Hong Kong Mortgage Corp was established in 1997 by the SAR government with the principal objective of promoting the secondary mortgage market and is one of the highest profile borrowers in the HK dollar debt market. Philip Li, senior vice president of finance, tells FinanceAsia about HKMC's funding strategies and plans for the year ahead.
How much funding is HKMC looking to raise in 2003? How different is that from previous years?
For 2003 the initial plan was to raise at least HK$11 billion. If a few large mortgage portfolio purchases under negotiation can be concluded, the figure may rise to between HK$15 billion and HK$17 billion, which is similar to last year. The amount of money we look to raise very much depends on the amount of assets we can purchase, how much for refinancing and the speed of mortgage prepayment.
What percentage are you looking to raise from local and international markets?
So far, HKMC has only tapped the Hong Kong capital markets. In the past five years we have only raised funds through Hong Kong dollar bond issuance and occasionally borrowed small amount of money from the interbank market for bridge financing. Starting from this month, we also make use of transferable loan certificates (TLC) as a supplementary funding tool. We have just concluded two bilateral TLC transactions for a total of HK$2 billion. The current market conditions are such that the banks are highly liquid and looking for quality borrowers to lend money to, so this is a good time to raise longer-term money.
What are the cost benefits of going to the loan market?
In terms of pricing, the loans and bond markets are quite similar, albeit there are more opportunities for us to achieve lower funding costs by issuing fixed rate debt and swapping the proceeds to floating rate fund. We regard TLC as a hybrid financing product between loans and bonds because they have transferable features and are tradable. We have incorporated TLC into our existing HK$40 billion Debt Issuance Programme.
About a third of your issuance in 2002 was in the form of retail bonds. What is the thinking behind that?
HKMC is a pioneer of the retail bond market. We introduced the current offering mechanism through the placing banks in 2002. In the past, some retail debt securities were offered to the public through the stock exchange that were not very successful for various reasons, mainly due to impediments to placing channels and the little effort in promotion made by the intermediaries. Under the current offering mechanism, our last retail bond issues were available at over 600 bank branches. From a psychological point of view this is important to the retail investors, who may not have had much experience in buying shares or other investment products through stock brokers, but feel easy to speak with bank tellers to buy bonds.
Are there any pricing differences with retail bonds compared to deals offered to professional investors?
The pricing gap of bonds in the retail and professional markets is narrowing down due to the increasing competition among issuers. You may also see the banks starting to underwrite large chunks of retail bonds at professional pricing. Issuers have no longer viewed the retail bond market a market for raising cheap funds, but as a new funding source.
What are your target funding costs and what are current spread levels like for your deals?
Spread varies according to amount and tenor. I would say there are more opportunities to achieve lower funding costs through private placements or bilateral transactions. In general, for short-term debt we can get sub-Hibor fund, but for the deals that are between five and ten years, we can achieve a spread between low teen to low 20's.
What about your ratings? Do you anticipate any changes to your ratings in 2003?
I don't see it changing. Our rating is the same as those of the Hong Kong SAR Government (S&P/Moody's: AA-/Aa3 for the long term local currency and long term foreign currency rating is A+/A3).
What do you perceive to be the main credit strengths of HKMC?
We obviously have very strong financials and government connections. The credit rating agencies always acknowledge the strong government support that HKMC receives. Our chairman is the Financial Secretary, deputy chairman is the Chief Executive of the Hong Kong Monetary Authority, and a number of senior government officials are on the board of directors. In addition to that, we also have a HK$10 billion revolving credit facility from the Hong Kong Monetary Authority.
What is the average maturity of your debt profile and how are you trying to change this?
At the moment, the average maturity of our debt profile is about three years. The design of maturity is very much dependent on the prepayment rate of our mortgage portfolio. From 1998 to 2000, the prepayment rate was very high, rising to around 40% at one time, which meant the average lives of mortgages was between 2 and 3 years. Then, we issued most of our debts with maturities of 2 to 3 years to match the high prepayment rate. However, as I mentioned earlier, the prepayment rate has slowed down significantly in the past one year to around 15%, which means we have to lengthen our liabilities and issue longer-term debts.
HKMC has a US$3 billion securitization program. So far you have issued HK$2 billion. What plans do you have to use the facility in future?
It is always the objective of HKMC to promote the development of a secondary mortgage market by way of mortgage securitization. We have two securitization programs not one: the back-to-back pass-through securitization programme and the Bauhinia multi-currency securitization programme. With the back-to-back securitization programme, HKMC buys mortgage portfolios from a bank and sell back the assets in the form of MBS with HKMC's guarantee on it to the seller bank. It helps reduce the risk weighting of mortgage loans from 50% to 20%. And with the Bauhinia programme, we securitize mortgages from our own retained mortgage portfolio and sell the MBS to a wide spectrum of investors.
At the moment, it is difficult to do securitization because the mortgage rates are so low that the economics cannot work out enough MBS issues. Having said that, there are ways to get around this. When HKMC considers whether to do an MBS deal or not, we will check whether one or more of the following objectives can be achieved: fundraising, credit risk management, interest rate risk management and capital management. Ideally, you would like to achieve all these objectives at the same time by an issue but if one or more of them can be achieved, banks or institutions would tempt to securitize their assets.