By Gareth Vaughan
ASB says its newly established covered bond programme, which at 7 billion euro (NZ$12.3 billion) is about twice the size of its Reserve Bank mandated limit, allows for future growth in the bank's asset base.
ASB has become the last of the country's big four banks to join the covered bonds bandwagon, registering a prospectus for the issue of up to 7 billion euros worth or covered bonds, or the equivalent in other currencies. It has applied to list the bonds on the London Stock Exchange. The prospectus notes the covered bonds are expected to be assigned an Aaa credit rating from Moody's Investors Service and an AAA rating by Fitch Ratings.
Barclays Capital and ASB are listed as arrangers for the programme and Barclays as dealers.
Nigel Annett, ASB's Treasury general manager, told interest.co.nz the bank hasn't yet issued any covered bonds and the timing of the first issue will depend on the market and future funding requirements.
"Feedback from offshore investors indicates that there is interest in an ASB Covered Bond," Annett said.
The Reserve Bank says banks can use up to 10% of their total assets as collateral for covered bonds. That means, based on its total assets of NZ$63.1 billion, ASB's NZ$12.3 billion covered bond programme is almost twice the size of its about NZ$6.31 billion 10% limit. Annett said the seven billion euro programme allows for future growth in ASB's asset base.
ASB's not the only bank to have a covered bond programme in excess of the Reserve Bank imposed limit. Westpac has a 5 billion euros (NZ$8.8 billion) programme and total assets of NZ$56.8 billion. That puts its 10% cap at about NZ$5.68 billion. However, the banks say they intend to issue their full programme of covered bonds over a period of several years.
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 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.
In June ANZ New Zealand completed an investor roadshow for a 5 billion euros covered bond programme but hasn't yet issued any covered bonds. However, Westpac New Zealand raised 1 billion euros from overseas institutional investors in its first covered bond issue in June and in four covered bond issues so far BNZ has raised about NZ$3.47 billion, reaching 60% of its Reserve Bank mandated capacity.
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19 Comments
"Popular in Europe" - enough said.
Disgraceful this pernicious tool has been allowed on these shores to the detriment of deposit holders who now stand behin these "AAA" rates instruments. Are TD rates rising as a result of this farcical attempt to reignite credit growth??
A very interesting piece that highlights the REAL focus the RBNZ has on keeping house prices up due to massive bank risks if they don't. Rather obvious the RBNZ has a real problem with investment bias. Their policy is simple:
Save the Bollard property bubble at ALL COSTS at the expense of savers, depositors and EXPORTERS
@JT - "So they wont be offered to mum and dad kiwi investors...."
You make a very good point.
It is imperative that banks no longer enjoy the privilege of securing domestic funding on an unsecured basis unless there is a significant public effort by the RBNZ to forewarn the unsuspecting depositor.of his or her risks.
Smug comments about depositors from the RBNZ report Iain referenced, such as:
Each has freely invested in a private institution and
has enjoyed a return on that investment whilst accepting
the risks associated with the investment.
just don't cut it.. Where's the choice if it is so 'freely' entered into.
Inexplicable carnage will erupt for the elderly and other innocents if OBR has to be called upon to rescue a delinquent bank - they all are if we are to believe the reports coming across the wires of late.
What other reason would there be for lenders to demand collateral in the form of 'covered bonds - it takes a thief to catch a thief, so the saying goes.
The institution of OBR will signal the end of cosy banking in New Zealand as depicted on television advertisments and this site.
Who will want to save or have their salary put at such risk in a two tier system? - but there will be no choice - how covenient.
It is little wonder the crown on lends surpluses from their Westpac A/C to the RBNZ to secure collateralised lending.to 'our' banks.
If there is no trust from the top why should there be any at all.
Bollard does not have control. He does what the banks tell him to do. That is the perception resulting from these reports and reports that westpac was not following the rules, such as they were, back in 08/09, of which we are only now finding out. Welcome to the farce that is the nz banking system.
I have no deposits with any of these banks and I never will.
I offer myself to the trolls again.
The evil of covered bonds is much overated; they have been used in Europe for decades to diversify a banks funding base and provide an excellent and stable source of low cost, long term money for housing mortgages.
The problems some European banks have were not caused by borrowing other peoples money at low interest rates, but because they have given their dosh to others who look increasingly likely to not give it back.
Though similar at first glance, they are in practice quite different from the Mortgage backed securites and CDOs built up by American banks, the principle differences are:
1: The buyers get an excellent low risk security (a genuine AAA rating), and pay for it with lower interest rates.
