BNZ first to use Govt funding guarantee

BNZ Bank was last month the first institution to make use of the Government's Wholesale Funding Guarantee, raising $180 million from domestic institutional investors in a bond issue.

But while the Reserve Bank is hopeful local banks will use the guarantee to raise funds on longer term overseas markets soon, BNZ says offshore investors probably prefer to do business with New Zealand banks' bigger Australian parents at the moment.

BNZ head of capital markets Patrick Mullins said the issue was priced at a margin of 80 basis points over the 5 year swap mid-rate, with an issue yield of 4.775 per cent. Being guaranteed, it carried the Government's AAA Standard & Poor's domestic debt rating and Moody's Aaa rating.

The guarantee fee was an additional 90 basis points taking the overall margin over swap to 170 basis points. That was roughly what banks would pay for five-year money on an unguaranteed basis. It was more expensive than a year ago, but less expensive than banks would have expected to pay at the end of last year.

In late January the fee structure for the guarantee was reduced to make it more competitive with Australia's in a bid to encourage local banks to raise longer term capital overseas. However Mullins said:

"They'd rather buy Westpac Australia or NAB Australia because they carry the Australian guarantee and all things being equal offshore investors will probably charge more to buy a New Zealand guaranteed asset than an Australian guaranteed asset because they view Australia as having the stronger credit."