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BNZ to launch country’s first covered bond programme

Bank of New Zealand is looking to raise as much as $3 billion of new funds through a covered bond programme, a first for the country.

Wednesday, June 9th 2010, 4:59AM

by Paul McBeth

 

The covered bonds, which provide investors an extra security on a pool of residential mortgages if the issuer defaults on a payment, were given triple-A ratings by Moody's Investors Services and Fitch Ratings after the issuance of the securities was given the all-clear by the Reserve Bank in its latest Financial Stability Report.

Jennifer Wu, a senior analyst at Moody's, told depositrates.co.nz that benefit of covered bonds is that the extra security can give an "uplift" in the potential rating, with the mortgage pool acting like a guarantee if the issuer defaults on repayments. She said it was exciting to see the securities launched in New Zealand, and it should attract new sources of funding for BNZ.

"There's a strong trigger in there to protect the quality of the pool or mortgages," Wu said. "The fact that it's the first issuance of the bond has everyone interested - it has to be as good as it can be."

Fitch and Moody's cited the strength of the mortgage pool, worth some $521.8 million, and BNZ's own profile as major strengths of the security.

BNZ plans to launch the bond domestically, which will help it raise more funds locally and bolster its credit funding ratio, which was introduced by the Reserve Bank to improve the nation's financial stability by cuttings lenders' reliance on offshore credit lines.

Wu said the credit quality of the loans backing BNZ's bond was stronger than those of Australian residential mortgage backed securities. Though RMBS and covered bonds are similar, Wu said the difference was that the mortgage pool is a secondary security for investors in a covered bond, rather than the primary security in RMBS, and that covered bonds tend to run for shorter periods of time.

Standard and Poor's View on Covered Bonds

As part of its efforts to provide insight to investors on structured finance transactions, Standard & Poor's Ratings Services has chosen to comment on covered bonds in New Zealand, particularly in the context of the recently announced establishment of a covered bond program in New Zealand, by Bank of New Zealand (BNZ; AA/Stable/A-1+). These comments can be found in an article published today entitled, "S&P Comments On Covered Bonds In New Zealand Following The Launch Of Bank of New Zealand's Covered Bond Program".

We chose to comment at this time because we believe the covered bond asset class and this specific transaction is important to the marketplace, and that our views can add value for investors. Standard & Poor's may, from time to time, choose to provide our views on structured finance markets and transactions across various asset types and geographies, even if we did not rate the transaction, if we deem the transaction important to the market and we believe that our opinions would provide value to investors.

We have only reviewed very limited public information pertaining to the program and have formulated a broad outline of how our criteria for rating covered bonds, may be applied in the context of possible covered bonds issuance from New Zealand. Our covered bond criteria are published in the article titled "Revised Methodology And Assumptions For Assessing Asset-Liability Mismatch Risk In Covered Bonds", on Dec. 16, 2009. Standard & Poor's has received a number of enquiries from the market since the announcement of the BNZ program, and we are seeking to broadly outline our likely approach to analyzing such transactions.

As Standard & Poor's has very little information on the specifics of this particular program or any series-specific issuance being contemplated, our comments and opinions are based on some broad assumptions of transaction structure and collateral pool type. The opinions expressed in the article are based on our expected approach and should not be construed as a credit rating.

 

Paul is a staff writer for Good Returns based in Wellington.

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