Hong Kong to securitize toll revenues

The government will shore up its finances by borrowing against toll fees from territory''s bridges and tunnels.

The Hong Kong government plans to raise HK$6 billion ($778 million) from the sale of bonds backed by toll revenues. Investment banks bidding for the deal, which is expected to close before the end of Hong Kong's financial year, are rumoured to include Deutsche Bank, Goldman Sachs, HSBC, Merrill Lynch and UBS.

The plan is in line with the government's commitments to inject new cash into its coffers. The government announced in its 2003 budget that it would securitize or sell HK$112 billion of assets in the next five years to make up for the territory's revenue shortage. The budget projections reckoned the sales could raise HK$21 billion for the financial year ending March 2004.

The bonds will be backed by the revenue generated from the government's five toll-paying tunnels and the Lantau Link, which comprises the Tsing Ma and Kap Shui Mun bridges. On an average day the Lantau Link carries 38,000 vehicles while the five tunnels - Aberdeen, Cross-Harbour, Lion Rock, Shing Mun and Tseung Kwan O - help almost 400,000 vehicles travel through Hong Kong's mountains and under her deep-water channels.

Some bankers are reportedly sceptical that the government can raise as much as HK$6 billion, but sources close to the deal scoff at the suggestion. "A figure of six billion is not unrealistic at all," says a person familiar with the deal. In total the bridges and tunnels contribute revenues of about HK$1.7 billion a year to the government purse.

In July 2002 the Western Harbour tunnel succesfully refinanced for a total of HK$3.5 billion and was over-subscribed by HK$5.25 billion. So the government's much larger portfolio of toll-generating assets should have no problem in supporting a deal less than twice that size.

The deal will also serve the government's goal of boosting the local market. "Promoting the development of the Hong Kong dollar bond market is one of the key directions of the government's policy in advancing Hong Kong's position as an international financial centre," said Frederick Ma, secretary for financial services and the treasury, at the signing ceremony of the Kowloon-Canton Railway Corporation's bond offering in May.

Given this commitment, and timing that will probably target the first quarter of 2004, there is a logical expectation that the deal will tap liquidity in the local market. "There's plenty of it," says one banker.

Hong Kong's two other securitization deals this year have both been arranged by HSBC. The first, a five-year HK$3 billion balance-sheet deal in which HSBC will securitize receiveables from a portfolio of taxi and public light bus loans, is expected to close in the next couple of weeks. The other deal, a mortgage-bascked securitization, is expected to raise at least HK$2 billion for the Hong Kong Mortgage Corporation.

With those two mandates under its belt HSBC is considered to be the front-runner to land the government's toll deal, but competition will be fierce for such a high-profile offering. And with securitization offerings thin on the ground in comparison to recent years investment banks will likely be pitching to do the deal for low fees.