Three of New Zealand's big four banks load up on a combined €2.450 billion worth of covered bonds

ASB, BNZ and Westpac have filled their boots with new covered bond issues, borrowing a combined €2.450 billion (about NZ$4.15 billion).

First up was ASB borrowing €750 million through a 10-year issue. ASB's order book topped €1.1 billion, with the issue ultimately having a coupon of 0.25%.

Westpac borrowed €850 million through a seven-year issue. Its order book reached more than €950 million, and it is paying an annual coupon of just 0.01%.

And in its own seven-year issue BNZ is also borrowing €850 million. BNZ's order book reached €1.2 billion, and its issue also has an annual coupon of 0.01%.

All three issues priced at 12 or 13 basis points above the euro swap curve. ASB's covered bond yields more because it's a 10-year issue, and the swap rate curve steepens between seven and 10 years.

Whilst the covered bonds are priced cheaply, the New Zealand banks' costs will also include hedging costs to swap the money borrowed into the Kiwi dollar. One suggestion put to interest.co.nz is that the NZ dollar cost could be about 50 to 60 basis points over the bank bill benchmark rate (BKBM).

Covered bonds are debt securities through which the bondholders have both an unsecured claim over the issuing bank and hold a secured interest over a specific pool of assets set aside by the issuing bank known as the cover pool. NZ banks' cover pools consist of residential mortgages.  if the issuing bank becomes insolvent, the assets in the cover pool are carved off from the issuer’s other assets solely for the benefit of the covered bondholders.

Should a bank issuer fail, covered bondholders, in the form of institutional investors predominantly located overseas, would be at the front of the queue to be repaid ahead of depositors and holders of other secured bonds. The Reserve Bank gave NZ banks the green light to start issuing covered bonds in 2010. The Reserve Bank says banks may use up to 10% of their total assets as security for the benefit of covered bondholders.

Covered bonds typically attract the highest possible credit rating, higher even than their bank issuer's rating. The new ASB, BNZ and Westpac covered bonds all have an Aaa credit rating from Moody's and an AAA rating from S&P Global Ratings. To date, only the big five NZ banks have issued covered bonds. So in addition to ASB, BNZ and Westpac, that means ANZ and Kiwibank. However, other NZ banks are allowed to issue covered bonds, should they choose to.

The four Australian owned banks must factor Australian Prudential Regulation Authority (APRA) rules affecting funding from their parents into their covered bond planning.  APRA says only covered bonds meet its criteria for contingent funding arrangements provided by the Australian parents to their Kiwi subsidiaries during times of financial stress.

There's more from the Reserve Bank on covered bonds here and here, and a public register of NZ banks' covered bond programmes here.

This story has been updated correcting the coupon on the BNZ and Westpac issues to 0.01% rather than 0.1%. 

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