Awkward - the Reserve Bank has left Kiwibank blushing at the checkout. Photo: Getty Images

Is there anything more embarrassing than arriving at the supermarket checkout and having your credit card declined?

There is if you’re the nation’s biggest locally-owned bank and your attempt to borrow $191 million from a bunch of Australians is declined at the very moment you’re withdrawing the money — especially when it’s the Reserve Bank doing the declining.

That’s what happened to Kiwibank on Tuesday night when it pulled out of a transaction to borrow A$175 million from Australian investors at the very last moment because the Reserve Bank was unhappy with two previous bond issues by the state-owned bank.

The awkward incident forced Kiwibank to make two unusual statements to the stock exchange within minutes of each other on Wednesday, telling investors it was well supported by its new shareholders, the ACC and the NZ Super Fund, and to reassure investors the Reserve Bank decision was simply a technical matter.

It was the equivalent of telling the people in the line behind you that your card was declined because the machine wasn’t working.

It wasn’t supposed to happen this way. Kiwibank had been going through the regular motions of an issue of 10 year bonds with an interest rate of 4.5 percent to investors through ANZ, its agent in Australia. The deal had been priced and agreed last week and settlement was due to happen on Wednesday.

The first sign that things had gone awry was this terse statement to the Australian debt markets from ANZ just after 6.30 pm:

“ANZ regretfully announces it has been advised by Kiwibank Limited that they cannot proceed with the settlement of the AUD 175MM 4.50% 15 March 2027 issue which was priced on the 7th March 2017. Settlement on this new bond was scheduled to take place on the 15th March 2017, but will now not take place. Regrettably no further information is forthcoming at this stage.”

It is the last thing investors want to hear from a bank about another bank’s ability to complete a transaction. During the Global Financial Crisis that sort of event surrounded in mystery would have caused all sorts of ructions. An Australian banking newsletter speculated early on Wednesday morning that perhaps Kiwibank could not borrow any more because it had lost its Government guarantee.

It is true that Kiwibank’s guarantee from the wholly Government-owned New Zealand Post expired on February 28 as a result of the deal done last year to sell 47 percent of the bank to the also Government-controlled ACC and the New Zealand Superannuation Fund.

But that wasn’t the reason for the failure.

Kiwibank’s Head of Funding Geoff Martin issued a statement to the NZX at 8.30 am which explained that Kiwibank had cancelled the deal at the last minute because the Reserve Bank had decided two slightly more complicated bond issues by Kiwibank in June of 2014 and May of 2015 had not complied with the regulators’ capital adequacy framework.

“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,” Martin said.

“Kiwibank is working
urgently to resolve the issues with the RBNZ,” he said.

You can bet there was plenty of urgency because a bank announcing that its regulator had some concerns about its compliance with capital adequacy rules is the last thing any investor in a bank deposit or bond wants to hear.

That urgency and sense of nervousness was evident in a second hurried statement to the NZX just 11 minutes later that sought to further reassure nervous investors.

“Further to the Kiwi Capital Funding Limited (KCFL) announcement regarding the
Reserve Bank of New Zealand (RBNZ) preliminary decision in respect of capital
issuances from Kiwibank to KCFL, the shareholders of Kiwibank, NZ Post, the New
Zealand Superannuation Fund and the Accident Compensation Corporation confirm
their support as long term shareholders,” Martin said.

This is the equivalent of saying to the supermarket checkout operator that your parents are more than happy to pay for the groceries if the card has a technical problem.

Martin went on with the soothing statements.

“The RBNZ preliminary decision does not in
any way impact the growth opportunities of the bank and all shareholders continue to
support those opportunities,” he said.

“In the event that the RBNZ determines that the
issuances to KCFL are not fully compliant, the Shareholders will ensure that the
bank will be in no worse capital position than if the RBNZ had not changed the
treatment of the capital.”

That is Kiwibank essentially saying that if the Reserve Bank decides it needs to have more equity capital then the Government, the ACC and the NZ Super Fund will stump up the money.

This was not one of the New Zealand banking’s finest days.

Essentially, the Government’s banking referee just stopped the Government’s banking team from playing the game because it wasn’t sure if it had enough players on the field. It is effectively now consulting the video referee to count the number of green jerseys on the field.

This is not something investors would want to see in public.

Banks are built on assurances about their ability to hand over cash whenever a saver wants their money (liquidity) and confidence about their capital levels (the amount of equity owned by the bank itself as a buffer to cope with bad loans).

The last thing it would want is for investors to think the banking regulator has some doubts, just at the very moment it was raising a big slice of fresh funds to lend on to customers.

Kiwibank no doubt hopes its reassurances have been enough to calm those grumpy customers shuffling their feet at the back of the queue, particularly the Australians.

But the incident also raises some bigger questions about the Reserve Bank’s sharper and more aggressive approach to bank capital requirements. It has just launched a review of bank capital requirements this year that is expected to force banks to put more equity capital aside for riskier loans.

Kiwibank used so-called hybrid tier 1 and tier 2 bond issues to raise some of the extra equity capital it needed to back new loans in 2014 and 2015 because the Government was reluctant to pour in more equity. These hybrid bond issues essentially park a certain amount of the money where investors cannot easily get it back, allowing Kiwibank to classify it as equity.

These tier 1 and tier 2 bonds are unusual vehicles for a regulator that would prefer a cleaner and simpler way to raise equity capital. If the Reserve Bank decides these two bond issues do not really equate to true core equity then the Government may yet have to pour more capital into Kiwibank.

The next time Kiwibank ventures offshore to borrow money in a big lump, it will no doubt check the Reserve Bank isn’t about to pull the plug just at it arrives at the checkout and pulls out the card to find the supermarket doesn’t take credit.

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