HKMC lays foundations for international issuance

The Hong Kong Mortgage Corporation (HKMC) is back in business, mandating a ratings adviser, launching the Territory''s largest fixed rate bond offering and reviving plans for international bond and securitization deals.

HSBC has been appointed credit rating adviser to the government-owned agency in a decision that further underlines the bank's status as the most active international lead manager and adviser to corporate and sovereign Hong Kong. For HKMC, the move also signals an acceleration of plans to diversify its funding base after a difficult year trying to build its domestic mortgage portfolio.

Since its incorporation in March 1997, HKMC has been an active issuer in the Hong Kong dollar bond market, launching a record-breaking HK$5 billion ($640 million) fixed rate deal via HSBC yesterday (Wednesday). However, the agency has yet to fund itself through the international capital markets.

Similarly, while it was able to complete two domestic securitizations for Dao Heng Bank and American Express Bank in late 1999, it has not yet followed through with plans laid the same year for an international MBS deal.

The main reason for the delay has been the depressed state of the Hong Kong property market, which has led to increased competition for business between mortgage lenders and a consequent reduction in their willingness to sell portions of their portfolios to HKMC. As a result, the agency found that having been able to build up its portfolio to HK$11.3 billion ($1.5 billion) by the end of 1998, there was a sharp drop to HK$8.7 billion in 1999.

HKMC officials say that the portfolio is now back up to the HK$11 billion mark and is set to increase quickly going forwards, because of a recent agreement with the Hong Kong Housing Authority (HKHA) over the government-owned body's subsidized mortgage pool. Finance official Philip Li says that the agreement will enable HKMC to purchase up to HK$18 billion from HKHA through to September 2002, potentially doubling the agency's balance sheet. The purchases will be completed in a series of tranches, the first of which should amount to about HK$5 billion.

With an authorized capital base of HK$3 billion, of which HK$2 billion comprises paid-up capital and HK$1 billion capital on call, the agency can purchase mortgages on a 20 times ratio up to the HK$60 billion mark. Li says that he hopes the agency can reach this figure within the next few years and then use the international MBS market to take some of the loans off balance sheet and increase the overall pool further.

The first step is to secure a credit rating, which will then be followed by the establishment of MTN and MBS programs. Li comments that HKMC would like to launch an international bond and international securitization towards the end of the year, although it has not yet made a final decision on currency, sector, lead managers or, in the case of the bond deal, maturity.

Where the MBS issue is concerned, the agency would like to raise the equivalent of about HK$2 billion. The first issue off the MTN program, however, is likely to be larger as the agency wants to establish a solid international benchmark. 

The key question will be where to price such a bond relative to existing benchmarks laid by quasi-sovereign borrowers Mass Transit Railway Corporation (MTR) and Kowloon Canton Railway Corporation (KCRC). Come the time, lead managers are likely to argue that HKMC deserves a premium because it is a closer sovereign proxy. While, for example, government ownership of MTR and KCR is set to fall, HKMC will remain fully government-owned under the Hong Kong Monetary Authority's (HKMA) Exchange Fund. HKMC also has civil servants on its staff, including the Financial Secretary as chairman (at the moment still Donald Tsang), and HKMA head Joseph Yam as vice chairman.

Li further states that ratios underlying the agency's mortgage portfolio remain extremely strong. With an average maturity in the four to seven year range, he says the portfolio is currently recording a delinquency rate of 0.42%. This is well below the sector average for Hong Kong, but not as strong as the 0.01% rate the HKMC recorded back in 1999. The current loan to value ratio is said to stand at 80%.

Yet these ratios will change with the advent of the Housing Authority loans which are subsidized by the government and do not carry a mortgage rate. Li says, however, that the agency will purchase the loans on commercial terms. The HKHA loans also structurally differ since they have a shorter average maturity, exhibit lower delinquency rates and are less susceptible to sudden swings in residential property prices.

Setting a new benchmark in the domestic bond market, the agency launched a HK$5 billion fixed rate issue yesterday. Led by HSBC, the five-year deal was priced at par with a quarterly coupon of 5.68%, equivalent to a spread over Hibor in the low teens.

Observers say that the sheer size of the issue means that it should become a more liquid benchmark than even government bonds, since there is little Exchange Fund issuance at the mid to longer end of the curve. The deal also gives the profile of the Hong Kong dollar market a boost at a time when Singapore seems to hog most of the headlines. Indeed, the size of the issue tops Singapore Telecommunications' record-breaking S$1 billion ($575 million) offering last month in its own domestic market.

Prior to HKMC, the largest fixed rate deal in Hong Kong was the Asian Development Bank's HK$3 billion three tranche offering of 1998. On the FRN and FRCD side, Wharf Holdings and the Bank of China have both respectively issued transactions of HK$5.5 billion back in the mid 1990's. 

As one banker concludes: "This transaction has been extremely popular because the last year-and-a-half has been dominated by lots of small private placements from double or single-A rated banks to the order of about HK$200 million to HK$300 million. For large holders of quasi sovereign paper, this deal adds liquidity and diversity."

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