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BNZ steals a march with $1.6bln European covered bond issue

Thursday 18th November 2010 3 Comments

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Bank of New Zealand has stolen another march on the rest of the local banking industry and its Australian owner, National Australia Bank, making a 1 billion euro (NZ$1.6 billion) issue of high-security covered bonds in Europe overnight.

The latest issue follows BNZ's sale of $425 million New Zealand dollar-denominated covered bonds in June, the first such issue of any covered bond by an Australasian bank.

Covered bonds carry a higher credit rating because the bank ring-fences a pool of loans large enough to repay bondholders in full in the case of the bank's failure.They represent an attractive way to meet new bank liquidity requirements under the so-called Basel 3 rules, introduced in the wake of the global financial crisis and intended to make banks less reliant on short-term deposits.;

"Strong demand by European investors enabled the issue size to be scaled up to 1 billion euros - an excellent result considering European sovereign debt concerns re-emerging in recent weeks," BNZ Treasurer Tim Main said.

Among buyers were Dutch, German, Austrian, British and Korean central bank investors.

Main said that BNZ would be back for more, seeking to issue a suite of five to seven year maturity benchmark bonds into the well-developed European covered bond market and to establish liquidity for BNZ paper.

"It's our intention to be regular European covered bond issuer," he said. "They need liquidity and that means coming back regularly to maintain issuance and give benchmark securities to trade in."

The seven-year bonds were priced at a spread of 0.61% annually over the Euro mid swap rate, a financial markets benchmark. The transaction followed a recent investor roadshow that took the BNZ's story to nine European countries.

Australian banking law prevents products that give bond-holders prior rights to repayment over the bank's depositors - a reversal of the normal order of creditor priority. However, Treasurer Wayne Swan is under pressure to allow its banks to issue covered bonds, even if the "Big Four" - Westpac, ANZ, NAB, and Commonwealth Bank of Australia - are only allowed to issue covered bonds as a small proportion of total deposits.

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

"It also increases the bank's access to a significantly broader range of global investors."

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Comments from our readers

On 19 November 2010 at 10:16 am Doug said:
Prior to the current financial crisis "Covered Bonds backed by ring fenced loans" were called "securitised mortgage assets". These were probably the biggest single cause of the financial crisis because of the poor credit quality of the ring fenced assets. Credit quality is best controlled by banks which keep assts on balance sheet and which meet all Basel 3 rules - which in the end come down to minimum requirements on capital and liquidity which in future will extend to minimum levels of local funding. Having had the crisis and introduced the new Basel 3 rules to avoid a reoccurence of the crisis, it is disappointing to see that RBNZ is immediately allowing a local bank to skirt around the new rules.
On 19 November 2010 at 2:42 pm Tony at Sharesight said:
I don't think these assets will go off the balance sheet but I agree that it is a disappointing development and definately a step in the wrong direction.
On 24 November 2010 at 11:54 am charlesleighton said:
it is hoped that the the bnz will not use its borrowing ability to stimulate another consumer orgy of overseas trips and noisy motorbikes!
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