International credit rating agencies Moody's Investors Service and Fitch have assigned provisional Aaa and AAA ratings, respectively, to the Bank of New Zealand's NZ$3 billion covered bond programme, the first such bond offer in New Zealand.
(Updates add link to earlier background story and Fitch information).
Covered bonds are senior debt instruments backed by the cashflows of mortgages written by banks. BNZ plans to issue the bonds for terms of five to seven years. The Reserve Bank recently said it was comfortable with banks' issuing covered bonds worth up to 5% of their total asset base. BNZ's total assets are valued at NZ$69 billion.
However, they're not allowed in Australia because covered bond investors’ have a priority claim on the mortgages the bonds are secured by, meaning in the event of a default by the issuer depositors’ claims are diluted. Click here to read a fuller story on covered bonds.
BNZ's covered bond programme outlines periodical issues either domestically through BNZ, or offshore through its BNZ International Funding Ltd vehicle and London branch.
Read Moody's full statement below:
Moody's Investors Service has today assigned a provisional long-term rating of (P)Aaa to the mortgage covered bonds (the covered bonds) proposed to be issued by Bank of New Zealand (BNZ or the issuer) under its $3 billion covered bond programme.
The covered bonds will constitute direct, unconditional and senior obligations of BNZ (Aa2/Prime-1/C+) and will be secured by a pool of residential assets (the cover pool). This will be the first issuance of covered bonds by a New Zealand issuer.
The rating takes into account the following factors:
(1) Credit strength of the issuer
(2) Structure created by the transaction documents
(3) Credit quality of the cover pool securing the payment obligations under the covered bonds, with a current collateral score of 4.7%. All loans in the cover pool will be backed by residential assets originated by BNZ in New Zealand
(4) Commitment by BNZ to maintain an asset percentage of 97%, which translates into an over-collateralisation of around 3.09%.
Moody's considers this over-collateralisation to be "committed" As of the launch date, the total value of the assets in the cover pool is approximately NZ$521,777,333. The cover pool assets are mortgage loans secured by properties in New Zealand. The loans have a weighted-average seasoning of 25 months and a remaining term of 275 months.
The weighted-average loan to value (LTV) ratio is 44.8%. If BNZ issues hard bullet covered bonds, they will benefit from a pre-maturity test according to which BNZ has to pre-fund any covered bond maturing within six months of the issuer being downgraded below A1, and any covered bond maturing within 12 months of the issuer being downgraded below Prime-1. Moody's has assigned a Timely Payment Indicator (TPI) of "Improbable" to the covered bonds.
As is the case with other covered bonds, Moody's considers this transaction to be linked to the credit strength of the issuer, particularly from a default probability perspective. If the issuer's credit strength deteriorates, all other things being equal, the rating of the covered bonds could come under pressure. If the issuer's rating or the pool quality deteriorated, the issuer would have the ability, but not the obligation, to increase the over-collateralisation in the cover pool.
The principal methodologies used in rating the transaction were "Moody's Rating Approach to Covered Bonds" published in March 2010, and "Assessing Swaps as Hedges in the Covered Bond Market", published in September 2008. All can be found on www.moodys.com in the Rating Methodologies sub-directory under the Research & Ratings tab.
Other methodologies and factors that may have been considered in the process of rating the transaction can also be found in the Rating Methodologies sub-directory on Moody's website. In addition, Moody's publishes a weekly summary of structured finance credit, ratings and methodologies, available to all registered users of our website, at www.moodys.com/SFQuickCheck. The rating assigned by Moody's addresses the expected loss posed to investors.
Moody's ratings address only the credit risks associated with the transaction. Other non-credit risks have not been addressed, but may have a significant effect on yield to investors. Moody's ratings are subject to revision, suspension or withdrawal at any time at our absolute discretion. The ratings are expressions of opinion and not recommendations to purchase, sell or hold securities. Moody's ratings are subject to revision, suspension or withdrawal at any time at our absolute discretion.
Moody's issues provisional ratings in advance of the final sale of securities and these ratings reflect Moody's preliminary credit opinion regarding the bond. Upon a conclusive review of the transaction and associated documentation, Moody's will endeavour to assign a definitive rating to the bonds. A definitive rating may differ from a provisional rating.
