Australian banks continue to tap receptive covered bond markets home and away in a further vindication of local legislation passed in 2011 which first allowed them to issue these instruments.
Commonwealth Bank of Australia extended the run of major bank overseas supply with a US$1.5bn three-year Yankee sale on Monday, a day before non-major ING Bank (Australia) raised A$1.25bn (US$838m) from a domestic three-part trade.
"Covered bonds are the right product to secure funding when conditions are more challenging as they have been recently, especially offshore where investors have a clear preference for defensive assets high up the capital structure,” said Suzy Ramos, director of syndicate at ANZ.
Covered bonds, which are backed by both the issuer and pools of residential mortgages, were not available to Australian banks during the financial crisis, which left them requiring expensive and embarrassing government guarantees to access wholesale markets in 2008 and 2009.
In addition to providing reliable access to wholesale funding in challenging times, covered bonds offer a welcome source of relatively cheap funding when clearing margins are at multi-year highs.
Australian covered bonds typically pay spreads equal to around 70%–85% of unsecured note spreads, depending on the market, an attractive carrot for banks facing hefty funding needs to help meet upcoming Term Funding Facility redemption towers.
The Reserve Bank of Australia’s A$200bn TFF, which ran from March 2020 to June 2021, provided banks with three-year funding at a fixed rate of 0.25%, later lowered to 0.1%, that needs to be financed from next year.
The four majors accessed all their TFF allowances for a combined A$133bn, while total bank drawdowns reached A$188bn.
Australian majors have been tapping the local senior unsecured space in some size as Australia and New Zealand Banking Group and National Australia Bank underlined with their recent record-breaking A$4.75bn four-part sales, though they had to pay up for the privilege.
For example, the five-year notes within Westpac's A$2.7bn four-trancher on November 7 cleared at 123bp – the widest margin by a major since 2012.
Covered bonds are not a realistic proposition for the majors in such volume at home, because asset managers and bank balance sheets know them inside out and prefer to hold senior unsecured paper that delivers more juice.
In the US and Europe, however, investor pools are larger and more diverse, including those that require the security of the covered bond format and/or Triple A ratings and appreciate the pick-up over, for example, SSAs and eurozone and Canadian covered bonds.
Australia being in a relatively stable part of the world is another supportive factor, though one Sydney-based DCM manager noted that more questions were being asked about the Australian housing market in the face of rising interest rates and falling house prices.
CBA’s latest trade takes total major bank offshore covered issuance in US dollars, euros, sterling and Swiss francs in 2022 to over US$20bn-equivalent from 16 deals, according to IFR data. In 2021, they raised less than US$3bn-equivalent in euros, sterling and Swiss francs.
Westpac is the only major bank to access the local covered segment this year with a A$2bn three-year print in May.
Non-majors have been more active locally, with ING Bank (Australia), Suncorp-Metway, Bank of Queensland and a debut from Bendigo and Adelaide Bank raising a combined A$3.8bn this year versus just A$1bn from two ING transactions in 2021.