Hong Kong Mortgage Corporation's second offer from the Bauhinia mortgage-backed securities programme has closed and the bonds will be issued on November 4. The HK$3 billion ($387 million) issue, lead managed by HSBC, is Hong Kong's largest residential mortgage securitization to date.
The notes are offered in three tranches of HK$1 billion each, are backed by a pool of 2,520 residential mortgages and are fully guaranteed by HKMC, which means they qualify for 20% capital risk weighting, rather than the 50% weighting for mortgage loans. HKMC is rated Aa3 by Moody's and AA- by Standard & Poor's.
An innovative bond-style structure is designed to give the deal as broad an appeal as possible, with a view to developing Hong Kong's securitization market. The Class A-1 notes are aimed at investors looking for a stable return, offering a three-year soft bullet structure. In other words, the bonds are protected from prepayment risk in the first three years and investors have a one-time option to put them back at year three. They are priced at 12bp over one-month Hibor.
The A-2 and A-3 bonds offer a higher yielding 18bp over Hibor thanks to a fast-pay structure with an expected weighted life of 2.3 years. The bonds reach legal maturity in 2024. Investors in these two classes of notes pay for the yield pick-up by absorbing the prepayment risk on the whole mortgage portfolio in the first three years. The A-2 bonds are being offered to institutional investors while the A-3 bonds are being placed with an asset-backed commercial paper conduit.
HKMC is a quasi-government entity and some bankers question whether it needs to raise funds through securitization at all. "Having said that, HKMC has a mandate to develop the securitization market," says one banker. "In those terms it's successful. The structure is a good one and it's pretty fine pricing."
The previous Bauhinia MBS issue, which launched early in 2002 and was lead managed by Merrill Lynch, was priced at 25bp over Hibor and now trades in the mid 20s. ABN Amro's synthetic MBS deal issued AA paper priced well wide of this, at 65bp over Hibor. "As such, this latest Bauhinia MBS is competitively priced and definitely sets
a new benchmark," says a source familiar with the transaction.
The deal marks the end to a good couple of weeks for HSBC. Last week it launched a HK$3 billion securitization of receivables from its own loans to taxi and light bus operators. That deal comprised a HK$2.61 billion super senior swap rated AAA by Standard & Poor's and Aaa by Moody's, and three cash bond tranches: a HK$120 million AA/Aa2 tranche, a HK$90 million A/A2 tranche and a HK$60 million BBB/Baa2 tranche.
Mallesons Stephen Jaques advised HKMC on legal issues relating to the deal with a team led by Adrienne Showering. Freshfields Bruckhaus Deringer advised HSBC, led by Patrick Lines.