Read Fitch's statement below:
Fitch Ratings has today assigned Bank of New Zealand's (BNZ, 'AA'/Outlook Stable/'F1+') first series of mortgage covered bonds, issued under its NZD3bn mortgage covered bond programme, an expected 'AAA' rating.
The BNZ covered bond programme allows BNZ to periodically issue covered bonds either domestically through BNZ, or offshore through BNZ International Funding Limited (BNZ-IF), a BNZ-guaranteed vehicle used for international funding by BNZ, acting through its London branch (together the "issuers"). BNZ is a wholly owned subsidiary of National Australia Bank ('AA'/Outlook Stable/'F1+'). Covered bonds to be issued under this programme will be backed by a cover pool of New Zealand residential mortgage loans.
The expected ratings are based on BNZ's Long-term Issuer Default Rating (IDR) of 'AA' and a Discontinuity Factor (D-Factor) of 22.9%, the combination of which enables the covered bonds to reach an expected 'AAA' rating for the programme on a probability of default basis. The ratings also take into account the programme's asset coverage test, providing sufficient enhancement to sustain 'AAA' stress scenarios applied by the agency. Transaction documents do not permit the asset percentage (AP) to exceed 97%, and the initial AP for this programme is expected to be 86.2% (equivalent to a 16% overcollateralization or OC).
This falls within the 88.3% maximum asset percentage, supporting a 'AAA' rating in Fitch's view, hence justifying the assignment of an expected 'AAA' rating to the inaugural issue. OC measures the difference between the cover assets and covered bonds as a percentage of the covered bonds, whilst AP measures the covered bonds as a percentage of cover assets. Supporting AP for a given rating will be affected by, among others, the current profile of cover assets versus the covered bonds, even in the absence of further issuance. It cannot be assumed that a given AP supporting the rating will remain stable over time.
"BNZ's programme will be the first covered bonds programme to be launched in this region and opens another potential source of funding for issuers," said David Carroll, Director in Fitch's Structured Finance team.
Fitch's D-Factors measure the likelihood of interruption of payments on the covered bonds at the time of a default by their issuer, on a scale between 0% and 100%, with 0% reflecting a perfect continuity and 100% equivalent to a simultaneous default of the issuer and its covered bonds. The D-Factor assigned to the covered bonds reflects: the strength of the asset segregation through a bankruptcy remote SPV, which will act as guarantor of the covered bonds; the mitigant to liquidity gap risk in the form of a pre-maturity test, triggering the cash collateralisation of payments due over the next 12 months upon a downgrade of the issuer below 'F1+', or for future soft bullet issues, a 12 month maturity extension; the expectations around the ability for cover assets to be transitioned to an alternative manager; and the lack of a covered bond regulatory regime in New Zealand.
The agency has analysed a provisional portfolio of eligible assets out of which an initial cover pool will be selected. The late May 2010 data consisted of 3,731 loans secured on New Zealand residential properties with a total outstanding balance of NZD522m. The portfolio is wholly comprised of full documentation loans which have a weighted average current loan-to-value ratio of 44.8%, and a weighted average seasoning of 27 months. All loans are floating rate. In a 'AAA' scenario, Fitch has calculated a weighted average frequency of foreclosure for the cover assets of 2.4%, and a weighted average loss severity of 47.2%.
The cover pool is geographically distributed around New Zealand's population centres, with the largest concentrations being in Auckland (30.5%) and Canterbury (centred on Christchurch - 17.4%). The agency's mortgage default analysis is based on the Australian mortgage default model criteria updated with a New Zealand-specific default probability, market value declines, and other risk adjustments that relate to the New Zealand mortgage market.
Fitch formed assumptions about the default probability and losses of the cover pools under a 'AAA' stress scenario, and tested maturity mismatches between the cover pools and possible covered bond issuances in a wind-down scenario under the management of a third party.
Due to the dynamic nature of the cover pools, covered bonds and funding of OC through a demand loan granted by BNZ to the covered bond guarantor, Fitch will monitor the key characteristics of the cover assets and periodically check whether the AP taken into account by the agency provides sufficient protection to maintain its rating. A report on BNZ's covered bond programme will shortly be available on the agency's public website, www.fitchratings.com.
Final ratings are contingent on information on the initial cover pool and AP conforming to the information already received by Fitch.
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