HK moves a step closer to realising sukuk dream

The Hong Kong government is in the process of issuing its highly anticipated maiden Islamic bond, establishing a benchmark for the instrument in the territory and setting the scene for more to come.

Hong Kong has mandated HSBC, Standard Chartered as joint global coordinators, lead managers and bookrunners of the proposed dollar-denominated sukuk offering, according to a Hong Kong Monetary Authority announcement on Thursday. Other joint bookrunners include CIMB and National Bank of Abu Dhabi.

The banks will arrange a series of fixed-income investor meetings in Asia, the Middle East, Europe and the US commencing September 1 for the 144A/Reg S-registered Islamic bond, added the HKMA.

Hong Kong Sukuk 2014, a special purpose vehicle fully owned by the government and established for issuing shariah-compliant securities in international markets, will raise the debut note.

“You are starting to see a critical mass of interest and in the acceptance of these kinds of instruments outside of traditional Islamic markets,” said Christian de Guzman, senior analyst for Moody’s sovereign risk group, to FinanceAsia. “Many other governments have also expressed interest on top of those that have already issued.”

In June, the UK was the first western country to issue an Islamic bond, attracting orders of more than £2 billion ($3 billion) from global investors for its sale of shariah-compliant debt. The £200 million sukuk, which came days before the start of Ramadan, is part of the long-term economic plan to make the UK the centre of the global financial system, George Osborne, the chancellor, said.

This is very similar to Hong Kong’s ambitions, with Peter Pang, deputy chief of the HKMA, saying in April at a conference that the former British colony had put in place a tax framework for common types of sukuk to level the playing field between Islamic and conventional bonds.

South Africa and Pakistan have also stated interest in planning global Islamic bonds of their own. Luxembourg is also expected to raise a €200 million ($264 million) sukuk this year, after it passed a law on real estate transactions in July that allowed for the issuance of the instrument.

Use of proceeds

The proceeds from Hong Kong’s sukuk certificates will be used by the issuer to purchase certain properties currently owned by the government. Subsequent to the purchase, the borrower will enter into a lease agreement with the government, according to sources close to the deal.

Based on the terms of the agreement, the government will periodically pay an amount sufficient to fund distributions payable by the issuer to investors in the sukuk. At the end of the Islamic bond’s term, the government will purchase the lease assets at the exercise price, thus providing the principal amount payable by the issuer to certificate holders.

If the dissolution is triggered by a total loss event and the insurance proceeds are not sufficient to cover the amount payable by the issuer, the government will pay an amount equal to the shortfall.

Hong Kong’s proposed issuance comes in the wake of a law passed in March 2014 that allowed the government to issue sukuk under its existing Government Bond Programme.

Earlier, Hong Kong also amended its tax framework in July 2013 for common types of sukuk to help facilitate sales of corporate Islamic debt. The tax law amendments removed additional profits tax and stamp duty charges incurred in issuing sukuk compared with conventional bonds.

Moody’s estimates that total sovereign sukuk outstanding account for more than 36% of the $296 billion of outstanding Islamic bonds as of July 2014. For sovereign sukuk, much of the growth occurred in the past three years, as annual issuance rose sharply from less than $15 billion in 2010 to $33 billion and $23 billion in 2012 and 2013, respectively.

Hong Kong’s upcoming Islamic offering is rated AAA, Aa1 and AA+ by Standard & Poor’s, Moody’s and Fitch respectively, according to a source.