BNZ’s term funding programme, and will enable the bank to achieve greater investor and maturity term diversification," said Main.

"The bonds are also repo eligible under the Reserve Bank of New Zealand’s liquidity policy, that came into force from April 1, 2010. This inaugural euro covered bond issue is a very cost effective form of term funding for BNZ," Main added.

“It also increases the bank’s access to a significantly broader range of global investors”.

Westpac is expected to be the next New Zealand bank to issue covered bonds, with an issue targeted for the first half of the 2011 calendar year. ANZ and ASB are also considering issuing covered bonds.

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Good work by BNZ - decent issue and a very nice spread in a tough market.