First government backed bond issue off the ground

In a plus for New Zealand investors BNZ has issued the first bank bonds guaranteed by the New Zealand government under the Wholesale Funding Guarantee Facility – domestically, rather than using the guarantee to raise money in offshore capital markets as originally envisaged.

BNZ currently has an AA credit rating from Standard & Poor’s (Australia) with a stable outlook, and Aa2 from Moody’s, while the New Zealand government is rated AAA and Aaa by S & P and Moody’s.

Now the government has essentially leased BNZ its AAA credit rating.

The government-guaranteed bond issue allows BNZ to raise money at a cheaper rate than it would otherwise be able to, by paying a lower yield on the bonds because they are less risky.

Because no banks had previously taken up the government guarantee, the charge for it was recently reduced from 140 basis points to 90 basis points – the point at which BNZ has pounced.

BNZ has now made the New Zealand government effectively a monoline bond insurer, or a triple-A-rated entity that participates in no other line of insurance business, but guarantees all interest and principal payments on a bond will be paid as scheduled.

There is a precedent for monoline bond insurers in New Zealand, but they’ve previously been US based ones – now the taxpayer is one.

The five-year bonds were issued at a margin of 80 basis points over the five-year swap mid-rate, with an issue yield of 4.775% p.a., payable semi-annually. The bonds have a maturity date of 20 February 2014.

The minimum subscription amount for the bonds was $500,000, ensuring the bonds were placed with institutional investors.

Likely investors include pension funds, other fund managers who want to balance their portfolios with lower risk, New Zealand fund managers who run fixed interest funds, charitable trusts – and the New Zealand Super Fund, which refused to confirm to NBR whether it had taken up the issue.

BNZ’s move is sure to be shortly replicated by other banks and financial institutions eligible for the guarantee, and also has implications for the current ratio of banks’ offshore vs local borrowing – currently 40/60.

This ratio is often used to explain why banks haven’t been passing on the full cuts in the official cash rate – because the banks’ total cost of borrowing, including overseas funds, is higher than the OCR. But if the banks are sourcing more of their funding from NZ than overseas, this rationale loses its weight.

And if the New Zealand Super Fund does start taking up this and other bond issues, the move could lead to an increase in liquidity in New Zealand capital markets.

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