Kiwibank raises about NZ$188 mln through inaugural covered bond issue in Switzerland secured by NZ residential mortgages

Kiwibank has turned to Switzerland for its first covered bond issue, borrowing 150 million Swiss francs (about NZ$188 million).

A Kiwibank spokesman confirmed to interest.co.nz that the state owned bank had completed its inaugural issue of covered bonds secured by New Zealand residential mortgages this week. He said 150 million Swiss francs was the maximum size the bank was willing to borrow as a debut and in respect of its current "modest" overall funding requirements. The bonds will mature in December 2020.

They were priced at 13 basis points over the benchmark mid-swap curve in Switzerland and will reportedly yield 0.97%.

The Kiwibank spokesman said a "very healthy spread" of investors across private banks, pension funds and fund managers bought the bonds, exceeding Kiwibank's expectations following a "well received" investor roadshow in Switzerland. Kiwibank has no current plans to issue covered bonds within New Zealand, but may do so in the future.

Covered bonds are dual-recourse securities, issued for anywhere from three to 10 years, through which bondholders have both an unsecured claim on the issuing bank (should it default on the bonds) and hold a secured interest over a specific pool of assets - generally residential mortgages - called the cover pool. Covered bonds are different to senior unsecured debt instruments issued by banks, where the bondholder is simply an unsecured creditor of the bank, and also from mortgage-backed securities, where the bondholder has a secured interest in the cover pool but has no claim on the issuing bank.

Due to their dual recourse security, covered bonds generally attract the highest possible AAA credit rating (which is generally higher than the bank issuer's own ratings, Kiwibank's is AA) and are therefore a cheaper form of funding for banks than standard bank bonds.

New Zealand's big four banks have borrowed more than NZ$11 billion through covered bond issues, mainly to overseas institutional investors, since BNZ became the first to do so in 2010.

Earlier this month Fitch Ratings assigned a AAA credit rating to any covered bond issue from Kiwibank, which the credit rating agency said could issue covered bonds worth up to NZ$3 billion secured by residential mortgages.

Also see: What covered bonds mean for ma & pa.

(Update adds comments from Kiwibank spokesman).