BNZ raises A$700m in five-year Aussie covered bonds; Wishes rivals luck with their issues

BNZ raises A$700m in five-year Aussie covered bonds; Wishes rivals luck with their issues

By Gareth Vaughan

After issuing A$700 million (NZ$912 million) of covered bonds in Australia the Bank of New Zealand (BNZ), still the only New Zealand bank to have issued covered bonds, has reached 60% of its Reserve Bank mandated capacity and says it won't be issuing any more until at least next year.

BNZ yesterday issued the five-year covered bonds to Australian institutional investors at 88 basis points over the Australian mid-swap rate. The bank's Treasurer, Tim Main, told he estimated that was at about 65% of what comparable senior unsecured bonds would have priced at in the Australian market.

It was slightly higher than what the BNZ paid on its NZ$425 million domestic covered bonds issue last June, with Main saying Australian investors saw the issue in their country as a one-off.

"We're getting ahead of all the other Aussie banks who have not yet prepared their (covered bond) programmes," Main said. "So our parent (National Australia Bank) allowed us in there one time only to tap the market. I'm very pleased with the outcome."

Main said the Australian investors would receive interest of about  6.31%  per annum.

The Australian issue means BNZ, which has issued covered bonds to domestic institutional investors, European institutional investors, through a private placement and now in Australia, has issued about NZ$3.47  billion worth of covered bonds.

'Step back a bit'

The Reserve Bank says it's comfortable with banks using up to 10% of their total assets as collateral for covered bonds. BNZ had total assets of NZ$68.668 billion at March 31. Main said it had now reached 60% of its covered bond capacity.

"So we think it's prudent to step back a bit, allow a bit of headroom on that limit so that if we do need the funding next year, we can consider another covered bond," said Main.

"Our strategy now is to go back into the senior unsecured bond market to recommence issuance, to maintain a presence in that market which is very important to us, and then we may look to do another covered bond issue next year, depending on how conditions evolve."

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 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.

'Good luck to ANZ & Westpac'

Although they haven't yet issued any covered bonds, both ANZ and Westpac are prepared to do so. ANZ is this week conducting a European investor road show ahead of an inaugural covered bond issue after establishing a 5 billion euros programme, And Westpac plans to resurrect the 1 billion euro  covered bond issue it delayed in February when the pricing's right. New ASB CEO Barbara Chapman says her bank is also preparing the ground work for a covered bond programme.

Main said he wished the other banks well with what's a "very cost effective" form of funding.

"I wish them luck because really it's not a competitive thing, we're selling New Zealand Inc to the European market so it's in all our best interests if their issues are successful. It means in the future we all have access to a good market and the New Zealand name is very strong," Main said.

Unlike Australia, there has been no specific law preventing banks from issuing covered bonds in New Zealand. However, the Reserve Bank is working on legislation aimed at giving foreign investors greater confidence in buying New Zealand covered bonds. Main said BNZ was relaxed about issuing covered bonds ahead of any legislation.

"They (the Reserve Bank) have said they'll grandfather existing issuances and we're confident that the legislation they come out with will be consistent with what we've been doing."

The latest covered bond issue will further bolster BNZ's strong liquidity position against a backdrop of weak lending growth. Although BNZ was the only one of the big four Australian owned banks to lift its gross lending in the March quarter, chief financial officer Ken Christie told last month that BNZ was "certainly cashed up," with cash and liquid securities well in excess of NZ$8 billion.

The banks say covered bonds will help them meet the Reserve Bank's core funding ratio (CFR). Established on April 1 last year, the CFR sets out that banks must source at least 65% of their funding from retail sources and wholesale sources like bonds with durations of more than one year. The Reserve Bank plans to lift the CFR to 70% on July 1 and then 75% on July 1 next year.

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Could anyone tell me what happens to depositors in the event of bank failure? I'd like to think that depositors get their money back first, and then covered bond investors can get at the pool assets. If as I suspect, depositors can't get money back from pool assets unitl covered bond investors are fully repaid, doesn't that increase the risk of a bank run? Individual depositors will know that the banks best assets are reserved for other customers, so if there's any risk of failure your best option is to get your money out fast.

Possibly someone in the know can put my mind at rest here?

If one of the 'local' banks gets into strife, and it goes down, then the Aussie have let it go, and it won't matter where you have, what ever you have. All assets will be worthless- because they are all valued in monetary terms - For the Aussies to let one of the Pillars go, the world will have come to an end, financially. So not much to worry about, in practice :)

Thanks for the reply but that was a bit more doom-laden than I wanted.



Covered Bond holders rank before depositors.  They come first.


I don't know, why the article does not come up with the link.

Scroll down at this site to the last bullet point at the very bottom "articles you might be interested in"  BNZ CEO Andrew Thoburn


Here's all our covered bond coverage



Thanks for your reply, but that didn't put my mind at rest. This just makes keeping money in the bank that bit riskier than it was before.

btw: Your link didn't work. You missed the 'r' in 'thorburn'.

Remember when the BNZ went broke ( the last time!), james, in the 90's? What happened? NAB bought it and all it's creditors ( depositors). You'd have to guess there was some trans Tasman government agreement there. The same thing happened with State Bank of Victoria ( bought by CBA); State Bank of South Australia ( bought by ANZ). Spot the pattern? The Aussie don't allow their banks to fail. And as our biggest banks are owned by ther BIg 4 Aussies; where do you see the risk?

What happens if all of the banks are in the doo-doo at the same time? It might be fine with a single weak bank, but suppose it's the whole sector? Which could be the case, looking at the Aussie housing boom. Which bank buys up the weak one if they are all looking weak?


Anyone know why BNZ went broke? Would the following self-fulfilling escapade have anything to do with it. In the 1980's, the AU Federal Labor government de-regulated the financial system and floated the AUD and invited overseas (foreign) banks to enter the domestic market and provide competition to the locals (The Four Pillars). And they came, in droves. Nearly 30 o/s banks obtained licences and commenced the business. One of those was BNZ. The local Four Pillars saw their comfortable territory being threatened. They had never had to compete before. And they began competing. Did they compete. They prostituted themselves. Using their very bloated balance sheets they undercut everyone. They drove every newcomer out. In the process Westpac nearly went broke. (It was salvaged by Kerry Francis Bullmore Packer). Not one of the newcomers survived. Not one of those foreign banks has a presence in AU to this day. And the collateral damage of that stoush was BNZ. Cost them very dearly. Is that what broke them?

I'm not sure, iconoclast, that Kerry 'salvaged' Westpac, but in his inimitable style, he did a good deal !

" Westpac reported a huge loss in the early ’90s. The share price plummeted to the mid-$2 level before Packer pounced, gobbling up a 10% stake. He sought a board seat to restructure the company but was denied and, very frustrated and angry, he sold out for a $100m profit. It was the not the success it could have been, but it was very much in keeping with Packer’s most profitable style—buying quality businesses on the cheap following bad news."

But in essence you support my point. The Big 4 are going nowhere, and the fact they 'fought off ' ~30 licenced banks ( there were 108 financial entities at peak from memory; most with a FX trading licence etc., although not a fully licenced retail entity like BT, Citi or Barclays, and yes, the BNZ etc). But was the BNZ any different to our Telecom or Warehouse or any other raiding parties across The Tasman?

One area that hurt BNZ badly in late 80's was their exposure to commercial property and investment companies, which went bust after the 87 crash. Equiticorp was an example but can't remember if that was one BNZ held. Nonetheless, the sector got trashed and the banks (as well as DFC) had been overexposed.

In addition to other comments, new bank regulation is bringing in changes that aim to improve financial system stability. This includes the provision that bank sub-debt converts to equity if necessary. These securities rank behind depositors. There is also a new proposal by the RBNZ that aims to reduce the risk of contagion across banks.


You are correct, covered bonds carry additional risk for despoitors, thats why they are valued by foreign investors - and dont let Nicholas tell you just cause depositors have not lost money before in a big bank that it will always be fine and dandy. Foreign investors know Aus banks are fragile and reliant on existing asset bubbles - they either want to be compensated with higher rates (which woudl push down house prices) OR get less risk by jumping the queue. The Aus govt has only recently deregulated this horrendous form of debt, and in doing so hghlighted again that they are clueless when it comes to running a post GFC economy. Lets face it, the govt wants more debt, it wants more asset bubbles - cos thats what the Aus economy is built on (NOT mining). Thats also what meltdowns are built on, but I'm guessing they hope that occurs on someone else's watch ... and in any event, no one could have seen it coming.

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