New Zealand Covered Bonds

1 Who is the issuer?
  • Universal credit institution
  Comments: The four largest New Zealand banks issue all non-New Zealand Dollar bonds from the London Branch of a subsidiary which is 100% owned. The New Zealand bank unconditionally guarantees issuance by the London Branch. References below to the issuer will be taken to include both the subsidiary and the New Zealand bank.
2 Does the bondholder have recourse to the credit institution?
  • Yes, direct
3 Who owns the cover assets?
  • SPE which guarantees the covered bonds
  Comments: Assets acquired by the SPV using funds from an inter-company loan made by the issuing credit institution. Cash, bonds or swaps held by the SPV. Housing loans are subject to a clean sale while the associated mortgage securities, which give the SPV rights over the house and other security against the housing loan, are subject to an equitable assignment which becomes a clean sale when title to the mortgage security is perfected.
4 Is the issuer the originator of the assets?
  • Yes
  Comments: Not by legislation but programme documentation eligibility criteria require housing loans to be approved and originated by the issuer.
1 Are the bonds governed by a special covered bond Legislation?
  • Yes
  Comments: Part 5 of the Reserve Bank of New Zealand Act 1989 which came into effect on 10 December 2013.
2 What is the legal framework for bankruptcy of the issuer of covered bonds?
  • Specific legal framework superseding the general insolvency law
  Comments: The issuer is governed by general insolvency law, however, the Reserve Bank of New Zealand Act 1989 specifically states that the SPV, as covered bond guarantor, is seperate from the insolvency of the issuer.
1 What types of assets may be included in cover pools?
  • Exposures to public sector entities
  • Mortgage loans (Mortgage loans for the purpose of this question are taken to include guaranteed real-estate loans.)
  • Exposures to credit institutions
  Comments: Legislation does not specify assets, however, contractual programme documentation limits assets to Housing Loans and the Related Security, Substitution Assets and Authorised Investments (demand or time deposits, certificates of deposit, long-term debt obligations, short-term debt obligations, government and public securities).
2 What is the geographical scope for public sector assets?
  • Other
  Comments: Legislation does not specify assets, however, contractual programme documentation limits public sector debt to either: (1) NZ dollar denominated government and public securities provided that such investments have a remaining period to maturity of one year or less and which are rated at least P-1 by Moody's and F1+ by Fitch or their equivalents by two other internationally recognised rating agencies or (2) NZ dollar denominated and qualify for 0% risk weight under Standardised Approach.
3 What is the geographical scope for mortgage assets?
  • Domestic
  Comments: By contract, New Zealand residential morgage assets only.
4 Are regular covered bond specific disclosure requirements to the public mandatory?
  • No
  Comments: Not by Legislation, however, each issuer publishes monthly or quarterly investor reports on their website.
1 LTV is calculated using which valuation?[4]
  • Market value
  Comments: Latest valuation used at time of drawdown. In programme tests, LTV uses either latest valuation or lower of (i) latest valuation and (ii) indexed valuation, depending on the programme and series.
2 Are there any special LTV limits used solely for calculating collateralisation rates for the cover pool (if yes, specify)?
  • Residential      
    75%-80%
  Comments: Legislation does not specify, however, contractual programme documentation limits credit to not greater than either of 75% or 80%, depending on the programme, for the purposes of calculating the asset coverage test and amortisation test.
3 Do bondholders get the benefit of that portion of the loan which exceeds the LTV cap?
  • Yes
4a Is there an LTV cap which makes the entire loan ineligible to be put in the cover pool (if yes, specify)?
  • No
4b Is there an LTV cap which would require a loan to be removed from the cover pool?
  • No
5 Is there any additional LTV limit on a portfolio basis?
  • No
Exposure to market risk
1 Is exposure to market risk (e.g. interest rate, currency risks) required to be mitigated by law or contract?
  • Yes
  Comments: Legislation does not specify, however, contractual programme documentation requires interest rate
and currency risk to be mitigated.
2 What is the primary method for the mitigation of market risk?
  • Use of derivative hedge instruments
3 If the answer to the above question on market risk mitigation is “Use of derivative hedge instruments”, please specify whether those instruments are entered into:
  • By the time of issue of covered bonds or entry of asset in the cover pool
4 What type of coverage test is applied?
  • Nominal cover
  Comments: Legislation requires test at least annually to ensure value of the cover pool assets is greater than the outstanding covered bond. Contractual programme documentation requires an asset coverage test to be performed on a monthly or quarterly basis depending on the programme and following a notice to pay to the SPV an amortisation test on a monthly basis.
5 What is the frequency of coverage calculations?
  • Monthly
  • Quarterly
  Comments: Legislation does not specify, however,contractual programme documentation requires calculation on a monthly or quarterly basis depending on the programme.
6 What types of stress scenarios are applied?
  • Not relevant
  Comments: By contract, interest rate and cross currency risk is required to be hedged.
7 What is the frequency of stress test calculations?
  • Not relevant
Exposure to liquidity risk
8 Is exposure to liquidity risk required to be mitigated by law or contract?
  • Yes
  Comments: Legislation does not specify, however, contractual programme documentation does specify liquidity risk mitigants.
9 What is the primary method for the mitigation of liquidity risk on interest payments?
  • Contractual arrangements, e.g. a requirement to establish a reserve fund
  Comments: Legislation does not specify, however,contractual programme documentation requires reserve fund if issuer's rating falls below F1+ by Fitch or P-1 by Moody’s and an interest rate swap which is required to be entered into. Interest rate shortfall test required where interest rate swap is not in place.
