Kiwibank 'working urgently' with the RBNZ after a preliminary view from the regulator concludes $250m of its bonds don't comply with bank capital rules

The Reserve Bank has decided $250 million worth of bonds issued by Kiwibank that provide the bank with regulatory capital, may not actually be capital after all.

In a statement Kiwibank says the Reserve Bank has concluded this in a retrospective preliminary view, which it has yet to finalise. The state owned bank says its regulator believes the Kiwibank Bonds in question “do not comply with certain requirements” in the Reserve Bank’s capital adequacy rulebook.

“The issue relates to a technical interpretation matter and in Kiwibank’s view does not in any way affect the quality of the capital represented by the Kiwibank bonds. Kiwibank is working urgently to resolve the issues with the Reserve Bank,” Kiwibank says.

“While the issues continue to be discussed, Kiwibank has decided not to proceed with the settlement of a proposed AU$175 million [senior, unsecured] bond issue that was scheduled to settle on 15 March.”

In an additional statement Kiwibank says its shareholders, NZ Post, the New Zealand Superannuation Fund and the Accident Compensation Corporation, confirm their support as long term shareholders.

“The Reserve Bank preliminary decision does not in any way impact the growth opportunities of the bank and all shareholders continue to support those opportunities. In the event that the Reserve Bank determines that the issuances to KCFL [Kiwibank funding vehicle Kiwi Capital Funding Limited] are not fully compliant, the shareholders will ensure that the bank will be in no worse capital position than if the Reserve Bank had not changed the treatment of the capital,” Kiwibank says.

The bonds in question are a $100 million, 10-year issue of unsecured subordinated capital notes dating from 2014, and a $150 million issue of perpetual capital notes dating from 2015.  The latter are paying investors 7.25% per annum for five years and were issued with a BB- “junk” credit rating. The former 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.

Aside from questions over whether these types of bonds actually really qualify as bank capital, the Financial Markets Authority has warned they may not be suitable for many investors. Both sets of Kiwibank securities could, potentially, be required to be converted into ordinary Kiwibank shares or written off. And they are not guaranteed by Kiwibank or any of its parent companies.

For regulatory capital purposes, the perpetual bonds have been classified as additional tier 1 capital, giving $147 million of capital. The subordinated bonds are classified as tier 2 capital. The convertible bond issue in question, plus a second $150 million issue dating from 2012, combined, provide $208 million of capital for Kiwibank. 

As of December 31, Kiwibank had total capital of $1.336 billion. At the same date the bank’s total capital ratio, expressed as a percentage of risk weighted assets, stood at 13.4% versus the minimum required 10.5%.

A Kiwibank spokesman said the bank doesn’t know when the Reserve Bank will make a final decision on whether its two bond issues do or don’t comply with regulatory capital rules. A Reserve Bank spokesman said it has not yet been determined when the final decision will be made, and he declined to say what the regulator would expect from Kiwibank if the final decision is unchanged from the preliminary one.