BNZ pulls bond offer to avoid competing with ANZ on price

An ANZ five-year bond offer, paying investors’ 165 basis points over the five-year swap rate, has trumped a longer-term offer from BNZ with the latter choosing to pull its offer rather than compete on price.

The latest price action reinforces a trend towards higher funding costs for banks in the wake of the Global Financial Crisis. Before the crisis, margins to swaps for longer term New Zealand bank debt ranged from 25-30 basis points. They blew out to over 250 basis points over swaps in the months after the crisis, but had appeared to be headed under 100 basis points earlier this year. The European Financial Crisis has reversed that move.

Interest.co.nz understands BNZ was looking to tap into additional investor interest in a seven-year bond it launched last September that matures in September 2016, offering investors’ interest of 155 basis points over the swap rate. The original issue was at 135 basis points over swaps. BNZ’s move followed its recent launch of New Zealand’s first covered bonds when some investors’ expressed further interest in standard long term bonds.

The bank therefore decided to look at adding to the NZ$100 million it has raised from last September’s seven-year offer, offering bonds of  just over six years duration. However, interest.co.nz was told that ultimately although the BNZ felt there was demand, it didn’t want to go head-to-head with the ANZ on price as it didn’t desperately need the money.

The pricing stand-off comes as major banks look for sources of long-term funding to help meet the Reserve Bank’s core funding ratio (CFR) which was introduced in April. The CFR requires banks to fund 65% of their loans from either retail deposits or long-term wholesale funding with maturities of more than one year.

Last November the central bank estimated the main banks all had a CFR above 65%, but only just in many cases. It plans to increase the CFR to 70 and ultimately 75% by mid-2012. This comes in the wake of the Global Financial Crisis, amid Reserve Bank concerns the banks are vulnerable if ‘hot’ international wholesale money markets freeze, as they did when Lehman Brothers collapsed.

ANZ’s offer, open until Friday, is of five-year bonds paying 165 basis points over the five-year swap rate. That’s significantly higher than the bank paid in its last five-year offer as recently as March, when it raised NZ$250 million at 135 basis points over the swap rate.

Dean Spicer, ANZ’s head of capital markets, said the bank’s new offer had been priced for current market conditions. Spreads had widened both locally and globally since March. The deal was driven by demand signals from investors. ANZ is looking to raise NZ$100 million, but the offer is also open to unlimited over-subscriptions.

“We’re certainly getting some positive feedback at this early stage so we would expect that there would be the potential for the deal to be upsized,” Spicer said.

One fixed income fund manager who didn’t want to be named said given international credit markets had taken a turn for the worse over the past two months, if people wanted to borrow they had to pay up. Furthermore, with rates falling and spreads widening, a lot of professional investors were fully invested meaning there wasn't a lot of cash around.

Meanwhile, three of Australia's big banks - ASB's parent Commonwealth Bank of Australia, BNZ's parent National Australia Bank and Westpac - have prepared for funding difficulties by boosting their cash holdings by A$12.7 billion in recent months, Fairfax's The Age reports.

The three have been bracing for a possible freeze in funding markets due to fears over Europe's sovereign debt crisis by establishing more conservative balance sheets. ANZ was the only one of the big four prepared to run down its cash holdings in May, with the bank's cash holdings dropping by A$1.75 billion, largely as ANZ added to its lending book.

The Age reports figures compiled by  the Australian Prudential Regulation Authority show total bank holdings of cash and liquid assets, including bank bills and government bonds, rose above A$81 billion by the end of May. That's up A$12.7 billion from April, but is still well below the A$99 billion in cash the banks hoarded at the height of the global financial crisis in late 2008.

* This article was first published in our email for paid subscribers earlier today.See here for more details and to subscribe.