Hong Kong’s (AAA/Aa1/AA+) foothold in Islamic finance is very new, having debuted in that market only in September 2014, when it raised $1bn from a tightly priced 2.005% five year ijara.
But just one offering was never going to be enough for a city that harbours hopes of becoming a regional hub for Islamic financing and Hong Kong has been preparing for its return ever since. And its choice of structure for its second visit was intended to further help its corporate sector to follow suit.
"Building on the momentum from the successful issuance of the inaugural sukuk last year, the latest issuance strengthens our relationship with global investors and demonstrates the flexibility of Hong Kong's Islamic finance platform,” Hong Kong’s financial secretary, John Tsang, said in a press release on May 28.
Compared with an ijara, which requires underlying tangible assets of an identical value to back the issuance, a wakala is more flexible and can be backed by a portfolio of tangible and intangible assets.
Hong Kong’s new $1bn 1.894% 2020 sukuk is 66% backed by a commodity agreement (murabaha) and the remaining by selected units in the government-owned Southorn Centre in the Wan Chai area of Hong Kong.
“I hope that the sukuk issuance will catalyse further growth of the sukuk market in Hong Kong and attract more issuers and investors to participate in our Islamic finance platform," Tsang added in the statement.
Closing the gap
While this transaction is unlikely to spur a slew of corporates to try to tap the Islamic investor base in the short term, one Dubai-based Islamic finance specialist pointed out that the potential of this issue could be huge.
“In the past, the only Asian issuers to really tap the Middle Eastern investor base for funding were from Malaysia, Indonesia and, to a very limited extent, India,” the specialist said. “Hong Kong has now showed that it is possible for others to tap into that liquidity pool and it’s doing that not just for its corporates, but also the Chinese, which the entire world knows has huge infrastructure needs under the One Belt, One Road policy.”
Hong Kong’s aim of bridging the gap between the two regions looks to have worked, if the new sukuk’s distribution statistics are anything to go by.
Joint global co-ordinators HSBC and Standard Chartered recorded a $2bn order book that contained 49 lines. The Middle East took 42% of the bond, Asia 43% and Europe 15%. MidEast investors accounted for only 36% in the 2014 trade.
“This [increase in allocation to Middle East] was very encouraging because it shows that the Islamic community is getting comfortable with a credit that was foreign to them up until less than a year ago,” he said. “The gap between the two regions is definitely closing.”
Clear marketing strategy
Aside from simply being more familiar with the credit, another reason why Hong Kong was able to get such a strong reception out of the Middle East was because the leads had built a shadow book with selected Islamic accounts in the week of May 18.
“Sukuk are a unique proposition that take time for investors to understand the structure, the assets and get the necessary approval to invest,” said Ashish Malhotra, head of global bond syndicate at Standard Chartered. “The people who drive these are not the type to buy on a quick intra-day decision.”
By putting in the early work, the leads were able to obtain an extremely well anchored book ahead of launch, which enabled them to open books at a very punchy level of 35bp-40bp over Treasuries. But the early demand — and the level at which it was willing to come into the transaction — also meant that some investors felt squeezed.
“When I saw the initial guidance, it was clear that the leads were shutting us [fund managers] out because there was no way any of us could have bid at such a tight level,” a Hong Kong-based fund manager said. “You sort of know what you’re going to get with a rare triple-A rated issuer like Hong Kong, but that was crazily tight.”
The sukuk was eventually priced at 35bp over and the $1bn 1.894% 2020 was sold at par. Based on final pricing, the wakala came almost 15bp inside the outstanding ijara, which was quoted at around 40bp over at the start of bookbuilding, once the curve extension was taken into consideration.
However, the tight pricing was all part of the marketing strategy since the Middle Eastern investor base that Hong Kong was targeting consists mostly of banks, which were looking at the deal from an asset liability management (ALM) angle.
While pricing might have seemed aggressive to fund managers, these banks were still more than happy to chip in because of the pick-up the paper offered over US Treasuries. Banks took 74% of the deal, central banks/sovereign wealth funds 23% and others 3%.
CIMB and National Bank of Abu Dhabi were joint bookrunners. Bank of Communications (Hong Kong), Hong Leong Islamic Bank, Maybank and NCB Capital were co-managers.
The sukuk was wrapped around reoffer in the afternoon of May 28.