RBA’s Debelle sees covered levels as symptomatic of ‘global repricing’
Reserve Bank of Australia assistant governor, financial markets, Guy Debelle noted that a step increase in funding costs for Australian banks had accompanied their entrance into the covered bond market, in a speech today (Tuesday) discussing Europe’s effects on Australian financial markets.
Guy Debelle, RBA
Debelle said that while Australian banks had sold covered bonds at “markedly wider” spreads than senior unsecured issuance in mid-2011 – despite covered bonds being ranked senior to the unsecured debt – the high costs paid on a first wave of Australian covered bonds was broadly in line with covered bonds issued by banks in other jurisdictions where costs had also risen.
He said that this “sizeable step up” in the cost of issuance was the result of investors demanding much higher compensation for bank credit risk than in mid-2011, noting that this had probably occurred in the last quarter of 2011 rather than amid the new supply this year, but that a lack of issuance at the end of last year had made it more difficult to observe.
“This global repricing of bank debt has clearly affected the Australian banks’ wholesale funding costs,” said Debelle.
When Commonwealth Bank of Australia launched the first domestic Australian covered bond in mid-January, a A$3.5bn (Eu2.85bn) dual tranche five year issue, it paid 175bp over mid-swaps, and Westpac followed a week later with a A$3.1bn five year covered bond at 165bp over. Bankers noted at the time that these were repricing Australian bank debt wider, but Debelle noted that spreads have since tightened.
“In the past few days, there has been a sizeable narrowing of spreads in the secondary market on the domestically issued covered bonds, to around 140 [basis] points over swap[s],” he said. “This narrowing in bank credit spreads was confirmed by the unsecured issuance last week.”
Last week National Australia Bank sold the first senior unsecured Australian deal of the year, a A$1.5bn five year issue priced at 185bp over, which was tighter than some market participants had been expecting.
The speech can be found via this link:
