ANZ establishes NZ$8.9 billion covered bonds programme; Roadshow underway in Europe

ANZ New Zealand representatives are this week meeting with potential European investors ahead of its first covered bond issue as part of a 5 billion euros (NZ$8.9 billion) covered bond programme.

An ANZ spokeswoman told interest.co.nz the bank was currently conducting a European investor road show on an inaugural Euro denominated benchmark covered bond issue. She didn't say how big the initial issue might be, but said it would be 100% backed by "prime New Zealand residential mortgages" and would be launched following the road show subject to market conditions.

Her comments come after Moody's Investors Service released a provisional Aaa credit rating on covered bonds to be issued by ANZ New Zealand, saying the bank had established a 5 billion euros covered bond programme.

ANZ New Zealand chief financial officer Nick Freeman told interest.co.nz last month that the bank was ready to go on a covered bond issue.

"We are prepared for a covered bond issue," Freeman said. "The timing of which will depend on our requirements for funding. At the moment, because customer deposits have been strong across the whole system, the timing has become a little more discretionary."

"But we see that as one more arrow in the funding quiver and from that perspective we would anticipate doing a covered bond deal when the timing's right," Freeman said at the time.

Covered bonds are senior debt instruments backed by a dedicated group of home loans assigned to provide security for the debt known as a “cover pool.” Popular in Europe, they are usually issued for terms of between five and 10 years. The way they're structured means if the issuing bank defaults, the assets in the cover pool are carved off - or ring fenced - from the bank issuer’s other assets solely for the benefit of the covered bondholders.

This ring fencing of a chunk of a bank’s balance sheet is why covered bonds have been banned by the Australian Prudential Regulation Authority (APRA) as, in the event of a default by the bank issuer, depositors’ claims are diluted. However, the Australian government decided in December to change the law, and has introduced legislation to allow banks there to issue covered bonds.

Unlike Australia, there has been no specific law preventing banks from issuing covered bonds in New Zealand. The Reserve Bank says it's comfortable with banks using up to 10% of their total assets as collateral for covered bonds. ANZ had total assets of just over NZ$125 billion at March 31, meaning it could issue covered bonds worth up to about NZ$12.5 billion.

So far the BNZ is the only New Zealand bank to have issued covered bonds. Since its first issue last June, BNZ has issued NZ$2.57 billion worth in total with issues both to European and local institutional investors. However, like ANZ, Westpac is also ready to go with covered bonds.

Read Moody's 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 ANZ National (Int'l) Limited (ANZNIL or the issuer), a wholly owned subsidiary of ANZ National Bank Limited (ANZ National, Aa3/Prime-1/C) under a €5 billion covered bond programme established by ANZ National Bank Limited.

The covered bonds will constitute direct, unconditional and senior obligations of ANZNIL (Aa3/Prime-1) and will be guaranteed by ANZ National. The covered bonds will also be secured by a pool of residential mortgage loans originated by ANZ National and eligible substitution assets (the cover pool). Issuer: ANZ National Bank Limited Covered Bond Programme ....EUR[•]M Series 1, Assigned (P) Aaa As with all covered bonds, the covered bonds benefit from two layers of protection by having recourse to both the issuer and ANZ National and a collateral pool.

The rating therefore takes into account the following factors:

1) The credit strength of ANZ National, rated Aa3.

2) The value of the cover pool. The covered bonds are primarily backed by residential mortgage loans originated by ANZ National. Other key factors:

3) Commitment by ANZ National to maintain an asset percentage of 90%, which translates into an over-collateralisation of around 11.11%. Moody's considers this over-collateralisation to be "committed".

4) Structure created by the transaction documents. Moody's has assigned a Timely Payment Indicator (TPI) of "Improbable" to the covered bonds. As of the cut-off date, the total value of the assets in the cover pool is approximately NZ$2,689,201,910.

The cover pool assets are mortgage loans secured by properties in New Zealand. The loans have a weighted-average seasoning of 27.8 months and weighted-average remaining term of 216 months. The weighted-average loan to value (LTV) ratio is 50.6%. If ANZ National issues hard bullet covered bonds, they will benefit from a pre-maturity test according to which ANZ National has to pre-fund any covered bond maturing within 12 months of the issuer being downgraded below Prime-1.

KEY RATING ASSUMPTIONS/FACTORS

Covered bond ratings are determined after applying a two-step process: expected loss analysis and TPI framework analysis.

EXPECTED LOSS:

Moody's determines a rating based on the expected loss on the bond. The primary model used is Moody's Covered Bond Model (COBOL) which determines expected loss as a function of the issuer's probability of default and the stressed losses on the cover pool assets following issuer default.

The Cover Pool Losses for this programme are 24.0%. This is an estimate of the losses Moody's currently models in the event of issuer default. Cover Pool Losses can be split between Market Risk of 16.25% and Collateral Risk of 7.76%. Market Risk measures losses as a result of refinancing risk and risks related to interest rate and currency mismatches (these losses may also include certain legal risks). Collateral Risk measures losses resulting directly from the credit quality of the assets in the cover pool.

Collateral Risk is derived from the Collateral Score which for this programme is currently 7.4%. TPI FRAMEWORK: Moody's assigns a "timely payment indicator" (TPI) which indicates the likelihood that timely payment will be made to covered bondholders following issuer default. The effect of the TPI framework is to limit the covered bond rating to a certain number of notches above the issuer's rating.

SENSITIVITY ANALYSIS

The robustness of a covered bond rating largely depends on the credit strength of the issuer. The number of notches by which the issuer's rating may be downgraded before the covered bonds are downgraded under the TPI framework is measured by the TPI Leeway. Based on the current TPI of Improbable the TPI Leeway for this programme is one notch, meaning the issuer rating would need to be downgraded to A2 before the covered bonds are downgraded, all other things being equal.

A multiple notch downgrade of the covered bonds might occur in certain limited circumstances. Some examples might be (a) a sovereign downgrade negatively affecting both the issuer's senior unsecured rating and the TPI; (b) a multiple notch downgrade of the issuer; or (c) a material reduction of the value of the cover pool. For further details on Cover Pool Losses, Collateral Risk, Market Risk, Collateral Score and TPI Leeway across all covered bond programmes rated by Moody's please refer to "Moody's EMEA Covered Bonds Monitoring Overview", published quarterly.

These figures are based on the most recent cover pool information provided by the issuer and are subject to change over time. RATING METHODOLOGY The principal methodology used in this rating was Moody's Approach to Rating Covered Bonds published in March 2010. 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. To obtain a copy of Moody's pre-sale report for this transaction, contact the client service desk in Sydney on +612 9270 8100 or visit our web page on www.moodys.com.

Moody's Investors Service did not receive or take into account a third party due diligence report on the underlying assets or financial instruments in this transaction.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, parties not involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information. Moody's Investors Service considers the quality of information available on the issuer or obligation satisfactory for the purposes of assigning a credit rating.

The issuer has not informed Moody's Investors Service whether the issuer is publicly disclosing all relevant information about the product. Moody's adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history. The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available.

Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information. Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.