VOLPICELLA Ensuring we are regularly accessing funding markets and that we are visible and viable in these markets is something we have all focused on. As we expand our funding programmes and profiles across the globe, the investment banks that we bring onto our transactions also support these deals in secondary markets, further promoting liquidity.

In New Zealand, liquidity will always be a reflection of the size of our market. It also reflects the fact that, even when we are issuing a more highly rated and better product offshore, the price will reflect the liquidity.

LUCAS Turnover is certainly a challenge. As Guy says, we need to ensure we are visible and relevant across markets and we are also cognisant of keeping investors up to date. On the supply side, New Zealand banks tend to issue in smaller volume than our offshore peers and this can be a challenge. We can manage this through balancing transaction sizes with less frequent issuance.

LUCAS We were staring into a situation in which a large part of the market was potentially going to be blocked. Thinking about supranational, sovereign and agency Kauri issuance, for example, there are other, international, investors in these bonds. But it would have been likely that these issuers would have gone to other markets instead of New Zealand. Diversi-ty in any market is key, as it gives confidence to investors that there are different types of buyers that will pick up paper they want to sell.

VOLPICELLA Given New Zealand’s size, it is not ideal to have too many distinctions between local policies and the rest of the world. Ideally, we are aligned with the rest of the world.

DELL It benefits, from a ‘New Zealand Inc’ perspective, to have as much depth of capital mar-kets as possible, across the board. This is not just regulatory but a broader consideration about the functioning of the economy.

LUCAS This feeds into other areas, such as derivatives. A larger bond market, which includes international issuers, creates cross-currency swap demand, which partially offsets the cost for domestic issuers when they access offshore markets.

ROSS We should be frank about liquidity. The European market is not particularly liquid even for more frequent and core issuers. For instance, many covered bonds don’t trade at all. This is the challenge for a lot of investors.

New Zealand has a well-regulated economy and well-rated banks but a mid-size fund man-ager in France or Germany with one or two bank analysts can’t get involved in every deal. This will not be news to anyone but it is the reality that a smaller group of investors is look-ing at New Zealand paper than many other regions. By definition, this means less liquidity and therefore wider pricing.
 
When we speak with investors in Europe, we ask what issuers can do to improve their pro-file, story and liquidity. The feedback is often that New Zealand and Australian banks have some of the best marketing programmes out there. The consistency with which New Zea-land issuers visit Europe, the US and Asia is commendable. As far as it can, this work miti-gates the tyranny of distance and the fact that the New Zealand banks have smaller bal-ance sheets than many of the banks in Europe.

VOLPICELLA Liquidity in the New Zealand market simply reflects the relative size of the market – but it feeds into price.

TAMARELLE As one can imagine, it is costly to maintain a credit line and investors would really like to receive a visit every 12-18 months to justify doing so. As Frazer has mentioned, very low coupon paper never trades. The problem at the moment is that the covered-bond index is extremely wide. However, if an issuer comes to market with an on-the-run coupon, it will trade much more tightly compared to low coupon paper.

This makes it very difficult to pinpoint the exact value of a New Zealand covered bond. The only way we can derive value at the moment is to use the most recent convention.

We are having lots of discussions with investors to gauge appetite for the asset class, be-cause it is the only way we can really ascertain appetite as well as pricing expectations. In-vestors say they need to trade with a pick-up but they all know the pick-up they are seeing in the covered-bond index is much too wide. This brings about a highly unusual situation where primary deals can price the secondary market tighter – due to the lack of liquidity.