Australia’s covered bond law and contractual practices boast relative strengths, according to Moody’s, relating to cover asset sales and collateral, but the agency cited some weaknesses. CBA meanwhile hit its targets with a Eu1.25bn issue last week, according to its head of funding.

In a sector comment published today (Tuesday), Moody’s noted that the Australian legal framework for covered bonds contains relatively few prescriptive requirements, but rather relies on issuers to create programme structures using a contractual framework.

“The result is that the regulatory regime assumes certain contracts will be in place, and these contracts are therefore, to some extent, a component of the regulatory framework,” the rating agency said. “There is no option for banks to issue covered bonds outside of the regulatory framework.”

The report is the latest of a series of reports in which Moody’s discusses common sets of legal features in different covered bond jurisdictions, ranking each legal feature as Strong, Average, or Weak relative to a benchmark average or typical covered bond framework. This enables readers to make meaningful comparisons across jurisdictions, the rating agency says.

Moody’s said that the strengths of the Australian framework and contractual practices include that the law contains no restrictions on asset sales by the guarantor in order to refinance maturing covered bonds, and contractually, restrictions are very limited.

Moody’s also noted that, contractually, only residential mortgages are typically included in cover pools, even though the law also allows the inclusion of commercial loans and does not place any limits on the proportion of commercial loans in the cover pool – which the rating agency cited as a relative legal weakness.

Another relative strength, Moody’s said, is that foreign assets are not permitted in cover pools.

However, Moody’s also cited some relatively weaker features.

The rating agency highlighted that mortgage loans above the LTV threshold may be included in the cover pool, as long as the cover pool – up to the minimum overcollateralisation (OC) of 3% – is satisfied by loan parts that fall within the LTV threshold. It said this could mean that OC above this level may contain high LTV loans from the outset – rather than just as a result of declining property values.

Moody’s also cited as weaknesses that there is only a nominal coverage test for assets in the cover pool backing the covered bonds, that there is no net present value (NPV) test for determining cover pool asset coverage relative to the covered bonds, and that the law does not require coverage tests for interest rate, currency or liquidity risks.

However, the rating agency noted that many of these weaknesses are mitigated by the contractual framework and by market practice.

Commonwealth Bank of Australia on Wednesday sold only the third euro benchmark covered bond from an Australian issuer this year, following a dual-tranche issue from itself in January and a Eu500m debut from Macquarie Bank in February.

Leads Barclays, CBA, Credit Suisse, and Deutsche launched the 10 year issue on Wednesday morning with initial price thoughts of the mid to high 20s, before moving to guidance of 22bp plus or minus 2bp with books at Eu2.5bn. The spread was then fixed at 20bp and the size at Eu1.25bn, with the book closing at Eu2.7bn.

“The deal went exceptionally well, with the book growing quickly to in excess of Eu2bn within two hours of launch, and ultimately peaking at around Eu2.7bn,” said Patrick Bryant, head of term funding at Commonwealth Bank of Australia.

Some syndicate officials away from the leads said the deal could comfortably have been priced tighter, given very supportive market conditions, estimating that the initial guidance level offered a new issue premium of around 10bp, substantially more than previous deals.

However, Bryant said the final price was in line with CBA’s expectations.

“The deal was launched with IPTs of the mid to high 20s to engender strong engagement from European real money investors, which is exactly what transpired,” he said. “There were minimal drops from the book as pricing guidance was revised.

“This meant we were able to both upsize the deal from Eu1bn to Eu1.25bn, and set final pricing at 20bp, which was in line with our pricing expectations at launch.”

The final spread offered a new issue premium of around 3bp, according to Bryant and CBA’s leads.

Some 125 accounts were in the book, with fund managers taking 35.5%, central banks and official institutions 24.5%, banks 22.5%, and insurance companies and pension funds 17.5%. Accounts in Germany and Australia were allocated 47.5%, Asia and the Middle East 12%, France 8%, the Benelux 8%, southern Europe 7%, the UK and Ireland 6%, Eastern Europe 4%, the Nordics 4%, and Switzerland 3.5%.

Bankers had noted that after the euro benchmarks from CBA and Macquarie at the start of the year, Australian issuers had focussed instead on the US dollar market, because of favourable arbitrage. Westpac and NAB sold US dollar-denominated benchmarks in February and March, respectively, while Australian issuers also sold a number of US dollar private placements, according to syndicate officials.

Bryant said CBA decided to enter the market in pre-summer and to issue in euros instead of an alternative currency after a substantial improvement in the tone of euro markets, following volatility in the wake of the UK’s vote to leave the EU on 23 June.

“This volatility had resulted in significantly diminished new covered deal-flow and investors were keen to participate in new primary issuance,” he said.

Bryant added that CBA’s funding plans for the rest of the financial year include “a number of further covered bonds”, with timing dependent upon market conditions and pricing relativities versus other funding options.

“We consider the covered market, particularly in euros, to be a deep and reliable source of funding,” he said.