Kiwibank says it's not repaying early two bond issues worth a combined $250 mln that are no longer regarded as capital by the RBNZ

Kiwibank says the Reserve Bank has confirmed, in a final decision, that two Kiwibank bond issues no longer qualify as regulatory capital.

The regulator’s retrospective move was first revealed by Kiwibank in a preliminary decision in March.

The two bond issues are both convertible capital instruments issued for Kiwibank through the special purpose vehicle Kiwi Capital Funding Limited. The first issue affected is a 10-year $100 million convertible subordinated bond issued on June 6, 2014, which was regarded as Tier 2 capital. The second is a $150 million perpetual bond issued on May 27, 2015, regarded as additional Tier 1 capital. The perpetual securities have a first call date of May 27, 2022.

Kiwibank says the Reserve Bank has confirmed that from today (May 30) the two bond issues won’t qualify as regulatory capital. However, Kiwibank won’t be calling, or seeking early repayment of, the two bonds at this time.

“Kiwibank continually assesses the quantity and mix of capital required to support its operations and meet regulatory and rating agency requirements,” the bank says.

“The Reserve Bank had previously provided Kiwibank with letters of ‘non-objection’ in relation to the Kiwibank bonds. However, it has concluded that Kiwibank, as issuer of the Kiwibank bonds, had levels of control or significant influence over Kiwi Capital Funding Limited which it now views as inconsistent with the securities qualifying as regulatory capital.”

“Changes made by Kiwibank in an effort to address the concerns raised in March are still being reviewed by the Reserve Bank,” Kiwibank says.

The perpetual bonds are paying investors 7.25% per annum for five years and were issued with a BB- “junk” credit rating. The 2014 bonds are paying 6.61% per annum for the first five years and were issued with a BB+ credit rating, also “junk.” See credit ratings explained here. Both sets of Kiwibank securities are tradable on the NZX, here and here.

Kiwibank’s shareholders, NZ Post, the Accident Compensation Corporation and the New Zealand Superannuation Fund announced in April they were subscribing for $247 million of common equity in Kiwibank to bolster its capital position in response to the Reserve Bank’s move.

Kiwibank still seeking certainty ahead of new bond issues

Asked whether Kiwibank feels it now has enough clarity on capital issues from the Reserve Bank to push ahead with new bond issues, including resurrecting the Australian bond issue postponed when this problem blew up in March, a Kiwibank spokesman says, “We are awaiting the final decision on the changes we have made to address the Reserve Bank’s concerns. It is in the best interests of the market to have an assurance that future capital instruments meet regulation.” 

“Kiwibank will engage with debt investors both in NZ and overseas to ensure they fully comprehend this matter with a view to future issuance,” the Kiwibank spokesman says.  

A Reserve Bank spokesman would only say, “We don’t comment on matters relating to specific entities that we prudentially supervise.”

Here’s Victoria University’s Martien Lubberink with his take on the issue, suggesting it’s specific to Kiwibank and has no impact on other banks.