2: The banks keep ownership of the underlying properties in the covered bond pool, and can't 'on sell' their obligations.
3: In Europe at least, there is very strict regulation on them - in Sweden for instance, the banks must analyse and keep track of their cover pool on a daily basis. If any loan in the pool becomes high risk, it must be taken out and replaced with a low risk one.
Deposit holders and shareholders are no worse off - they are at the bottom of heap if the bank turns up its toes, as they have always been. You can argue that the extra stability and diversification brought in by adding covered bonds decreases a banks overall default risk , and are actually better off.
Existing bond holders are worse off, they do loose a bit of security as the covered bond holders jump to the head of the queue. Limiting the ratio of covered bonds to 10% would seem a sensible way of reducing this.
Covered bonds are traditionally sold in big blocks, for longer terms and hence usually only offered to the wholesale market - I can't really see most Mum and Dads salivating at the thought of forking out 1 million for a 10 year bond at 2.5%
Well, he's a sensible man and our banks haven't had much experience playing with their new 'covered bond' toys. If you were to allow, say 50% as a limit, you'd unwind the benefits of diversification, and would irritate exisiting bond holders, who would be justifiably narked if such a large percentage were allowed.
I would think this is a precautionary rule and we'll see what happens in due course - New Zealand is different from Europe and we have different mortgage structures, so covered bonds may only ever play a smallish part in our banks funding - but they can be a very useful tool in a banks funding armoury and shouldn't be rejected out of hand.
@ teabagger said
"3: In Europe at least, there is very strict regulation on them - in Sweden for instance, the banks must analyse and keep track of their cover pool on a daily basis. If any loan in the pool becomes high risk, it must be taken out and replaced with a low risk one.
Deposit holders and shareholders are no worse off"
Who might be worse off then - if the high risk mortgages are pushed into the uncollateralised pool and the low-risk into the covered bond pool?
Some money is better than other money - where have I heard that before?
It's as though the scam as explained by you is guaranteed to crush unsecured retail depositors. Always the patsies and yet always the backstop when times get tough - ie SCF, AMI.
Depositors and share holders have always been last in line, and this won't change.
If a bank raises a 100 million from a normal bond offering, those bond holders are ahead of the shareholders and depositors. If it raised 100 million through a covered bond offering, the shareholders and depositors are still in exactly the same position.
Existing bondholders however will have seen the covered bond holders move ahead of them and are disadvantaged because of this. If the amount of covered bonds is limited, this disadvantage will not be great - but where the sweet point is I don't know.
The advantage/disadvantage is a fight between the various types of bond holders, the poor share holders and depositors will not be affected by this reshuffling of risk, which takes place further up the food chain. In the event of a default, they would not be any better or worse off it the covered pool was there or not there - they would still get the same amount, probably not much.
The NZ Post bond referred to above is technically a perpetual callable non-cumulative preference share with a 30 year maturity, and these are usually regarded as quasi-equity and ranked alongside normal shares. The same is true of most of the hybrid bonds.
True bonds like those found in the corporate section of the link below:
http://www.directbroking.co.nz/directtrade/dynamic/ratesheet.aspx
have a definite fixed term and are unsubordinated in the main - and banks do issue a lot of them.
These bonds definitely rank above shareholders, hyrbrid security holders, perpetual shareholders, depositors and subordinated bonds, and in turn rank below covered bonds.
hehehehe.....looks like it, only cash..........Nicole Foss suggest cash like things....right now bank failures (loss of deposits) look more short term real risk than Govn bonds....so maybe some short term bonds, say 6months to two years....Ive never done that, yet....not in a position to, clearing debt still.
regards
@Steven
"right now bank failures (loss of deposits) look more short term real risk than Govn bonds....so maybe some short term bonds, say 6months to two years"
You are certainly correct in your assumption if indeed the crown is determind to avoid guaranteeing innocent depositor's savings - the liability for other's folly rests firmly with the private, prudent investor.
However, opening an A/C with a broker to trade/purchase government stock may prove more harrowing than one would expect.
Yield spread quotes for government stock in NZ are typically 5bps wide at the wholesale level, compared to choice for US Treasury bonds. Furthermore brokerage fees are added on top. It doesn't take much to destroy the return after tax when contemplating 2.41%, 2.45% and 2.67% yields for 3mth. 6mth and 1 year Govrenment T Bills.
The only alternative is Kiwi Bonds - but the rates are derisory.
It is past time for the NZDMO to open a service similar to Treasury Direct.
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