There was some relief for investors in the third quarter as deal flow picked up – from bank and corporate names, and in retail and wholesale format. The headline trade was Westpac’s return to the senior market. This was the first senior transaction in 10 months from a major bank in New Zealand and, at NZ$1.1 billion (US$686.7 million), the largest-ever local credit deal (see table).

Ollie Williams, Westpac New Zealand’s Auckland-based treasurer, tells KangaNews deal size provided reassurance that regulatory changes have not fundamentally weakened demand for bank securities. “Reopening the Kiwi senior domestic market after a fairly lengthy pause in issuance was a positive development for us and the wider market following the RBNZ [Reserve Bank of New Zealand]’s latest liquidity policy consultations,” he says.

In December last year, the RBNZ published the response to the second consultation paper under its liquidity policy review, which set out tightening measures on the eligibility criteria for liquid assets in the domestic market. Level one liquid assets include reserve bank bills and local government bonds and bills, while level two assets include bonds issued by the New Zealand Local Government Funding Agency and highly-rated Kauri bonds.

There was a question mark over where a narrower list of suitable liquid assets would leave banks’ demand for each others’ paper. But the Westpac deal outcome suggests the regulatory conclusion did not significantly reduce the scale of demand for senior bank bonds.

Volume was supported by pent-up demand, deal sources say, and issuers are getting into the market as lower rates start to bed in. The RBNZ cut the official cash rate (OCR) by 25 basis points in August and a further 50 basis points in October, to 4.75 per cent.

New Zealand market participants suggest several reasons why the first half of this year was relatively quiet. One of the main reasons is that banks had been keeping investor powder dry for an expected upsurge in additional capital requirements. Even including the jumbo Westpac deal, senior bank issuance in New Zealand was just NZ$2.2 billion in 2024 to mid-October – less than half the total from the preceding two years.

A pull-back in supply of senior notes should help clear the way for New Zealand banks to embark on a programme of building their capital stacks that market users expect will entail raising approximately NZ$9-10 billion of new additional tier-one (AT1) and tier-two notes by 2028.

The requirements stem from the RBNZ’s December 2019 capital review decisions, which began to come into force in October 2021. By the end of the transition phase in 2028, domestic systemically important banks will be required to have a 4.5 per cent common equity capital ratio, a tier-one ratio of up to 2.5 per cent and a tier-two ratio of 2 per cent. They must have a total capital ratio of 18 per cent by 2028, including a prudential capital buffer of at least 9 per cent.

Liam Cleary, head of funding, balance sheet and securitisation at Westpac in Auckland, highlights the dearth of senior bank issuance in New Zealand over the last 10 months. With a reasonable number of bonds maturing over that time, he says, the market was well-primed for fresh issuance.

The banking sector was able to dial back its use of the domestic capital market in large part because its funding has been buoyed by positive deposit flows coinciding with low credit growth in a struggling economy. This has also curtailed corporate funding needs.

Where corporates have needed to borrow, market users say bank lending has won some market share back off the bond market. Supply from the property and retirement sectors has been limited, for example, as issuers have been able to obtain funding from other sources, notably bank debt, at appealing levels.

There has also been a surge in New Zealand corporate supply into the Australian dollar market since 2022 (see chart 2). Names to have made use of an increasingly liquid Australian dollar market in recent times include Air New Zealand in May 2022, Transpower New Zealand in November 2022 and June 2023, and Auckland International Airport in November 2023 and June 2024.

Meanwhile, the local banks have tapped global core markets for senior issuance: ANZ printed a euro benchmark in January while Westpac visited the US 144A market a month later. New Zealand market participants say pricing offshore has held at levels that are the closest they have been to New Zealand dollars for quite some time.

“In many cases, offshore issuance has remained open and available to New Zealand, including the four majors,” says John Vanderbom, director, capital markets at BNZ in Auckland. “Banks can raise NZ$1 billion or more from US dollars and euros, which is a big chunk of issuance.”

Mat Carter, executive director and head of debt capital markets and syndicate at Westpac in Auckland, agrees that quieter domestic issuance periods have been exacerbated by strong global markets.

“US dollars and euros have been particularly strong for the banks and this is why some of the major banks have looked elsewhere,” he says. “The domestic market is typically a safe haven, but when offshore markets have strong relative value, issuers rightly take the opportunity.”

Credit supply has been a topic of conversation in New Zealand for many years, so it is understandable that the sluggish pipeline of 2024 would be a talking point. While it follows two relatively positive years, the reality is that H1 deal flow does not even match up to the pre-pandemic period – and this is in an environment in which demand should be growing thanks to the emergence of KiwiSaver funds.

Some market users are confident that 2024 is an outlier, with normal service to be resumed in due course. In fact, the deal flow of September-October might already represent a rebound. Geoff Martin, head of funding at Kiwibank in Wellington, tells KangaNews that this year “feels like an anomaly” and that he expects supply to pick up.

“I can’t recall a year in which the first major-bank senior deal in the domestic market came at the end of September,” Martin suggests. “Banks are now having to refinance their funding-for-lending maturities and, as the economy improves, issuance should only increase.”

The banking complex is likely to be the focal point of the credit supply and demand discussion in New Zealand for the foreseeable future. Repaying funds sourced from the RBNZ during the pandemic stimulus period will likely provide a solid baseline of senior issuance needs. But the accumulation of additional capital is where market users say capacity will be tested.

