Westpac priced a Eu750m five year issue yesterday (Tuesday), the tightest New Zealand euro covered bond and the first under the dedicated legislation, and an official at the issuer said it was worth waiting to issue under the legal framework.

The deal is Westpac New Zealand’s second euro covered bond, coming three years after it made its debut with a Eu1bn five year issue in June 2011. That was issued on a contractual basis, as were all subsequent New Zealand deals prior to yesterday’s for Westpac, which was issued under a covered bond legal framework effective in December, two years after the Reserve Bank of New Zealand (RBNZ) published proposals for legislation.

Jim Reardon, treasurer at Westpac New Zealand, said that the issuer had deliberately abstained from tapping the benchmark covered bond market for some time as investor engagement over the past year had led it to believe that it would meet with a better response if it waited to issue under the legislation.

“We’re very pleased with the result,” he told The Covered Bond Report. “Out of the 85 investors in the book, almost half were either new to Westpac New Zealand or new to New Zealand from what we can gather, which indicates that there was stronger participation and as a result we got much more pricing tension.”

Leads Barclays, UBS and Westpac priced the deal at 20bp over mid-swaps, the tight end of guidance of the 22bp over area plus/minus 2bp, which followed initial price thoughts of the 25bp over area.

At 20bp over, Westpac NZ came some 5bp-6bp wide of its parent, which compares with a 20bp-25bp pricing differential some 18 months ago, according to Reardon, although he acknowledged that a friendly market environment and overall spread compression also played a part in this development.

“We’re pretty happy that we’re pricing that tight, although I won’t truly be happy until we’re pricing flat,” he added.

Armin Peter, head of EMEA debt capital markets syndicate at UBS, said that the deal drew some Eu1.4bn of demand, of which Eu1.25bn was good at re-offer, and that this enabled the size of the transaction to be increased from that initially targeted.

He highlighted a good level of granularity in the order book, noting that discussions about the LCR-eligibility of non-EAA covered bonds may have contributed to luring investors, but that a law-based covered bond paying a 20bp spread for five years, “especially when it’s New Zealand”, was also a compelling offer.

“It’s difficult to say whether the covered bond legislation made a pricing difference but it seems likely judging from the feedback and the order book, and the ability to move the spread so tight and not lose much demand,” he said.

A covered bond banker away from the deal said that Westpac had obtained “a fantastic result”, seeing the deal as having been priced through the ASB Bank curve, with this having performed on the back of Westpac’s deal.

“And Eu750m isn’t the typical New Zealand deal size, so that indicates that appetite was so enormous they couldn’t resist,” he said.

Fund managers were allocated 36%, banks 25%, central banks and official institutions 19%, insurance companies and pension funds 11%, and private banks 9%.

Germany and Austria took 34%, the Benelux 19%, the UK 15%, Switzerland 10%, Asia 8%, France 3%, and others 11%.

At 20bp over, the deal is the tightest ever euro New Zealand covered bond. It also came with the lowest coupon for a New Zealand issue, the lowest having previously been 1.5% — Westpac’s pays a 0.875% coupon.

Peter said that it was priced flat to curve-adjusted secondary market levels, based on ANZ New Zealand 1.5% October 2018s trading at 14bp over, bid, and ASB Bank 1.5% November 2018s bid at 21bp over before the Westpac deal was announced.

Westpac is the only New Zealand issuer to have a covered bond programme registered with RNBZ, having entered the central bank’s registry in early April.

Reardon said that the registration process took around three months and was relatively straightforward.

“The legislation was very consistent with the structures of the programmes that had already been set up, so we didn’t need to change the programme,” he said. “Being first through the process meant it was a bit difficult in that that RBNZ was also dealing with certain things for the first time, but from my perspective the process wasn’t too bad.”

He said that part of the registration process involved ensuring that outstanding bonds complied with the legislation, which provides for grandfathering of conforming issuance.