Westpac Banking Corporation AUD 3-Year Covered Bond/5-Year Senior Unsecured
Westpac issued a 5 year fixed/floating senior unsecured bond. However, it is the 3 year fixed/floating covered bond that looks very appealing from a risk/return perspective.
Westpac is one of the first Australian banks to reissue a covered bond after this market being dormant for some time. Historically, covered bonds have priced much tighter than senior unsecured – normally around 70-80% of the total spread of senior unsecured bonds.
For example, if 3 year senior unsecured bonds are pricing at a spread of 3m BBSW +75/SQ ASW +75, then 3 year covered bonds would price at a spread of 3m BBSW +53/SQ ASW +53 respectively.
Chart 1. AUD Senior Unsecured vs Covered Bonds
Source: CBA, Bloomberg
Chart 2. AUD Covered Bonds
Source: CBA, Bloomberg
For this specific issue, the 3 year covered bonds are pricing at a spread of 3m BBSW +75/SQ ASW +75 − which is basically in line with the current 3 year senior unsecured curve. The covered bonds are also rated Aaa/AAA (Moody’s/Fitch) versus senior unsecured bonds which are rated AA-/Aa3 (S&P/Moody’s). Prior to an event of default, covered bonds sit higher up in the capital structure and have specific overcollateralisation levels required for them to sustain their Aaa/AAA rating(s).
Those investors who prefer to look at the overall yield would notice this translates to a yield of 4% using current 3y swap curves. Not too bad at all for a AAA asset.
As at 31 March 2022, Westpac’s covered pool was AUD30bn with an average indexed current LTV of 47%. 10.9% of the pool balance was interest-only (IO). 30+ day arrears was 0.34% and 12 month customer prepayment rate (CPR) was 26.3%. Around AUD27bn (equivalent) covered bonds were outstanding as of March 2022. The program had an overcollateralisation of 28.5%.
Westpac has largely completed CLF phase-out by building liquids. It has priced AUD22bn (equivalent) of term debt in H1 2022 and has another AUD11bn (equivalent) maturities in H2 2022 − of which almost half are covered bonds.
It expects approximately AUD2bn (equivalent) of Tier 2 issuance in H2 2022 (ending September 2022). Westpac expects minimal RWA impact from updated Basel III. However, it’s the only major so far to provide a new CET1 operation range target of 11-11.5% starting 1 January 2023. Current pro-forma CET1 is at the top-end of this new range.
