Prospects for NZ covered bond market encouraging: Moody's
The signs are encouraging a covered bond market will develop in New Zealand, providing banks with a useful funding tool which may cost them less than their senior secured or unsecured debt, says the credit rating agency, Moody's Investors Service.
National Australia Bank-owned Bank of New Zealand was the first New Zealand bank to issue covered bonds, raising $425 million in June. The issue was rated “Aaa” by Moody's.
“Apart from achieving a longer-term funding of five and seven years, the cost of the covered bonds was about two-thirds of BNZ's senior unsecured debt,” Moody's says. BNZ raised a further $1.6 billion in November from a European covered bond issue.
Covered bonds are a method of pooling assets, such as mortgages, and selling them to third parties. They give investors recourse to both the issuer's total assets as well as a specified pool of mortgages and, although new to Australasia, have been common in Europe for more than 200 years.
Moody's says during the global financial crisis, when the securitisation (a similar way of pooling assets and selling them to third party investors) market froze, the covered bond market remained active and liquid.
Covered bonds also allow issuers with access to a different set of investors, the ratings agency says.
The Australian Prudential Regulation Authority has banned them because holders of such bonds rank ahead of depositors, something it deems undesirable.
However, New Zealand's Reserve Bank is actively encouraging such issues because it wants our banks to wean themselves off their dependence of very short-term offshore finance to fund their mortgage books.
Moody's says in Europe covered bonds are supported by “robust national laws” and the Reserve Bank of New Zealand is proposing to introduce legislation later in 2011.
“A robust legal framework helps to mitigate the primary risks we would take into account in our rating process.”
In the meantime, segregation of cover pool assets to protect investors' rights can be covered by contractual arrangements.