The financial institution deal pipeline is already filling, New Zealand intermediaries say, as local banks turn their attention to satisfying their recently increased additional capital needs. ANZ kicked things off with a NZ$275 million AT1 issue on 8 March. It would take five months for the next AT1 transaction – from Bank of New Zealand (BNZ) – to price. This was a NZ$450 million print on 9 August. Westpac then followed up by raising NZ$375 million in the same format less than a month later and Kiwibank priced an upsized NZ$275 million of AT1 securities on 17 October.

This represents a record level of AT1 supply in New Zealand – but not of additional capital overall, as the tier-two market has been almost silent this year (see chart 3).

Even so, with a slew of AT1 deals having already priced and more expected, attention has turned to capacity in the segment. Ironically, the fact that AT1 is a tougher fit with most institutional mandates means the most plausible source of significant new credit supply may not find sufficient demand to meet the banking sector’s collective need.

Mike Faville, director, capital markets at BNZ in Auckland, confirms the common expectation that the big four will need around NZ$9 billion of additional capital issuance by July 2028 as a result of the RBNZ’s update. But another source says the retail-heavy AT1 market may not be able to accommodate more than NZ$4 billion.

Indeed, one New Zealand bank has pre-empted local capacity concerns by pioneering a new option for AT1 issuance. On 11 September, ANZ raised A$800 million (US$549 million) of AT1 capital using a holding company structure, marking the first time a New Zealand bank has priced a perpetual additional capital deal in a foreign currency (see box). The deal attracted A$3.7 billion of demand. The reason a boost to AT1 issuance is likely not to be a significant part of a solution to the lack of credit diversity in the New Zealand market is that AT1 is defined as a type of equity security and must follow the imputation that banks adopt for their ordinary equity.

Imputation materially limits non-tax-paying investors from participating in trades – a group that includes at least some institutional funds. Ever since the RBNZ’s 2018 capital review, there has been a degree of concern about the depth of the domestic AT1 market. Individual deal volumes have remained between NZ$275 million and NZ$500 million.

“The expectation is still that market capacity for additional capital is well below NZ$10 billion,” Faville says. “This has been the defining characteristic of additional capital requirements here such that, once the market caught on to the volume needed, there was almost a race to issue. Funders didn’t want the place at the back of the queue.”

Others are more optimistic about capacity. “The depth of the domestic AT1 market has been good this year,” says Shaun Roberts, director and head of debt capital markets at Forsyth Barr in Wellington. He notes that the NZ$1.1 billion raised in AT1 format between three majors so far this year almost doubles the amount of AT1 paper previously outstanding.

Market users say domestic AT1 deals that have priced in recent months have had encouraging responses. And the ANZ holdco trade demonstrating that there are alternatives should further ease concern about capacity overall, according to Penny Dell, treasurer at ANZ in Wellington.

While they have not done so to date, banks will also have to issue capital in tier-two format to meet RBNZ requirements. Kiwibank, for instance, expects to be a semi-regular issuer in the domestic market in tier-two and AT1 format. Volumes raised in recent domestic AT1 deals have been positive but all the transactions priced at a time when interest rates are still high. The domestic AT1 market is predominantly retail, and users are beginning to query what will happen to demand should headline yield fall by 2-3 per cent. The tension for New Zealand retail investors is typically between fixed-income securities and term deposits. Bank net interest margins have contracted since the US regional banking crisis drove up funding costs – but a more positive economic environment could also enhance competition for deposits and thus pricing.

While relative demand could soften on the back of changing relative and outright yield conditions, funds under management in New Zealand continue to grow. KiwiSaver funds are accumulating and market users believe real yields will still be attractive to investors even at 3.5 per cent OCR. In the KiwiSaver segment, there has also been a drive for more sophisticated products – which, at the margin, should support demand in the higher-grade fixed-income and credit sectors.

A positive yield curve should mean credit spreads on corporate bonds will start to stand out, believes Mark Brown, director, fixed income at Harbour Asset Management in Wellington. “When the cash rate neutralises, retail investors will observe that there are higher yields available in credit and demand for term deposits should diminish,” he argues.

Depth of demand for bank tier-two product domestically and offshore has been impressive this year, and Danny Keene, director, debt capital markets at Commonwealth Bank of Australia in Auckland, believes there is ample capacity for New Zealand banks to issue their requirements of tier-two product – including support from offshore investors that could grow in New Zealand dollars.

If there is a paradigm shift toward New Zealand banks accessing the Australian dollar market – and other foreign currencies – for their AT1 needs, the hope among New Zealand market users is that the banks will be able and willing to direct a larger proportion of their tier-two supply to the domestic market. New Zealand has historically offered a strong home-market bias in pricing outcomes for additional capital, and tier-two is typically a much more comfortable fit for institutional investor mandates.

New Zealand banks also have the ability to issue into the wholesale market in a range of formats, though pricing has typically been more favourable for retail trades. Keene says he expects the wholesale segment of the market to pick up as the institutional investor base has grown in recent years. “This is not necessarily about the number of investors but the size of the market. It is encouraging for growth over the next couple of years,” he tells KangaNews.