BONDS: New Zealand seeks covered bond boost
New Zealand is considering new covered bond legislation to drive down the funding costs of its banks. The moves are also meant to attract a wider following for New Zealand covered bonds in the now €2trn (US$2.58trn) global market.
Source: Reuters/Eddie Keogh
The government introduced The Reserve Bank of New Zealand Amendment Bill on May 10 to ensure that the country’s banks had effective access to “a source of long-term relatively stable finance and as an alternative source of bank funding”.
To date, all four of New Zealand’s major banks, ASB Bank, ANZ National, Westpac New Zealand and BNZ, have used the structured route to sell covered bonds.
Despite the often lukewarm reception from investors, covered bonds have become an important element of New Zealand banks’ term funding programme, as issuers say it allows them to extend maturities, while strengthening their balance sheets and supporting their Double A ratings.
The deals tend to be of sizes of around €500m and often struggle to attract investor responses similar to those for more-established European issuers.
According to syndicate bankers, certain investors are unwilling to analyse New Zealand bank credits due to the size of the offerings, the lack of legislation and ECB support, as well as not being compliant with the capital requirement directive under Basel III proposals.
The legislation will not make the country’s bonds CRD-compliant, but bankers still believe there will be a cost benefit from the new rules. They expect to see around a 10bp improvement in funding costs.
The Reserve Bank has limited the percentage of assets that a locally incorporated bank may use as collateral to 10% of its asset base.
The proposals require the country’s banks to register the covered bond, open the cover pools to an independent asset monitor and for the Chartered Institute of Management Accountant and the Companies Act to clarify the treatment of registered covered bonds in the event of an issuer’s insolvency.
Non-European jurisdictions, such as Australia and Canada, are increasingly introducing covered bond legislation to make such paper more palatable to institutional investors.
“The ability to issue covered bonds can improve financial stability as it gives New Zealand banks access to a large base of long-term investors that is not available for other forms of funding,” the government said.
“Covered bonds markets have remained accessible when unsecured wholesale markets have not. In this way, the ability of banks to issue covered bonds may reduce the probability of a bank having liquidity problems or failing.”