NZ covered bonds make a comeback after Covid hiatus - Fitch

Covered bonds are back. Photo / File

Covered bonds have returned after a Covid-driven hiatus with three major New Zealand banks issuing a combined $4.1 billion worth over the June quarter, refinancing $3.3b of maturing issues, Fitch Ratings said.

ASB Bank issued a 10-year €750 million bond, and Bank of New Zealand and Westpac New Zealand both issued a seven-year €850m bond, Fitch said in its quarterly covered bond report.

All are rated AAA with a stable outlook from Fitch.

Fitch senior director Claire Heaton said there had been an 18-month covered bond hiatus - aside from a Kiwibank refinancing last year.

"A lot of that is to do with the fact that there is government liquidity support, such as (the Reserve Bank's) funding for lending programmes and similar programmes in Australia," Heaton told the Herald.

"One of the phenomena has been increased deposits (during Covid) as well, so the banks have not actually had to go and find the funding per se - they have not had to go and issue covered bonds in the intervening period," she said.

New Zealand's covered bond issuance started in 2010 in response to tightening liquidity conditions in the aftermath of the global financial crisis.

Heaton said covered bonds are more generally viewed as contingent funding - the type of funding you want to be available when other funding market become dislocated.

Covered bonds are debt securities backed by the cash flows from a specific pool of mortgages or other loans.

They differ from standard bonds as investors have specific recourse to the assets that secure, or cover, the bonds in the event of default, and retain a claim on the bank's residual assets.

David Tripe, professor of banking at Massey University, said market's willingness to absorb covered bonds had changed.

"The banks, individually, have got a little bit of spare capacity and, of course from their perspective it's a relatively as attractive, stable-ish longer term funding," he said.

The Reserve Bank imposes a limit on banks' issuance of covered bonds at 10 per cent of their total assets.

Fitch noted New Zealand house prices have continued to rise despite the Reserve Bank of New Zealand (RBNZ) and the government introducing more stringent policy restrictions to curb price growth.

However, New Zealand cover pools are well positioned to buffer any negative consequences of these changes, mainly through significant loan equity that well exceeds the RBNZ's current loan-to-value lending restrictions, Fitch said.

House prices in New Zealand nationally rose by 7.8 per cent in the June quarter and 22.8 per cent in the 12 months to June 2021, according to CoreLogic NZ.

Looking ahead, Fitch's Heaton said much of banks' funding requirements would depend on how the New Zealand housing market pans out.

"I think the level of debt funding for New Zealand is going to be somewhat predicated on how the housing market keeps evolving, as it is the main asset base for the New Zealand banks," she said.