BNZ sticks with market rates on five-year funding

Bank of New Zealand will call a retail bond issued five years ago, even though it is likely to have a pay 200 basis points more on new money to replace this funding.

Yesterday, BNZ said it would call the bonds - which were sold primarily to retail investors - on 15 June 2012.

Were BNZ to leave the bonds in place they would cost the bank around 3.7 per cent in interest (given they could be reset for a further five years at a spread of 75 basis points over the swap rate).

Like a lot of borrowers in term debt markets, BNZ has an aversion to exercising this particular contractual right on the grounds that doing so could upset investors and make new term funding more difficult to access.

One commentator on the New Zealand credit markets, Triple T Consulting's Sean Keane, wrote in his daily Credit Suisse circular that "not calling the bonds would attract plenty of negative headlines from investors who expect that these instruments will always be called."

Bondholders that invest in any BNZ term deposit for at least 30 days will receive a bonus of 20 basis points on the advertised rate. For a five-year term deposit that bonus lifts the interest rate to 5.70 per cent.

Keane points out that this rate is "a sizeable premium to the five year swap rate of 3.00%, but reflective of the demand that Basel 3 has created for retail deposits on both sides of the Tasman."