ANZ says European covered bond roadshow was successful but puts any issue on ice

By Gareth Vaughan

ANZ New Zealand, the country's biggest bank, says its recent investor roadshow for a 5 billion euros (NZ$8.85 billion) covered bond programme was successful but it won't actually be issuing any covered bonds anytime soon.

Earlier this month ANZ representatives met with potential European institutional, or professional, investors after becoming the third New Zealand bank to launch a covered bonds programme.

Yesterday an ANZ spokeswoman described the roadshow as successful.

"(However) ANZ New Zealand has decided to defer the issue of a euro denominated covered bond and reassess market conditions after the (Northern Hemisphere) summer given the current market volatility and its limited funding needs," the spokeswoman told interest.co.nz.

The delay comes as the Greek debt crisis rumbles on.

Weak lending growth, plenty of cash at hand

ANZ's decision to hold fire on a covered bond issue comes at a time of weak lending growth. The Reserve Bank's latest monthly sector credit data, for April, showed business lending up NZ$268 million month-on-month, agriculture lending down NZ$231 million, consumer lending up NZ$63 million, and housing loans up NZ$244 million. ANZ's latest general disclosure statement, for the March quarter, shows the bank's gross loans contracted NZ$364 million to NZ$96.695 billion during the quarter.

And the bank has no shortage of sources of money to lend should it require quick cash. As of March 31 ANZ had liquid assets of NZ$1.7 billion and a total liquidity portfolio, including securities purchased under agreement to resell, government and local body stock and bonds, other bonds, and balances with central banks, of  NZ$11.8 billion.

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 five to 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 last December to change the law, and has introduced legislation to allow Australian banks 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. Covered bonds typically carry AAA credit ratings.

The Reserve Bank says banks can use up to 10% of their total assets as collateral for covered bonds. ANZ had total assets of NZ$125 billion at March 31, meaning it could issue around NZ$12.5 billion worth of covered bonds.

Westpac got 1 billion euro issue away but paid more than BNZ

ANZ's deferral comes after Westpac raised 1 billion euros from overseas institutional investors earlier this month in its first covered bond issue. Westpac priced its issue at 75 basis points over the euro mid-swap rate. That was more expensive than BNZ's 1 billion euro covered bond issue last November, which priced at 62 basis points over the euro mid-swap rate.

More recently, earlier this month, BNZ raised A$700 million in its fourth covered bond issue and first in Australia. The bank has now issued about NZ$3.47  billion worth of covered bonds reaching 60% of its Reserve Bank mandated capacity.

Meanwhile, ASB'S new CEO Barbara Chapman recently told interest.co.nz ASB is working on a covered bond programme. Describing it as a "work in progress", Chapman said there was no timeframe set yet for an actual issue, which would depend on the bank's funding needs.

Covered bonds are a source of cheap funding for the banks and also help them meet the Reserve Bank's core funding ratio (CFR). Introduced on April 1 last year, the CFR sets out that banks must secure at least 65% of their funding from retail deposits and wholesale sources, such as bonds, with maturities of more than one year. The central bank will lift the CFR, designed to reduce New Zealand banks reliance on short-term offshore wholesale funding, to 70% on July 1 this year and 75% on July 1, 2012.

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