Westpac aims to join BNZ by issuing covered bonds to bolster its balance sheet and wants to issue bonds valued at double the Reserve Bank's designated NZ$2.8 billion cap.
(Update adds detail of first BNZ issue).
Westpac chief financial officer Richard Jamieson told interest.co.nz the bank had already laid a lot of the ground work for an issue of covered bonds, which are five to 10 year senior debt instruments secured by the cashflows of mortgages written by a bank.
Westpac was aiming to get a covered bond programme up and running as soon as it could, hopefully before Christmas, Jamieson added, and was eyeing both domestic and international institutional investors, but not necessarily local retail investors.
The Reserve Bank says it is comfortable with banks issuing covered bonds worth less than 5% of their total asset bases. But Jamieson pointed out Britain’s Financial Services Authority allows banks to securitise up to 10% of their assets and credit rating agencies are comfortable with up to 15%. Westpac therefore felt it would be reasonable for the Reserve Bank to double its 5% threshold to allow banks to tap investors in a more material and substantial way.
He said this was under debate with the banking industry, ratings agencies, legal fraternity and auditors all talking to the Reserve Bank.
“We probably would like to target 10%,” Jamieson said.
This would allow Westpac to offer investors' regular covered bond issues.
“They’re not cheap programmes to run and set up so you’ve got to spread the establishment costs over the size of the transactions that you can deliver,” Jamieson added.
“A smaller percentage like 5% means you’re spreading those establishment costs over a small number of deals. A larger percentage, if you can get it closer to 10%, then it makes more economic sense to tap that covered bond market.”
Westpac New Zealand has total assets of NZ$56.3 billion. An issue at 5% of that would see the bank sell NZ$2.8 billion worth of covered bonds. Meanwhile, 10% would be worth NZ$5.63 billion. BNZ, which has total assets of NZ$69 billion, earlier this month announced plans for a NZ$3 billion covered bond programme.
Reserve Bank spokeswoman Anthea Black said the central bank wouldn't comment beyond what was said in its six monthly Financial Stability Report in May. That was that it supports the development of a covered bond market, was working on the development of a specific policy for them and this would go out for public consultation in coming months.
BNZ prices first offer
On Monday BNZ both launched and priced a NZ$425 million covered bond issue. It priced NZ$175 million worth of five-year bonds at 98 basis points over the swap rate meaning they'll pay 6% interest per annum. And NZ$250 million worth of seven-year bonds were priced at 112 basis points over the swap rate meaning they'll pay 6.425%. The five-year bonds mature on June 30, 2015 and the seven-year ones on June 30, 2017.
The rates compare to a December four-year NZ$290 million senior unsecured debt offer from Westpac that was priced at 110 basis points over the swap rate and a NZ$150 million three-year one last September from BNZ priced at 93 basis points over the swap rate.
BNZ capital markets director Mike Faville said the covered bonds were all sold to domestic institutional investors with an offer to overseas investors possible later in 2010. He said BNZ was pleased to have initially raised more than NZ$400 million with the sale done and dusted in quick time.
"We launched the term sheet at 11.15am and closed the book at 1.30pm," Faville said.
The covered bond push comes as the major banks seek new sources of funding to help meet the Reserve Bank’s core funding ratio (CFR) which was introduced in April. The CFR requires banks to source 65% of their funding from either retail deposits or long-term wholesale funding with maturities of more than one year. The central bank aims to lift the CFR to 75% by mid-2012.
Big in Europe, covered bonds are however banned in Australia. This is because covered bond investors have a priority claim on the mortgages the bonds are secured by, effectively ring fencing security on the bank's balance sheet. This means in the event of a default by the bank issuer, depositors’ claims are diluted.
Total bank assets stood at NZ$375.2 billion at the end of April according to Reserve Bank figures. Based on that figure, just under NZ$19 billion worth of covered bonds could be issued under the 5% cap. If it was lifted to 10%, banks’ could issue up to NZ$37.5 billion worth.
Covered bonds generally attract AAA credit ratings, giving them a higher credit rating than any of the AA rated ANZ, ASB, BNZ or National Bank and AA- rated Westpac. And they are generally issued at 50-60% of whatever the standard senior bond spread is. For example, if a bank issues five-year senior AA rated bonds at 100 basis points over the swap rate, it should be able to issue AAA covered bonds at 50-60 basis points over that swap rate.
Jamieson said issuing covered bonds could enable banks to hold on to investors they had attracted through participation in the Crown retail deposit guarantee scheme as it winds down.
“We’d really like to encourage a vibrant covered bond market in New Zealand,” he said.
Westpac had, however, rasied NZ$2.9 billion worth of wholesale debt so far in 2010, on top of NZ$5 billion last year. This included a seven-year NZ$1.5 billion euro transaction completed just before the Greek debt crisis flared up. That meant it was well positioned to meet CFR rules for the next couple of years.
But with Europe's sovereign debt crisis spooking investors, Jamieson said the European covered bond market was the only wholesale fund raising avenue open and working in Europe.
"You can't raise any other paper in Europe at the moment," he said.
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