It's a bright 2014 for Australia, NZ covered bonds

Their issuers continue to support their programs.

Moody's Investors Service says that Australian and New Zealand covered bonds exhibited high credit quality and stable ratings between H1 2013 and H1 2014, and will continue to do so for the remainder of 2014.

According to a release from Moody’s Investors Service, this expectation is underpinned by the high credit worthiness of all ten covered bond issuers, the Aaa ratings and stable outlooks for both sovereigns, and the improving credit quality of Australian cover pool assets and stable performance in New Zealand.

"Australian and New Zealand covered bond issuers also continue to support their programmes by maintaining high levels of excess overcollateralization in H1 2014," says Jennifer Wu, a Moody's Vice President and Senior Credit Officer.

Here’s more from Moody’s Investors Service:

"We expect such support to continue because both Australian and New Zealand issuers can still significantly increase their cover pools based on regulatory limits, by an average of 40.9% and 40.8% respectively," adds Wu.

Wu was speaking on Moody's just-released report titled "High Credit Quality and Stable Ratings to Continue for Australian and New Zealand Covered Bonds".

Moody's report notes that eight out of ten current Australian and New Zealand covered bond programmes are sponsored by the four major Australian banks and their four New Zealand subsidiaries.

The Australian banks, Australia and New Zealand Banking Group Ltd, Commonwealth Bank of Australia, National Australia Bank Ltd, and Westpac Banking Corporation are all rated Aa2 with stable rating outlooks.

Their four New Zealand subsidiaries, ANZ Bank New Zealand Limited, ASB Bank Limited, Bank of New Zealand and Westpac New Zealand Limited, are all rated Aa3 with stable rating outlooks.

The remaining two programmes are sponsored by Suncorp-Metway Ltd. (A1 stable), an Australian regional bank, and Kiwibank Limited (Aa3 stable), a wholly owned subsidiary of state-owned New Zealand Post (unrated).

The creditworthiness of the banks is important because it is primarily their obligation to ensure repayment of the covered bonds upon legal maturity.

Similarly, the credit strength of the sovereign is important because the same economic issues that affect sovereign ratings will have an impact on the creditworthiness of banks and covered bonds.

Moody's report further notes that both Australian and New Zealand covered bond programmes also still have ample issuance capacity. Moody's expects issuers will continue to target predominantly offshore markets.

Meanwhile, programmes in New Zealand have successfully complied with the new covered bond law requiring them to register with the Reserve Bank of New Zealand.

The new law is positive because it provides legal certainty on the segregation of cover pool assets from an issuer's other assets and requires issuers to maintain up-to-date registers of cover pool assets.