Westpac NZ raising US$1.5 bln via 3 year guaranteed bond issue

Westpac New Zealand is raising US$1.5 billion through an issue of a 3 year government guaranteed bonds, Reuters and Bloomberg have reported. This would be only the second such long term guaranteed debt issue by a New Zealand bank since the government's wholesale guarantee scheme was put in place in November. It will be welcomed by the Reserve Bank and the Government, who want the banks to lengthen the maturity of their foreign funding and make New Zealand's banking system less vulnerable to a global credit market freeze. However, the relatively high price of these issues means the banks are locked into higher funding costs that can prevent them from cutting mortgage rates if the Official Cash Rate is cut again and market interest rates fall. Reuters and Insto reported that Westpac NZ is pricing the issue at 80/85 basis points above the three year swap rate. After the guarantee fee of 70 basis points and other fees of around 20 basis points, that means Westpac NZ's funding costs will be around 170 basis points above swaps.  The 3 year swaps rate is currently around 4.10%, meaning Westpac's funding costs for three year debt on this occasion is running at around 5.8%. Westpac's 3 year mortgage rate is currently 6.85%, implying a net interest margin of around 100 basis points if funding was matched directly with lending. See all mortgage rates here.

ANZ National issued a similar US$1 billion bond on March 27 at a total of 250 basis points above the 3 year swaps rate, which implies the margin for foreign funding has reduced around 70 basis points in the last two months. An interview in the Wall St Journal by John Key was credited by ANZ as a factor ensuring the success of the first issue. The Reserve Bank called on the banks again on May 14 to extend the duration of its funding as it finalises a new liquidity policy with the banks. Here is the term sheet for the issue reported in Reuters and here is the report from Reuters indicating the pricing of 80/85 basis points above swaps.  Here is the report from Bloomberg, which says the bonds were priced to yield 123.5 basis points above US Treasury yields, which reflects the difference between US swaps and United States Treasury yields of about 50 basis points. Insto reported that the New Zealand issued bank debt had to offer around 30 basis points more than similar Australian guaranteed bank debt.