Last year proved to be a busy one for Hong Kong's funding officials. In July, the special autonomous region launched its inaugural bond. But the deal that really stood out was the one issued in May. That was the HK$6 billion ($760 million) securitization of Hong Kong's tolled bridges and tunnels.
This was Asia's biggest ever securitization outside Japan and the first of tolled facilities. The deal also provided a boost to the Hong Kong dollar market. But perhaps the most outstanding aspect was that it was the first securitization to be marketed to retail investors in Asia (institutional investors were also targeted). "The government wanted as broad a distribution as possible," says Kyson Ho, director, structured capital markets at HSBC, which sole lead managed the retail tranche.
That proved to be a smart decision. The Hong Kong public has shown itself to be a savvy investor in the past – primarily in equities offerings. Their knowledge and understanding of bond deals is less advanced. But HSBC went to unprecedented lengths to ensure that within a couple of months the public was better educated. "This transaction made retail investors more aware of what a bond is," says Ho.
The marketing campaign included a dedicated website for the securitization, poster advertising on buses and billboards around Hong Kong, flyers distributed at toll booths and banks, investor education seminars, and a PR drive aimed at the local press. HSBC's efforts paid dividends.
The three retail notes, carrying tenors of three, five and seven years received nearly 35,500 applications totalling HK$7.6 billion. This was more than three times the amount on offer. Demand was strongest for the three-year tranche, which attracted over HK$4 billion of orders.
Undoubtedly the attractive yields helped. The three-year notes, for example, were priced at 98.87 to give a spread of 45bp over the exchange fund notes issued by the Hong Kong Monetary Authority.
Institutional investors were equally enthusiastic over the transaction. The institutional offering, which was lead managed by Citigroup and HSBC, was broken into two parts – a one-year fixed rate bond (A1) and a floating rate note tranche (A2). The former was more than three times oversubscribed, while the latter was more than four times oversubscribed.
Investors from China, Macau, Taiwan, Singapore and Japan all participated. The A1 bond appealed to pension and mutual funds, while the floating rate note, which is due in 2016, attracted banks and other funds.
John Dahl, head of securitization, Asia-Pacific at Citigroup, says the deal was important because at the time the region's structured finance market was in a quiet period. "It was important to keep investors in Asia-Pacific focused on securitization transactions," he says. "What was most pleasing was that investors seemed enthusiastic with this type of product."
The bonds issued in the transaction are backed by revenues from six government owned but privately operated facilities: five road tunnels and the Lantau Link bridge system. The money raised will be reinvested in future infrastructure projects.
The bonds – both retail and institutional – are listed on the Hong Kong Stock Exchange. This was the first publicly listed securitization in the special administrative region.
Issuer: Hong Kong Link 2004
Date: April 29, 2004 (institutional); May 7, 2004 (retail)
Amount: HK$6 billion
Maturity: Institutional: one and 3.4 years (average life maturity); retail: three, five and seven years
Coupon: 1.19% (institutional); 2.75%, 3.6%, 4.28% (retail)
Lead managers: Citigroup; HSBC (institutional); HSBC (retail)
Credit ratings: Aa3 (Moody's); AA- (S&P)
Best multilateral bond in a local currency
IFC 2007
The International Finance Corporation (IFC) demonstrated its cutting edge credentials when it became the first supranational to issue an Islamic bond in December. The bond was placed in the Malaysian ringgit market, raising the equivalent of $132 million and carrying a tenor of three years.
This so-called Wawasan transaction provided a benchmark for future high-grade issuers and helped deepen Malaysia's capital market. For the borrower, the deal proved a cost effective way of funding. It also helped diversify the IFC's investor base.
The bond was heavily oversubscribed with an order book size of 4.3 times at final pricing. This reflected strong demand for the securities in Malaysia and also from abroad. Offshore buyers in Europe and Asia represented 30% of the final book. The issue was well distributed across a diverse investor base comprising financial institutions (65%), fund managers (23%), insurance companies (10%) and corporates (2%).
The strong demand meant that the IFC was able to increase the deal's size to M$500 million from an original M$400 million. It also meant that the borrower, which is the private-sector arm of the World Bank, was able to offer a coupon of just 2.88%. This represented the lowest ever yield, at launch, for a Malaysian ringgit-denominated bond issue. "The pricing was slightly tighter than it otherwise would have been because it was an Islamic bond," says Stephen Williams, head of debt finance, Asia-Pacific, at HSBC.
The transaction took advantage of a recent rally in three- and five-year Malaysian government securities that was driven by offshore interest on a potential appreciation of the ringgit.
The IFC undertook an aggressive marketing campaign in the months preceding the bond. Credit marketing was underpinned by a group presentation to more than 50 domestic institutional investors in Kuala Lumpur. One-on-one meetings with key domestic investors further drove momentum, as did conference calls with offshore investors.
"The transaction was the result of months of close cooperation between the Corporation and government on the regulations and procedures governing Wawasan issuance," says Nina Shapiro, treasurer at the multilateral. "By establishing IFC's credit in the domestic market, we hope to follow through with other structured financial products for clients in local currency."
As well as being the first Islamic bond by a supranational, the transaction created a number of other records: it was the first Malaysian Islamic issue by a supranational; the first ever Islamic debt issue by a supranational in any domestic debt capital market; and the largest ever ringgit-denominated debt issue by a supranational.
The deal provided a boost to Malaysia's bid to become the leading Islamic finance centre in the world. Nor Mohamed Yakcop, minister of finance II, said that the transaction "is in line with the Malaysian government's goal to broaden and develop our Islamic capital market".
Issuer: International Finance Corporation
Date: December 13, 2004
Amount: M$500 million
Maturity: Three years
Coupon: 2.88%
Lead managers: Commerce International Merchants Bank; HSBC Bank Malaysia
Credit ratings: Aaa (Moody's); AAA (S&P)