OREANDA-NEWS. Fitch Ratings says that covered bonds remain important for issuing banks in Australia and New Zealand to extend their long-term wholesale maturity profiles, despite lower issuance in 2015. Fitch's report "APAC Covered Bond Quarterly - 3Q15", released today, looks at the changing profile of covered bond funding, and how it compares with senior unsecured funding which makes up the bulk of long-term wholesale funding for the Australian and New Zealand banks.

Covered bonds issued by Australian banks with a term longer than five years have accounted for 48% of total issuance over the past 12 months, compared with 31% in 2012. It is a similar story in New Zealand, where terms of five years (and more) account for 91% of all covered bond funding since 2010, with the five-year term the most popular at 59%.

Covered bond issuance has suffered over the past 12 months as a result of falling yields due to the European Central Bank covered bond purchase programme in the euro market, which has driven 'real money' investors to alternative products. Reduced volatility in funding markets led to tighter senior unsecured spreads earlier in 2015, enticing issuers to prefer the senior unsecured market. But covered bonds are likely to play an important role for the banks in achieving longer-term funding goals with the introduction of the Net Stable Funding Ratio (NSFR) in 2018.

Fitch also comments in the report on rating covered bonds above the Country Ceiling, and how the uplift may differ compared with securitisation. Kookmin Bank's covered bond issuance, rated 'AAA' by Fitch in October 2015, was the first to be rated above Korea's Country Ceiling of 'AA+', as the programme incorporated structural features that mitigated the currency transferability and convertibility (T&C) risk. Fitch highlights the features that mitigated T&C risk, enabling timely payment on the on the covered bonds. The report also identifies the risks that can have an impact on the repayment of covered bonds following a covered bond default scenario - focusing on the agency's recovery cash flow analysis.

Covered bond Issuance in Australia in 3Q15 was at its highest since 2012, with AUD4.5bn issued. Activity during the third quarter exceeded a very quiet second quarter, while total year-to-date issuance is down by more than AUD3bn compared with the same period in 2014. New Zealand hit a new issuance peak during the quarter following Westpac New Zealand Limited's euro issuance which brought total issuance from New Zealand to NZD2bn, the highest since 2012 and double the issuance in 2014.

Singapore had its inaugural covered bond issuance in August 2015, with DBS Bank Ltd (rated AA-/Stable/F1+) issuing a USD1bn three-year soft-bullet issue with a 12-month extension period.

Data reported in the "APAC Covered Bonds Quarterly - 3Q15" is as of 30 September 2015. The report can be accessed at www.fitchratings.com.