BNZ attracted almost Eu1.7bn of orders for a Eu500m long three year covered bond yesterday (Monday), two weeks after holding off on a potential five year transaction. A BNZ official cited heavy Australian supply as a factor in its wait, which he said ultimately produced a great outcome.

“BNZ went fantastically well,” said a syndicate official at one of the leads, who said that it tightened by about 7bp this morning.

“It performed better initially than any other deal this year,” he added.

DZ Bank, JP Morgan, NAB, Natixis, RBS and UniCredit priced the transaction at 113bp over mid-swaps for the May 2015 issue, after having tightened guidance to 115bp-120bp from initial guidance of the 125bp over area.

“It was a very successful deal for the BNZ,” Mahes Hettige, head of balance sheet management at BNZ, told The Covered Bond Report. “We had very strong investor support, with a granular book including 115 accounts and nearly Eu1.7bn of orders.

“We only had a Eu500m requirement so it was a no-grow. We had key European investors involved and very strong distribution right across the board.”

BNZ was said to have tested appetite for a five year euro benchmark at 125bp-130bp over mid-swaps two weeks ago, but no transaction materialised at that time.

“That was exploratory work, looking at what investors wanted and gaining their feedback,” said Hettige. “There had been a large supply from Australian banks at that time.”

In the previous fortnight Commonwealth Bank of Australia, BNZ parent National Australia Bank and ANZ had opened the euro market with the first Australian covered bonds.

“Obviously this is a shorter dated deal,” added Hettige, “but it’s a great outcome and worked for the investors and BNZ.”

According to the lead syndicate official, the pricing was based on secondaries as well as where the issuer had thought about coming in the five year maturity. He put Westpac NZ June 2016 and ANZ National October 2016 issues at around 105bp-108bp over on the bid side, respectively.

“We wanted to go at a level where we knew there would be a successful deal,” he said.

He noted that the issuer had earlier been looking at a five year but “we had recommended that the three year was best, and I think we were vindicated”.

“Compared to other jurisdictions you can buy, there needs to be some sort of compelling reason to buy,” he said, adding that the scarcity of supply in the three year tenor had contributed to the trade’s success.

A syndicate banker away from the deal said that the curve between a long three year to a five year amounted to at least 15bp – the approximate differential between the May 2015’s 113bp pricing and the 125bp-130bp level floated for a five year – if not more, but that it is difficult to be definitive about spreads for New Zealand covered bonds.

A syndicate official away from the leads said that the 125bp over area was a “wild” starting point for BNZ’s deal, and that even the final spread of 113bp over looked generous. He suggested that, by way of comparison, a new three year Australian benchmark would be priced at 70bp-75bp over mid-swaps.

Some market participants, questioning why the deal had not materialised earlier, suggested that a lack of covered bond legislation in New Zealand could have influenced what BNZ could achieve. But Hettige played down any impact this might have had on the issuer’s plans. The Reserve Bank of New Zealand has launched a consultation on a planned law.

“The Reserve Bank has a proposal in front of banks and clearly the intention is it will grandfather existing deals,” said Hettige, “so it was not a major issue.

Fund managers were allocated 59% of the issue, banks 23%, insurance companies and pension funds 5%, corporates 4%, central banks 3%, and others 6%. An analyst suggested that what he described as “relatively low demand” from banks was the result of BNZ’s covered bonds being neither ECB eligible nor CRD compliant.

Germany and Austria took 57%, Scandinavia 14%, the UK 9%, Switzerland 5%, France 5%, Spain 5%, and others 5%.

Hettige said that the bank has no immediate plans to return to the covered bond market, being in a strong position due partly to a growing share of retail deposits. However, he said that BNZ is keen to maintain its presence in the market going forward.