10 What is the primary method for the mitigation of liquidity risk on principal payments?
  • Contractual arrangements, e.g. maturity extension or prematurity test
  Comments: Legislation does not specify, however,contractual programme documentation requires prematurity test for hard bullet and maturity extension of one year for soft bullet.
11 Is there any grace period in case of a breach of liquidity risk mitigants?
  • At the discretion of the relevant party
  Comments: Legislation does not specify, however,contractual programme documentation requires 30 days from notice requiring remedy (Reserve Fund) and that the servicer shall use all reasonable efforts to ensure any breach of the interest rate shortfall test is rectified by the next determination date (i.e one month).
12 What is the consequence of not fixing a breach of liquidity risk mitigants?
  • Event of default of the issuer
  Comments: Legislation does not specify, however, contractual programme documentation does.
Monitoring of exposures to market and liquidity risk
13 Who monitors the maintenance of coverage tests?
  • Supervisory authority
  • Rating agency
  • Trustee/cover pool monitor
  Comments: Legislation requires cover pool monitor (independant licensed auditor) to check calculation of tests at intervals of not more than 12 months and provide those reports to the Reserve Bank of New Zealand.
14 Are there any regular public reporting requirements for market and liquidity risk?
  • No
Overcollateralisation
15 Is mandatory minimum overcollateralisation required?
  • By contractual obligation
16 What is the level of minimum mandatory overcollateralisation?
  • 3% or 11% depending on programme
  Comments: Documentation sets minimum asset percentage at either 90% or 97% depending on programme.
17 If mandatory overcollateralisation is required, are the amounts above the minimum OC level protected?
  • Yes
  Comments: Between the contractual minimum and the contractual requirement amounts are protected but amounts in excess of the contractual (i.e. the ‘voluntary OC’) are not protected but instead serve as a management buffer for the issuer.
18 Is there any grace period in case of a breach of the coverage test?
  • Length of period:
  Comments: Legislation does not specify, however,contractual programme documentation allows for a breach of the coverage test to be resolved over two calculation dates.
19 What is the consequence of not fixing a breach of the coverage test?
  • Programme freeze (neither sale of assets nor new issuance allowed)
  • Event of default of the issuer
  • Redirection of cashflows
  Comments: By contract, issuer event of default and service of notice to pay to the covered bond guarantor SPV.
1 Is a special license required for the issuing of covered bonds?
  • No, but with additional requirements
  Comments: Only covered bond programmes registered with the Reserve Bank of New Zealand are permitted to issue covered bonds.
2 Are there special reporting duties of the covered bond issuer to the supervision authority concerning covered bonds and the cover pool, which go beyond the regular banking supervision?
  • Periodic reporting required
  • Reporting on demand for special occasions
3 What is the role of the banking supervision regarding covered bonds?
  • No special role
4 Is there a special role of banking supervision in crisis regarding covered bonds?
  • No specific role
5 Is there a cover pool monitor independent from the issuer?
  • Yes
6 If there is an independent cover pool monitor, what are its duties?
  • Verification of coverage tests
  • Other, please specify:      
    Cover pool monitor checks arithmatic accuracy of the asset coverage test and amortisation test on an annual basis, checks the asset register of cover pool assets has been updated accurately and in a timely manner and verifies issuer has satisfactory procedures in place.
1 Do covered bonds automatically accelerate when the credit institution goes insolvent?
  • No
2 What is the cover pool?
  • All assets on the cover register
  • All assets transferred to SPE
  Comments: Cash, bonds or swaps held by the SPV. Housing loans are subject to a clean sale while the associated mortgage securities, which give the SPV rights over the house and other security against the housing loan, are subject to an equitable assignment which becomes a clean sale when title to the mortgage security is perfected.
3 How are the covered bondholders protected against claims from other creditors in case of insolvency of the issuer?
  • Transfer of assets to an SPE
4 Is there recourse to the credit institution’s insolvency estate upon a cover pool default?
  • Yes, pari passu with unsecured creditors
5 Are there provisions that require derivatives to continue in case of insolvency of the credit institution?
  • Yes
  Comments: Legislation does not specify, however, contractual programme documentation has in place interest rate swaps and covered bond swaps documented to survive the insolvency of the issuer.
6 If derivatives are permitted in the cover pool, what is their ranking?
  • Senior to covered bond holders
  • Pari passu to covered bond holders
  Comments: By contract, the interest rate swap is senior and covered bond cross currency swap is pari passu.
1 Does the covered bond fulfil the criteria of UCITS 52(4)?
  • No
  Comments: New Zealand credit institutions are not EEA entities and therefore cannot do so.
2 For further information regarding the compliance to the criteria of Article 129 of the Capital Requirements Regulation (CRR), please see the following links: http://ecbc.hypo.org/Content/default.asp?PageID=504#position https://www.coveredbondlabel.com
3 Are listed covered bonds eligible in repo transactions with the national central bank?
  • Yes
  Comments: Being listed is not relevant. New Zealand Dollar denominated covered bonds eligible, see Reserve Bank of New Zealand website for eligible securities: http://www.rbnz.govt.nz/.
4 Are there any special investment regulations regarding covered bonds?
  • No
1 Link to National Association representing covered bond interests
  • Association


2 Link to national regulators and supervisors
  • List
3 Fact Book Country Chapter
  • Chapter
 
4 Hypostat Country Chapter
  • Chapter

Global comments for this chapter

New Zealand covered bonds are issued by the following banking groups: ANZ Bank New Zealand Limited, ASB Bank Limited, Bank of New Zealand, Westpac New Zealand Limited, Kiwibank Limited.