NZ banks now have $20b of assets, including 143,627 home loans, guaranteeing covered bonds

By Gareth Vaughan

A new report from credit rating agency Fitch puts the spotlight on the NZ$13.234 billion worth of covered bonds New Zealand banks have issued.

The report shows the five banks that have issued covered bonds now have a total of $20.459 billion worth of assets in cover pools guaranteeing them. This includes 143,627 home loans.

Fitch also confirms the euro as the dominant currency the bonds have been issued in since BNZ became the first New Zealand bank to issue covered bonds in 2010. Kiwibank has the highest weighted average loan-to-value ratio on the mortgages used in cover pools, with New Zealand banks' covered bonds to start maturing from next year.

Coveredbonds are dual-recourse securities, issued for terms of several years, through which bondholders have both an unsecured claim on the issuing bank (should it default on the bonds), plus a secured interest over a specific pool of ring fenced assets called the cover pool.

Due to their dual recourse security, coveredbonds generally attract the highest possible AAA credit rating (often higher than the bank issuer's own rating), and are therefore a cheaper form of funding for banks than standard bank bonds.

A bank can use up to 10% of its total assets as security for coveredbonds, the Reserve Bank says.

This is an abridged version of this article. The full version was published in our email for paying subscribers. See here for more details and how to subscribe.