Christchurch earthquake adds 20 basis points to govt bond margins and leads to first ever tender with no bids at all

By Gareth Vaughan

The tragic and devastating February 22 Christchurch earthquake has made its presence felt in the Government debt market, adding about 20 basis points to the cost of New Zealand government debt and leading to a tranche of government bonds receiving no bids whatsoever for the fisrt time ever.

New Zealand Debt Management Office (NZDMO) Treasurer Philip Combes confirmed to interest.co.nz that the offer of NZ$50 million worth of bonds due to mature in April 2015, in a February 24 tender which was the first after the earthquake, failed to attract any bids.

"We've certainly had tenders (before) where we've had very few bids and certainly not enough to issue all (the bonds) we would have wanted to offer," Combes said.

"But it was the first time where we've literally had no bids at all," Combes said.

That said, the NZDMO still managed to raise its targeted total of NZ$300 million in the February 24 tender. This was done by allocating an extra NZ$25 million into each of a bond maturing in April 2013 and another maturing in March 2019.

Ahead of each bond tender NZDMO officials talk with the participating bankers and ask them for indications of interest to gauge what bonds and terms to offer.

"We do occasionally have tenders that are trickier to read from our point of view immediately following some abnormal event," said Combes.

"This was a classic case. You get something like the Christchurch earthquake and typically investors want to wait and see a little bit because things have changed and with the passage of time they get a bit more information to be able to assess what's going on."

Last week's tender, the first after the February 24 one, had proven more successful with the NZDMO raising NZ$250 million in total. Of this, NZ$100 million was for bonds due to mature in 2019 and NZ$150 million for bonds maturing in 2021.

"And we got 2.7 and 3.5 times cover respectively," said Combes. "So we got good interest."

Ahead of schedule

The NZDMO has raised NZ$11.35 billion of the NZ$13.5 billion it plans to raise this financial year, which Combes says puts it in a good position, running well ahead of schedule.

"One of the tenders in January was a NZ$950 million tender, which was the biggest tender that we can find going back through the records."

However, the spread of government bonds over the swap rate has "drifted out" since the earthquake.

"It has probably cost us about 20 basis points in terms of bond spreads to swap," said Combes.

"Our spread over swap had narrowed quite a lot and now it has just gone back out to the levels it was through a fair bit of late last year," he added. "We'd managed to work those bond spreads in quite nicely, experiencing very solid demand, and then that work has been effectively undone by the uncertainty created around the earthquake."

He expected things to be quite settled over the next few weeks, but noted there was now heightened interest in the Government's Budget due on May 19.

In the latest issue of its regular Credit Focus series, ANZ analysts point out the NZDMO has now issued more NZ$1 billion worth of bonds for seven straight months, meaning total issuance is NZ$2.1 billion ahead of schedule for the first eight months of the fiscal year, assuming a NZ$13.5 billion programme.

"As it stands, the NZDMO is scheduled to issue a further NZ$13.5 billion of bonds in 2011/12 as well," ANZ says "But that was before the Christchurch earthquake. And while it is too soon to say with any clarity what impact the quake will have on the Crown’s finances, it’s fair to assume that overall issuance over the next five years is set to be ramped up significantly, so it’s a good thing that funding is running ahead of schedule."

"Closer analysis of the weekly tenders does not suggest that buyers have been scared off by the quake – and reassurances by credit rating agencies have certainly helped."

ANZ sees three themes, NZDMO has CPI bonds on ice

Looking ahead, the ANZ analysts predict three broad trends, or themes, will develop:

1. Ongoing large-scale issuance.

2. A desire to term out (lengthen) the duration of funding. "Issuing more bonds is one thing, but care needs to be taken with regard to the maturity profile."

3. Innovation. "Expect the Crown to use innovative ways to raise funds. By definition, this could mean anything, and the market is already talking about things like disaster bonds and increased offshore funding. And of course there’s always the old trick of selling the family silver (i.e. the SOE’s). This would seem a prudent first step."

Meanwhile, Combes said having done much of the leg work to prepare for its first issue of inflation indexed bonds since 1999, the NZDMO was continuing to monitor pricing.

"We will continue to monitor and wait for things to settle before having a really good look at it (inflation indexed bonds) again. It's certainly unlikely to be in the next few weeks."

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