Covered bonds in the funding mix

With limited issuance needs and generally positive issuance conditions, covered bonds could have slipped off the agenda for New Zealand banks. In fact, the product remains a crucial means of accessing international liquidity.

CRAIG With the kinds of tailwinds we have discussed it might be assumed that the New Zealand banks do not need to rely on covered bonds. Are covered-bond transactions as-sessed simply on the basis of relative value?

VOLPICELLA The major banks have been able to achieve their funding tasks without need-ing to issue covered bonds – even though the product has a pricing and a tenor benefit, as well as being more resilient in tight markets.

If an issuer is able to fulfil its funding requirement while preserving covered-bond capacity, this provides some protection against adverse events like geopolitical or macroeconomic risks.

DELL ANZ recently had two New Zealand covered-bond maturities so we took the oppor-tunity to issue into the euro market in 2023. Last year, shortening of duration was very much a theme for euro covered bonds so we printed a three-year transaction, for the first time. The investor response was astounding, with the final book more than seven times oversubscribed.

It was also important to maintain a presence in the market to ensure ongoing funding diver-sification. But in this case, as we haven’t needed to issue as much in general during the last few years, we received an exceptional reception from investors.

ZHANG We continue to use covered bonds as a core part of our funding mix and I agree that presence in this market is important. This year, we were awarded the ECBC [European Covered Bond Council] covered bond label, which will be handy for our investors.

CRAIG Bertrand, you have mentioned that in 2023 a long-dated euro covered bond meant 5-6 year tenor while this year some issuers have brought covered bonds at 15 years. Pre-sumably 15 years is an outlier – but what kind of duration can most issuers achieve?

TAMARELLE Yes, 15 years is an outlier. The sweet spot is around seven years, compared with around 4.5 years in 2023. Investor appetite is very much linked to the market’s percep-tion of the outcome of central bank monetary policy. Investors are willing to accept the yield on offer provided they have some certainty on future rate cuts.

We have also experienced a shift in the composition of the covered-bond investor base this year. More investors are coming into books, including much more support from asset man-agers. For the first time, we are seeing hedge funds getting involved – implying that there is good value in covered bonds in global markets.

This is because 2023 was a challenging year in euro covered bonds. There was underper-formance and a significant widening of credit spreads. However, we are now back at levels not seen in around 10-15 years.

Bank of Queensland (BOQ) issued a debut euro soft-bullet covered bond in May. This had an orderbook north of €2 billion (US$2.1 billion), which is roughly twice the average order-book BOQ might achieve in Europe. This demonstrates the extent to which investors are seeking diversification in their portfolios.

Australian issuers, even if they are considered a low beta name in senior or tier-two, are providing a pick-up – and investor feedback is that they see good value here, with a scarcity element. There have only been three transactions since the start of the year and this is not sufficient to satiate the demand.

Currently, European investors can only frequently buy French covered bonds or German pfandbriefe. Investor feedback is that their covered-bond options are very limited and they would like to diversify their portfolios.

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