HKMC's $500 million issue draws a crowd

Asian investors in particular flocked to the Hong Kong Mortgage Corporation's $500 million five-year bond that was priced on Friday evening Hong Kong time, resulting in $4.5 billion worth of demand and a tight spread of 110 basis points over Treasuries.

The unwillingness among investors to let an opportunity to buy high-quality investment grade paper out of Hong Kong pass them by was obvious and even though the price guidance was tightened during the two-day bookbuilding, not a single investor dropped out. That turned out to be the right decision since the bonds continued to tighten in the secondary market yesterday, ending the session at a spread of 97bp.

The bookbuilding started on Thursday morning Hong Kong time after a three-day roadshow to Hong Kong, China and Singapore, during which the company held a number of one-on-one meetings as well as two luncheons. By mid-morning there were whispers of a price in the Treasuries plus 125bp-area, which typically implies that the price can vary five basis points either side. By comparison, the Hong Kong SAR's 2014 bond was bid at 105bp over the five-year benchmark at the time, reflecting a reasonable new issue premium for HKMC.

By mid-afternoon that day, when HKMC's order book was already approaching $3 billion, joint bookrunners HSBC and J.P. Morgan went out with official price guidance of 115bp to 125bp and by Friday morning they told investors that the final price would be fixed at an even tighter spread of 110bp.

The quite illiquid HKSAR 2014 bonds didn't move during this process, meaning HKMC came at a minimal 5bp premium over the sovereign.

"There isn't a lot of investment grade supply out of Hong Kong and investors also tend to buy and hold, which means the existing issues are quite illiquid. So, the access to supply is mainly through new issues," one source said with regard to strong demand.

"This is a name everybody wants...(and) investors have plenty of money to put to work at the moment," added a banker not involved in the deal.

The exclusivity of the issue was further emphasised by the relatively small size of the deal. While the total demand confirmed comments by various market participants to the effect that the company "could have sold $2 billion" worth of bonds if it wanted to, HKMC made it clear from the beginning that it intended to sell no more than $500 million at this time.

The Regulation-S, senior, unsecured bonds carry a semi-annual coupon of 3.5% and were re-offered at 99.257 for a yield to maturity of 3.664%. The price was fixed over the 2.625% five-year US Treasury note, which at the time of pricing was trading at a yield of 2.564%.  

Not surprisingly given the Asian focus of the roadshow, the bulk of the issue was bought by Asia-based accounts. According to sources, 53% went to Hong Kong and the rest of Greater China, 29% to Singapore and other Asian countries, and 18% to Europe and others.

Looking at the type of investors, fund managers and insurance companies took 50%, banks 25%, private banks and retail investors 15% and the remaining 10% was bought by central banks and agencies.

This was the first public US dollar issue off HKMC's $3 billion Medium Term Note programme. The bonds are rated triple-A by Moody's, which is above Hong Kong's ratings ceiling for foreign currency bonds of Aa1 and its Aa2 foreign currency government bond rating.

In a release last week, Moody's said the rating reflects HKMC's unique franchise in Hong Kong, as well as its flexible business model, professional and prudent risk management, solid financial fundamentals and strong management team.

"The corporation carries out critical functions in enhancing banking and financial stability in Hong Kong by providing liquidity for the mortgage and property markets via banks and housing agencies, promoting home ownership, and spearheading the development of the debt market in Hong Kong," Moody's vice president and senior analyst Leo Wah said. "It (also) receives very strong backing from the government in numerous ways, in particular, funding and business opportunities."

However, Moody's does have a negative outlook on HKMC, announced in June, as it reassesses the level of support for financial government-related issuers in light of the financial crisis. Standard & Poor's Ratings Services rates the HKMC's latest bond issue AA+ with a stable outlook.