BNZ issues first New Zealand Covered Bonds in Australia

Bank of New Zealand has successfully completed its inaugural Australian Dollar denominated covered bond transaction, issuing AUD700m for a 5 year term. The issue was supported by strong demand from Australian institutional investors including some overseas investors.

“The transaction is another first for BNZ and New Zealand”, said BNZ Treasurer Tim Main. “It is the first covered bond issued in Australia by a New Zealand and indeed Australasian bank, and follows BNZ’s first offshore covered bond issue, the EUR1b 7 year issue completed in November 2010”.

The issue was priced at a spread of 0.88% p.a. over Australian mid-swap, which equates to around 65% of comparable senior unsecured bonds for the same tenor.

Covered bonds issued by the bank have a direct claim on a designated pool of mortgage loans. These bonds represent a key part of term funding raised by many European banks internationally.

Covered bonds have become an important element of BNZ’s term funding program, and will enable the bank to achieve greater investor diversification and a longer duration to its term funding. This helps strengthen BNZ’s balance sheet footing, which in turn supports the bank’s AA credit rating.

The Australian dollar denominated covered bonds issued will be repo eligible with the Reserve Bank of Australia.

On 21 January 2011, the Reserve Bank of New Zealand set the regulatory limit to be applied to the issuance of covered bonds by New Zealand banks at 10 percent of the total assets of an issuing bank, with this limit calculated on the value of assets encumbered for the benefit of covered bond holders. With the completion of this Australian covered bond transaction, BNZ is utilising about 60% of this limit.

“This inaugural Australian covered bond issue is a very cost effective form of term funding for BNZ said Tim Main. “It also increases the bank’s access to a significantly broader range of global investors”.

The issue follows considerable in-house development of BNZ’s covered bond capability.