Deal: Hong Kong SAR government global bond offering
Size: HK$20 billion (US$2.56 billion)
Arrangers and joint global coordinators: Bank of China Group, HSBC, Merrill Lynch ? US$ international notes & HK$ international notes;
Bank of China Group, HSBC ? HK$ retail bonds
Joint lead managers and book runners: BOCI Asia/Goldman Sachs/HSBC/Merrill Lynch/Morgan Stanley ? US$ international notes;
BOCI Asia/Citigroup/HSBC/Merrill Lynch ? HK$ international notes;
Bank of China Group/HSBC/Standard Chartered Bank ? HK$ retail bonds
Date: July 2004
It is a testament to just how far Hong Kong has recovered from the nadir of mid 2003, when the Sars epidemic was at is height, that the Hong Kong government was able last month to launch a maiden global bond offering successfully to institutional and retail investors.
Following an initial announcement of the plan to issue up to HK$20 billion (US$2.56 billion) of bonds in his 2004/2005 budget speech in March, financial secretary Henry Tang and his colleagues wasted no time in pushing the necessary approvals through Hong Kong’s legislative council in May and then swiftly brought the deal to market two months later in July.
Aimed principally at raising funding for local capital investment projects, the global bond offering was made up of three individual offers. First there was a $1.25 billion 10-year Regulation S and 144A bond targeted at US and international investors (termed US dollar international notes).
Further to that, there was a two-tranche offering of HK$3.5 billion five-year and HK$1.5 billion 15-year bonds aimed principally at local Hong Kong and Asian institutions (HK$ international notes) and a two-tranche retail bond offering of two-year and five-year paper that at the time of going to press had generated indicative sums of some HK$8.24 billion.
With the exception of the Philippines, which issues out of necessity as much as for benchmark reasons, Asian sovereign issuers are few and far between and strong issuers less frequent than most. Not surprisingly, such issuers, when they do come, tend to attract very strong interest.
First foray
Although Hong Kong’s pre-1997 colonial government had dabbled in the local Hong Kong dollar bond market, this offering was the first foray into the bond market of any kind for the government of the Hong Kong Special Administrative Region and the first of any Hong Kong government into the US dollar bond market.
The government and its advisers made sure that this point was rammed home to investors and public alike.
?It’s a very rare issue,? says Aaron Tan, managing director, debt finance group, at joint global coordinator HSBC. ?And the government has stated categorically that it won’t be a frequent issuer.?
With such a clear steer, the deal was bound to attract strong interest. According to Tan, all three offerings were very well received.
?They were massively oversubscribed,? he says of the institutional offerings. ?The HK dollar five-year and 15-year offerings closed several hours after the US dollar deal also closed oversubscribed.? All three bonds were increased in size from their original amounts, according to Tan, and pricing was also tightened from initial guidance.
Pricing for the US dollar international notes was fixed at 74 basis points over 10-year treasuries, the benchmark being the 4.75% 2014. The notes were issued at 99.233 to yield 5.224%. The HK dollar international notes were priced using the relevant mid-swap prices, the five-year fixed at the HK dollar mid-swap rate less 10bp to yield 3.783%, and the 15-year at 10bp over the relevant mid-swap, yielding 5.208%. The retail bonds were launched with a fixed coupon of 2.13% for the two-year bond and 3.38% for the four-year bond.
Pricing achieved for the bonds was tighter than China’s sovereign risk, underlying the unique status of the Hong Kong Special Administrative Region as a quasi-sovereign credit.
Better than China
?This is a credit that is regarded as better than China,? says Tan, ?so it has a much tighter yield than the 2013 China paper.?
With a strong reception for the global bond offering, it would not be surprising if Hong Kong’s government yielded to the temptation of further bond issues, not so much for funding grandiose infrastructure spending but simply to plug its yawning budget deficit. Hong Kong is well placed to benefit from the further strong economic growth expected from its mainland China in the years ahead.
Arguably with funding still available at attractive prices, it would be sensible for the government to fix its budget problems while the market still has the appetite for its issues.
Notwithstanding larger issues of fiscal housekeeping, all in all it was a pretty good result for Hong Kong’s maiden voyage into the bond markets. In fact, the only hitch to an otherwise faultlessly executed issue was the typhoon that forced a delay in the retail bond closing.
But with the issue carefully crafted to maximize demand through its evident rarity value, coupled with separate tranches to appeal to specific investor bases, the government can be well pleased with its efforts and those of its advisers. There are some things that even the weather cannot spoil.
