Roadshow mandates for NAB and CBA suggest the first Australian covered bonds could emerge soon, after legislation was granted royal assent and with APRA not seen as an obstacle. Pricing for the new jurisdiction – in euros and US dollars – is therefore being considered.

NAB said that a debut Rule 144A and/or Reg S covered bond could follow investor meetings in Europe and the US beginning on Monday, 31 October, raising the prospect of the first Australian covered bond coming not in euros, but US dollars. Deutsche Bank and JP Morgan are understood to have been mandated to work with NAB on the roadshow.

Commonwealth Bank building, Sydney

CBA will begin its marketing a week later, on 7 November, and has mandated BNP Paribas and Morgan Stanley to work with Commonwealth Bank on meetings in Europe and the US.

Coming only two days after the Banking Amendment (Covered Bonds) Bill 2011 was granted royal assent, on Monday, the mandates shows the Australians moving towards covered bond issuance at an unprecedented pace.

When the bill was introduced into parliament by Treasurer Wayne Swan, a Treasury official suggested that legislation could be in place by Christmas, but ultimately it took only just over a month, with the House of Representatives and Senate passing the bill on two subsequent days last week.

“I think from first reading to speech to Royal Assent, it would have to be one of the shorter timings on any legislation that has been passed, which is one of the benefits of having bi-partisan support,” said Andrew Jinks, a partner in Clayton Utz’s banking and financial services team.

No substantive changes to the bill were made during its passage through parliament.

Reserve Bank of Australia assistant governor (financial markets) Guy Debelle noted in a speech on bank funding today that whereas unsecured issuance by euro area banks has been at relatively low levels, secured issuance in the form of covered bonds has been relatively robust.

“The Australian Parliament last week passed legislation permitting the issuance of covered bonds by Australian banks,” he said. “As a result, one might expect to see some covered bond issuance by local banks in the near future, given the apparent preference of global investors for this product in the current environment.”

To complete Australia’s covered bond framework, the Australian Prudential Regulation Authority (APRA) has to draw up related regulations and guidelines, and these are not expected to come out until at least early next year. However, market participants have said they understand that some of the regulations are not prerequisites for issuance and that APRA could grant issuers waivers on a case by case basis where they could be in breach of existing rules that it plans to amend.

With rating agency dealings not expected to present any major hurdles, “it’s a question of all systems go”, according to one market participant.

Jennifer Wu, vice president and senior credit officer at Moody’s, said that while she understands banks to be at various stages of readiness, market conditions could play a more decisive factor in determining the timing of the first Australian issue.

“Especially when it’s quite clear that people are looking to issue offshore, possibly in the European market,” she said, “and given the volatility present in Europe at the moment.

“There is a high possibility that issuers might look to the US market given that it is a more open market at the moment. Pre-GFC [global financial crisis] there was some quite bulky RMBS issuance into the US market so investors there are familiar with the Aussie resi market.”

US-based covered bond bankers said that they expect the US dollar covered bond market to be open and receptive to supply from Australian issuers, with the strength of the country’s top banks and other features such as low loan-to-value ratios and fairly high but stable real estate prices cited as likely to appeal to investors.

“They would fall into the haves category as opposed to the have-nots,” said one banker in relation to market access.

He said that while Australian covered bonds are unlikely to command the type of pricing levels achieved by Canadian supply, higher quality Nordic covered bond supply would provide the most direct comparables for pricing.

“The first deals will involve some price discovery, but people will start in the same zip code,” he said. “There are some data points in Europe based on the New Zealand branches in euros, and the Aussies are likely to price tighter than their respective New Zealand counterparts.”

Another banker said that he expects Australian issuance to be very well accepted in the US given that Australia is “a great region”. He also said that while it would not be priced as tight as Canadian covered bonds given the government backing for most Canadian mortgage collateral, Australian issuers could obtain pricing at levels approaching spreads for Nordic covered bonds.

A Europe-based syndicate official said that Australian issuers will be able to tap the euro and dollar markets, but that it is important that anticipated supply be coordinated.

“I’m pretty sure they all want to do the same thing at the same time,” he said, “which creates the wrong impression. We need to spread the forces, and know who wants to do what.”

He appeared sceptical that Australian covered bonds would obtain pricing in the spread area for high quality Nordic names, but said that there are a wide range of perceptions as to pricing.

According to the syndicate banker, in the senior unsecured market there is a 40bp spread differential between Australian and Kiwi issuers, while in the euro covered bond market there was a large gap between pricing references, such as a re-offer spread of 58bp over for a Eu2bn five year DnB Nor Boligkreditt issue from 11 October and 95bp over for a Eu500m five year ANZ National (Int’l) trade from 13 October. [Article continues beneath poll.]

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And while there was not such a large differential between trading levels for Australian and top Nordic senior unsecured debt “we will see how that pans out in covered bonds”, he said. Considerations about whether the Australian mortgage market represents a bubble or not would also inform pricing discussions, he added.

The dollar and euro markets could also imply different pricing levels for Australian covered bonds given that relative pricing for other jurisdictions – Canadians, Nordics and French, for example – have varied from one currency to another.

Indicative Australian covered bond structure

Source: CBA, September 2011