The Accident Compensation Corporation appears to have snapped up all of ASB's NZ$300 mln covered bond isssue

By Gareth Vaughan

The Accident Compensation Corporation (ACC) appears to have swallowed all of ASB's inaugural NZ$300 million covered bond issue.

ASB's private placement of covered bonds, the first issue in a €7 billion (NZ$12 billion) programme, was outed on Monday when first Fitch and then Moody's issued press releases giving the six-year bond issue their highest respective AAA and Aaa credit ratings. ASB itself declined to disclose details of the NZ$300 million issue, which is secured by 26,040 loans over residential properties, including the interest rate the bonds will pay and who the investors are, saying these were confidential.

However, interest.co.nz understands the issue went to one local institutional investor with that investor likely to be the ACC. Asked for comment an ACC spokeswoman said she was unable to comment due to potential commercial sensitivity.

The government owned ACC is known as a buyer of longer-term bonds. Its 2011 annual report shows it had NZ$8.386 billion, or 51%, of its NZ$16.6 billion worth of reserves invested in New Zealand bonds as of June 30.

Covered bonds are senior debt instruments backed by a dedicated group of home loans written by the bank issuer assigned to provide security for the debt known as a “cover pool.” Popular in Western Europe, they are usually issued for terms of five to 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 were banned by the Australian Prudential Regulation Authority as, in the event of a default by the bank issuer, depositors’ claims are diluted. However, the Australian government decided last December to change the law, and the Australian parents of New Zealand's big four banks are now issuing their own 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. Therefore covered bonds typically attract AAA credit ratings.

Earlier this month the Reserve Bank confirmed plans for covered bond legislation 18 months after the first covered bond issue by a local bank and with more than NZ$6 billion worth of covered bonds already on issue from BNZ, Westpac and ANZ, although most have been sold to overseas investors.

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