Westpac 2nd New Zealand bank to issue covered bonds, raises 1 billion euros (NZ$1.74 billion)

Westpac has become the second New Zealand bank to issue covered bonds, after BNZ, issuing 1 billion euros (NZ$1.74 billion) worth of five year bonds to overseas institutional investors.

Jim Reardon, Westpac's Treasurer, said the issue was made against an order book of 1.4 billion euros with 55 investors in the book from Asia, the Middle East, and Europe including Scandinavia and Britain.

The issue was initially planned for February but was delayed, just after the Christchurch earthquake, with Westpac blaming the uncertain political situation in the Middle East.

"Given the backdrop of European and Global Credit markets this is a significant achievement," Reardon said. "The ongoing strength of the New Zealand mortgage market and banking sector contributed to a successful transaction."

Westpac said the funds raised would be used "to continue to help grow the New Zealand economy."

Reardon told interest.co.nz  the covered bonds had been priced at 75 basis points over the Euro mid-swap rate. This was "slightly wider" than where the bank was looking in February, but when the costs of transferring the money into New Zealand dollars were included, the overall cost was similar to what was on the table in February, Reardon said. BNZ's 1 billion euro covered bond issue last November was priced at 62 basis points over Euro mid swap.

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 with residential mortgage backed securities (RMBS), covered bond cashflows are funded by the issuer and not by the cashflows of the mortgage pool. Covered bond investors have dual recourse to the bank and mortgage pool collateral while senior bank bond investors can only claim on the bank, and RMBS investors can only claim on the collateral.

BNZ last week raised A$700 million in its fourth covered bond issue. And ANZ last week conducted a road show ahead on an inaugural issue.

(Update adds detail on pricing).