Fitch Ratings has assigned its AAA rating to Bank of Queensland's Series 2020-1 A$750 million conditional pass-through mortgage covered bonds. The issue – the first to be issued by BOQ in Australia – was priced at 107 basis points over 3-month BBSW after being 2.9 times over-subscribed by 68 insto investors, with 64 successful.
In a report on the AUD covered bond issue, the ratings agency also affirmed its AAA rating for BOQ's other two covered bond issues, totalling €1.0 billion. Each series has been assessed as having a "stable outlook".
The domestic bond issue means BOQ has total outstanding covered bonds A$2.3 billion at current exchange rates.
The AAA rating for these covered bonds is six notches above Fitch's issuer default rating for BOQ itself, largely due to factors such as the size of the asset pool relative to issuance, the use of a well-understood asset class, and the absence of obvious refinancing risks.
One feature of the Series 2020-1 floating-rate bonds is the presence of a 31.5 years "extendable maturity" feature – that is, a failure by BOQ to meet principal payments at the bonds' expected maturity will trigger a 31.5-year maturity extension for that series of bonds.
This is seen by Fitch as strongly mitigating against refinancing risk, along with other features, such as funding for a rolling three months of interest payment protection.
The cover pool, as of 23 April, consisted of 12,989 loans secured by first-ranking mortgages of Australian residential properties with a total outstanding balance of about $3.3 billion. The cover pool's weighted-average loan to value ratio was 56.9 per cent and the weighted-average seasoning was 51 months.
Investment loans formed 36 per cent of the pool, while interest-only loans comprised 9 per cent of the pool. Reflecting BOQ's regional home base, more than half (52 per cent) of loans in the pool were originated in Queensland.
While Fitch said it expects Australia's coronavirus containment measures will negatively affect the performance of residential mortgage loans, although the agency also recognised that "BOQ has substantial eligible mortgage loans, allowing it to replenish non-performing loans in the cover pool in line with its asset coverage test."
"This would be the case even assuming significantly reduced new loan production, longer foreclosure periods and large take-up of payment holidays that could affect available revenue receipt and liquidity," Fitch said.
BOQ is expected to use the proceeds of these bonds to extend its funding profile, after a $600 million senior debt line matured on 5 May 2020.
This adds to a $335 million capital raising (after costs) by BOQ in 1H20 through a $250m institutional share placement and new shares issued under the bank's dividend reinvestment plan for the FY19 final dividend, paid in November 2019.
In another balance sheet rejig, on 26 May 2020 the bank is to redeem and then replace all its BOQ Wholesale Capital Notes, originally issued on 26 May 2015. In an announcement to the ASX last month, BOQ said APRA has approved the redemption of these hybrid securities, "conditional on BOQ completely replacing the WCNs