BNZ starts covered bonds programme

BNZ is set to be the first New Zealand bank to issue covered bonds under a new funding scheme promoted by the Reserve Bank, but banned in Australia.

The key feature of the programme, which starts today, is that covered bonds are secured on specific mortgages held by the bank, as well as carrying a general claim on the BNZ's assets.

The additional security means they can get a top credit rating and allow the bank to raise money more cheaply than through standard bonds or deposits.

BNZ's director of capital markets Mike Faville said it was too early to disclose how much the bank was aiming to raise, but the issue would be rated AAA by Moody's and Fitch, a notch higher than the AA rating of the bank's senior unsecured stock.

''There's a new liquidity and core funding regime put in place by the Reserve Bank, and that's all about extending the duration and 'stickiness' of bank funding. Our covered bond programme is aimed at extending the duration of the bank's funding.''

Maturities of five and seven years would be offered, he said.

Buyers are likely to be mainly overseas, particularly Europe, where demand for covered bonds is high, said one market source.

''The real advantage is in raising funds internationally - there's a huge market in Europe for covered bonds,'' he said.

''It makes sense for the banking system because it allows access to a pool of liquidity they otherwise can't access.''

Banks in Australia are barred from issuing covered bonds by legislative restrictions in the country's depositor protection regime, which prevent banks issuing securities ranking ahead of deposits from ''mums and dads''.

Reserve Bank spokesman Mike Hannah said there was no restriction in New Zealand.

''We are going out to consult on what the appropriate boundaries there should be on this type of funding.''

A potential starting point, he said, was 5 per cent of assets.

Other banks are expected to follow BNZ with covered bond programmes of their own.

- © Fairfax NZ News