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June 3 (Bloomberg) -- Bank of New Zealand, a unit of National Australia Bank Ltd., is meeting investors this week before a possible sale of the nation’s first covered bonds, according to a person familiar with the plan.

The lender has completed the documentation it needs to sell the notes, the person said, asking not to be named as the plans are private.

“The development of a covered bond market in this part of the world would be a significant and successful initiative,” said Robert Mead, who helps manage about A$28 billion ($24 billion) of assets at the Australian unit of Pacific Investment Management Co. “There are natural buyers of AAA assets, and covered bonds offer investors a very significant credit enhancement when compared to normal bank debt.”

Lenders worldwide may be forced by regulators to increase the capital they set aside to protect depositors, after the global financial crisis caused almost $1.3 trillion of writedowns and losses. The $2.9 trillion covered bond market may offer “the way forward in terms of meeting the funding gap,” Mahes Hettige, BNZ’s head of balance sheet management - treasury said at a conference last week.

Covered bonds, which are mostly sold by European banks, attract higher credit ratings than regular notes because they are backed by a pool of assets such as mortgages that can be sold in a default. The extra security typically allows lenders to pay less interest. Pimco Australia holds European covered bonds in its portfolios, according to Mead.

Extra Security

The Reserve Bank of New Zealand has had “informal discussions” with banks regarding development of a covered bond market and supports the sale of the securities, it said in a report last month. The central bank set an informal guideline that covered bonds should be limited to no more than 5 percent of a lender’s assets, spokesman Mike Hannah said today.

BNZ had total assets of NZ$67.7 billion ($47 billion) as of Dec. 31, according to a document on the lenders’ website.

Australian banks, which own the four largest lenders in New Zealand, are barred from selling covered bonds in their home market. Australia’s financial regulator bans the notes because the home loans used as security wouldn’t be available to repay depositors if a bank defaulted.

Australian banks rely on overseas markets including the U.S. and Europe for about 30 percent of their wholesale funding, according to the International Monetary Fund.

To contact the reporter on this story: Sarah McDonald in Sydney at

To contact the editor responsible for this story: Will McSheehy at

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