HK steps up Islamic financing with $1b sukuk

The Asian financial services centre continues to pave the way for Chinese issuers to tap Islamic financing with its second sukuk and its first to use an asset-light structure.

With its intoxicating nightlife and big margin mentality Hong Kong isn't the most likely destination for Islamic financing, but the government of the Asian financial services hub recently underscored its commitment to Islamic funding with the issuance of a $1 billion five-year sukuk.

In contrast, rival financial centre Singapore has never issued a sukuk bond, according to data provider Dealogic. However, Singapore companies such as Swiber and Sabana tapped the Singapore dollar sukuk market in small sizes last year, raising S$39 million and a total of S$150 million respectively.

Hong Kong's Islamic bond, which priced on Wednesday night, is the second such issuance in what the government hopes will be a new stream of capital for Hong Kong and Greater China borrowers to tap into.

Hong Kong issued its first $1 billion inaugural five-year sukuk in September last year.

Both instruments qualify as Islamic paper but have markedly different structures. 

The inaugural sukuk used an ijara structure -- a sale and leaseback structure that is typically wholly backed by hard assets such as real estate -- whereas the latest sukuk has a wakala structure, an asset-light structure backed with less tangible assets such as shares.

“One of the key objectives was to establish a new structure and also to put a new benchmark in the market,” said one source familiar with the deal. “Hong Kong has no funding needs, so this is more about positioning Hong Kong as a key centre in the Islamic world,” he added.

Pricing was aggressive, with the $1 billion sukuk pricing at Treasuries plus 35bp -- the tight end of the Treasuries plus 35bp to 40bp guidance. The sharia-compliant note had a profit rate of 1.894%, slightly under the 2.005% last year.

However, the leads took comfort in the fact that there were solid anchor orders in place before launching the deal. Roadshows were held in key Islamic centres including Kuala Lumpur, Saudi Arabia, the Emirates and London and much of those orders came from reverse enquiries from roadshows.

The outstanding Hong Kong sukuk 2019s were trading at around Treasuries plus low 40bp, which meant that on a curve adjusted basis, the new sukuks priced about 15bp inside the curve.  On Thursday morning, they were trading at Treasuries plus 35/32bp in secondary trading.

The sukuk gathered an orderbook of $2 billion from 49 accounts. Given that it was an ultra-low yielding AAA product, banks treasuries took close to three quarters of the deal. Central banks and sovereign wealth funds took close to a quarter of the deal.

There was no breakdown on how many Islamic investors participated but the bulk of Asian demand, constituting some 43%, came from Islamic investors in Malaysia, while Middle Eastern investors took 42% and European investors 15%.

There has been a tide of sukuk issuances of late, with Indonesia selling a $2 billion sukuk last week and the country's flagship carrier Garuda Indonesia pricing a $500 million five-year sukuk on Wednesday night.

According to a second source familiar with the deal, issuers are scrambling to launch deals before the start of the month-long Ramadan period begins in a few weeks time, followed by the summer break in July.

HSBC and Standard Chartered were joint global coordinators and bookrunners on Hong Kong's second sukuk. CIMB and National Bank of Abu Dhabi were also bookrunners on the deal. Bocom's Hong Kong branch, Hong Leong Islamic bank, Maybank and NCB Capital were co-managers.


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