BNZ about to issue covered bonds

It was only two weeks ago that we reported that the Reserve Bank of New Zealand had declared its support for the development of a covered bond market in New Zealand. Last week we noted that the RBNZ seemed comfortable with covered bonds supporting up to five per cent of the New Zealand banks' total funding requirements. This would allow issuance of up to NZ$16 billion of covered bonds.

Now it appears that Bank of New Zealand will launch its first covered bond issue either this week or next. No indication has been provided yet on the size of the issue but Fitch and Moody's released their provisional triple A ratings on the bank's NZ$3 billion program, on Friday, and observed that the initial mortgage pool totals NZ$522 million, suggesting a possible covered bond issue size of NZ$500 million.

The program will allow bonds to be issued domestically and internationally, through BNZ International Funding Limited. Fitch noted the lack of a covered bond regulatory regime in New Zealand.

It is expected that BNZ should be able to issue the covered bonds with a credit margin of only 50 per cent to 60 per cent of what it would normally pay.

The last five-year bond issue from one of the major banks in New Zealand was from ANZ National, in March. It paid 135 basis points over swap, suggesting that BNZ should be able to place its covered bonds within a range of 67.5 bps to 81 bps over swap.

As an aside, Bank of Montreal (rated A+) issued US$2.0 billion of covered bonds in the US s144A market during the week, at a spread of just 39 bps over mid-swaps.