Bank of New Zealand (BNZ) has got the ball rolling with the country’s first covered bond scheme, with $425 million bonds sold to institutional investors.

Covered bonds provide security on a pool of prime residential mortgages and have been issued by BNZ to help it meet the Reserve Bank’s new liquidity rules, requiring more funds to be raised locally.

The bonds are issued under a cover pool of residential mortgages that acts like a guarantee, providing investors extra security if the issuer defaults on a payment.

BNZ treasurer Neil Bradley said the bank had received strong support from domestic investors and priced NZ$425 million of five and seven-year bonds, comprising NZ$175 million five-year bonds and NZ$250 million seven-year bonds, maturing June 2015 and 2017 respectively.

BNZ is the first bank to issue capital bonds in Australasia after the Reserve Bank gave approval in its latest Financial Stability Report.

The approval came with the requirement for the covered bonds to be capped at 5% of the bank’s total assets.

With assets of $69 billion, this could see BNZ raise up to $3 billion under the programme, however the bank said it would work to its own cap of 1%.

BNZ said the strength of the mortgage pool is worth $520 million.

Last week the covered bonds were given a provisional, long-term (P) Aaa rating by credit rating agency Moody's, which said the programme was positive for New Zealand’s banking system as it widened the wholesale funding available