The introduction of covered bond legislation in New Zealand will lead Fitch to give some, but limited, credit for statutory oversight over and above regular supervision, the rating agency said yesterday (Thursday), while Barclays analysts consider a deepening of lawmakers’ and regulators’ understanding of covered bonds as one of the bill’s most important achievements.

New Zealand parliament buildings, Wellington

Draft covered bond legislation was introduced in New Zealand’s parliament last Thursday (10 May), with a legal framework expected to come into effect this year alongside a six month transition period enabling registration of existing covered bonds programmes.

The legislation is called the Reserve Bank of New Zealand (Covered Bonds) Amendment Bill and, according to Barclays analysts, introduces a new chapter (sections 139A to 139J) into the Reserve Bank of New Zealand Act and amends a number of other statutory rules of the same act, particularly in relation to the statutory management of registered banks and the transfer of assets.

The bill includes provisions for the country’s central bank to maintain a register of banks’ covered bond programmes and for the independent monitoring of cover pools by an asset monitor. (Click here for previous coverage.)

Bill English, finance minister and the member of parliament in charge of the bill, said that a new legislative framework for the issuance of covered bonds by New Zealand registered banks will provide greater clarity for investors and depositors.

“Covered bonds can have significant benefits for registered banks as a long term source of relatively stable finance,” he added. “They also allow banks to diversify their funding by providing access to new investors and to a funding market that has been very resilient, even during the global financial crisis.

“The register will offer greater clarity for investors and depositors as to which assets are set aside for the benefit of covered bond holders.”

According to the governing National Party, the new framework is intended to come into effect this year. The bill can be found here.

Fitch yesterday said that the introduction of a legislative framework for New Zealand covered bonds is positive for investors. According to Fitch, the bill endorses the segregation of cover pool assets through an asset owning SPV, reinforces the legal certainty on their treatment in the event of an issuer becoming insolvent, and accommodates contractual arrangements within the existing rated covered bond programmes.

The rating agency said that provisions for the Reserve Bank to maintain a register of banks’ covered bond programmes reflects the central bank’s preference for a registration process rather than detailed monitoring of performance. No covered bond issuance will be allowed off an unregistered programme, according to Fitch.

The framework is not prescriptive compared with other covered bond issuing countries, added Fitch, for example leaving open what types of assets are eligible for the cover pool, and not specifying limits on loan-to-value ratios for mortgage loans or a minimum level of overcollateralisation.

Fitch’s analysis will therefore involve looking through the legal framework to the contractual provisions of New Zealand covered bond programmes on a case-by-case basis, it said.

“While we give some credit for statutory oversight in our covered bond analysis over and above the regular supervision of issuing banks, this credit will be limited in New Zealand in comparison with other jurisdictions, such as the UK or Germany, where the regulator takes a more active role in the oversight of issuers,” added Fitch.

Overall it expects the transition to the legal framework to be ratings neutral.

Barclays analysts said that the proposed covered bond bill strengthens the New Zealand covered bond product by stipulating registration and reporting requirements, which help ensure a minimum degree of standardisation, transparency and legal safety.

“Eventually, one of the most important achievements of the new covered bond bill is that it helped deepen the understanding of the covered bond product specifics at the level of lawmakers and banking regulators,” they added. “This is particularly important when it comes to the handling of covered bond programmes in distressed situations.”

A “rather light” direct supervisory involvement compared with statutory regimes of other countries is compensated, they said, by the mandatory assignment of a rather broad range of tasks and reporting duties to an independent asset monitor.

Introduction of legislation is unlikely to affect the secondary market for New Zealand covered bonds because it has been well anticipated, they added, but in the medium term could facilitate primary market access of New Zealand covered bond issuers.