Westpac waits for right time to issue NZ$1.8 bln of covered bonds; ANZ ready to go too

By Gareth Vaughan

Westpac New Zealand is set to resurrect the 1 billion euro (NZ$1.8 billion) covered bond issue it delayed in February when the pricing's right, says CEO George Frazis.

Frazis told interest.co.nz the issue was ready to go and would fulfill Westpac's funding requirements for 12 months.

"We’re actively looking at when’s the right time from a price perspective to do that," Frazis said. "There’s no hurry for us because our funding and liquidity position is quite strong and our (funding) term is quite long. But having said that, as soon as the window’s right, we’ll go for it."

The bank delayed its inaugural covered bond issue in February - in the same week the devastating earthquake hit Christchurch - blaming politicial turmoil in the Middle East. The issue is targeted at European institutional investors.

Meanwhile, ANZ New Zealand chief financial officer Nick Freeman says his bank is also ready to go on a covered bond issue.

"We are prepared for a covered bond issue," Freeman said. "The timing of which will depend on our requirements for funding. At the moment, because customer deposits have been strong across the whole system, the timing has become a little more discretionary."

"But we see that as one more arrow in the funding quiver and from that perspective we would anticipate doing a covered bond deal when the timing's right," Freeman said.

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 Europe, they are usually issued for terms of between five and 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 (APRA) as, in the event of a default by the bank issuer, depositors’ claims are diluted. However, the Australian government decided in December to change the law, and has introduced legislation to allow banks there to issue covered bonds.

Unlike Australia, there has been no specific law preventing banks from issuing covered bonds in New Zealand. The Reserve Bank says it's comfortable with banks using up to 10% of their total assets as collateral for covered bonds.

So far the BNZ is the only New Zealand bank to have issued covered bonds. Since its first issue last June, BNZ has issued NZ$2.57 billion worth in total with issues both to European and local institutional investors.

Based on its total assets of NZ$5.78 billion NZ$57.8 billion at March 31, BNZ could issue covered bonds worth up to NZ$5.78 billion. The bank says prudent use of covered bonds is likely to form an important part of BNZ's funding mix over the coming years.

ASB, Kiwibank and TSB Bank have all expressed interest in at least considering issuing covered bonds.

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