HK sovereign bond: calling all banks

Details emerge about what the Hong Kong government is looking for as banks start jostling for positions on the debut sovereign issue.

Regional fixed income bankers were yesterday poring over the request for proposals (RFP) that the Hong Kong Treasury and Financial Services Department sent out on March 10. The RFP is looking for proposals for a bond issue up to HK$20 billion in size ($2.56 billion), denominated in Hong Kong dollars and/or international G3 currencies.

According to bankers who have seen the RFP, banks have until 5pm on Wednesday March 24 to submit their proposals, with a shortlist to be announced after that. The government says it will make it final decision by the end of March for a bond deal to be sold within a time frame of three months after that, assuming the Hong Kong Legislative Council approves the issue.

Bidding banks have been asked to demonstrate a number of attributes. Firstly they have to show their experience in running sovereign bond issues in G3 and local currencies over US$1 billion in size in the past two years, suggesting the probable minimum size the Hong Kong government is looking at.

Analysis of the league table below, supplied by Dealogic, suggests that on these criteria, Citigroup, Deutsche Bank and JPMorgan have strong credentials. Citi ranks top, having arranged 48 deals worth some $35.2 billion. In total some 130 sovereign issues have been sold globally in the relevant period, although a large proportion of those deals tend to be semi auctioned issues for European governments.

Table 1: Sovereign G3 or local currency debt
$1bn or more 2002 to 2004 March 11
  Bookrunner Total Deal Value $m No. %Share
1 Citigroup 35,261.40 48 11.28
2 Deutsche Bank 28,440.60 37 9.1
3 JP Morgan 24,887.04 31 7.96
4 Goldman Sachs 21,432.19 22 6.85
5 Merrill Lynch 17,431.59 24 5.57
6 Morgan Stanley 16,592.92 21 5.31
7 ABN AMRO 12,918.45 15 4.13
8 Credit Suisse First Boston 12,625.07 14 4.04
9 UBS 11,347.99 15 3.63
10 Barclays Capital 11,159.77 13 3.57
11 BNP Paribas 11,023.64 15 3.53
12 ING 9,136.97 8 2.92
13 HSBC 8,610.37 14 2.75
14 Dresdner Kleinwort Wasserstein 8,285.78 15 2.65
15 Credit Agricole - Credit Lyonnais 7,339.89 9 2.35
  Grand Total 312,686.40 130  
  Source: Dealogic      

However, the bond is unlikely to be just an international issue. According to Henry Tang, Hong Kong's Financial Secretary, one of the main reasons the government is doing this deal is to offer Hong Kong savers an alternative to the miserly rates they can earn on their bank deposits. "This will give small investors an alternative source of investment…for a higher…income [than they can get on bank deposits]" he said on Wednesday.

Reflecting this stance, the RFP requires the banks to show evidence of a commitment to Hong Kong's capital markets with special reference to the development of the local bond markets. Indeed, the government says in the RFP that it envisages the deal being "a major domestic and global offer to international and local investors". On this criteria HSBC would seem to be a clear front-runner, reflecting its unmatched local presence and distribution skills in the local bond market.

Table 2: HK$ Bookrunners any size
2002 to 2004 March 11
  Bookrunner Parents Total Deal Value $m No. %Share
1 HSBC 11,483.25 411 43.31
2 JP Morgan 3,004.57 196 11.33
3 BNP Paribas 2,036.00 92 7.68
4 Standard Chartered Bank 1,229.17 45 4.64
5 Deutsche Bank 1,160.57 52 4.38
6 Barclays Capital 1,098.71 29 4.14
7 Citigroup 838.53 43 3.16
8 Credit Agricole - Credit Lyonnais 826.01 55 3.12
9 Morgan Stanley 704.11 28 2.66
10 National Australia Bank 650.72 35 2.45
  Grand Total 26,516.78 1069  
  Source: Dealogic      

Moreover, the only non-G3 domestic currency retail bond issued by a sovereign anywhere in the world in the last two years that exceeded $1 billion equivalent was from the Philippines, which issued Ps74 billion of retail treasury bonds, again through HSBC, in 2003.

According to bankers contacted for this article, most of the banks are now jostling to form joint bidding consortia, which the RFP specifically allows. However the RFP also gives the government the scope to pick and choose individual banks to make up its own winning consortium.

Most banks already have a pretty clear idea of what they will propose, this deal having been well flagged in the market for a number of months. "The proposal itself will not be tough, " says one banker. "It is just a question of dusting off the proposals we already have. People have been talking to the government about doing a benchmark bond deal for some time."

Interestingly the RFP makes no request for the banks to propose what levels of fees they will charge. This adds further credence to the view that this bond deal is not really about the money. While large in size - at HK$20 billion it is slightly under 10% of the government's entire budget for 2004-2005 of HK$212 billion - the government should not have any real trouble in raising the required amount.

Given the liquidity in the local markets, in the international markets and given Hong Kong's huge fiscal reserves (HK$239 billion or eleven months' government expenditure), there is no real need for the government to do the deal from a pure budgetary perspective.

Rather as one banker put it "this is all about politics and PR". In the RFP, this sense is reinforced by detailed sections requesting banks to say how they would market the bonds - including detailing the structure of international and local roadshows. It appears the government wants to sell Hong Kong to as wide a domestic and international audience as possible.

Coming away with a heavily oversubscribed order book and a wide local and international distribution would leave a strong feeling in the international and local investment communities that Hong Kong's economy had finally turned the corner after five years of pain.

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