Regarded as a decidedly efficient source of cheap funding for high-grade issuers, the market projects a particularly healthy deal flow from international borrowers such as European and Australian-based banks.
However, despite appearing to be relatively sophisticated, especially in comparison to its regional peers, this impression disguises an underlying lack of breadth and depth in the marketplace.
Issuance has been dominated primarily by the upper-investment grade borrowers with an issuance banding restricted to either a three- or five-year term.
Last weekÆs upsized HK$3.6 billion multi-tranche offering for the Link REIT offers a good case in point.
That deal consisted of a HK$1.4 billion two-year, fixed-rate tranche yielding 5% and a HK$800 million two-year, floating-rate note, which priced at Hibor plus 10bp û both by BNP Paribas and Standard Chartered. It also included a HK$1.4 billion three-year, fixed-rate tranche paying a yield of 5.12% via HSBC.
One of the largest corporate deals issued out of Hong Kong in recent years, the Link REIT offering clearly highlighted the abundance of liquidity in the market as well as the investor appetite for quality credits. With a marketing window of only 48 hours, the unwieldy deal was easily absorbed by the market at relatively tight pricing.
Aside from the narrow issuer base, the Hong Kong market is also disproportionately reliant on private placements and in some aspects bears more resemblance to a traditional money market than to a mature bond market.
ôThe Hong Kong dollar bond market is driven by high grade international borrowers and private placements and looking at it in these terms it is a very mature market. However, if it is to become a truly sophisticated market, a wider investment base and stronger offshore demand is needed,ö says Olivier Destandu, head of EMTN at Deutsche Bank.
In view of the competition to win mandates and the wealth of liquidity, another characteristic of the Hong Kong dollar bond market is the increasing tendency for the underwriting banks to fully backstop deals. This results in artificially tight pricings, especially when investors have to compete directly with bankers in order to be able to pick up sufficient allocations in any given deal.
The overarching consequence is that it has created a market that is primarily buy-and-hold and where secondary trading is infrequent. And with only a handful of market makers in the secondary market, it also gives rise to transparency concerns.
Although the investor base has seen marked growth in recent years, investor appetite has remained intently focused on the short end of the curve, while the breadth of issuers from the corporate and lower investment-grade space ramain thin. What's more, the market is far from displaying any potential for branching out into the sub-investment grade space.
The reason for this is that domestic borrowers find the syndicated loan market a much more attractive source of funding. For borrowers, going to banks for financing provides cheaper, albeit shorter, funding targets.
Hence, if the market is to make any progress into becoming a viable alternative source of funding it must take steps to ensure that it is willing to promote deals from a variety of issuers in extended tenors.
"For the market to develop further, more corporate issuance is needed to provide a wider choice for investors. More secondary trading in local bonds will further enhance liquidity and thereby provide the lever to expand the market furtherö says Aamir Rahim, head of fixed income debt capital markets Asia Pacific at Citigroup.
The task now is to find issuers who are willing to utilise the bond market and build up a substantive curve beyond a five-year horizon, particularly within the corporate space. With insurance companies and fund managers frequently looking for further avenues of diversification and increased holdings, does this offer a potential source of increased investor demand for corporate issuers with longer dated deals?
Long-term investors in Hong Kong have historically tended to be dollar users with little interest in local currency bonds. However, this trend is slowly changing. As more investors begin to emerge from outside the corridors of banking, more and more issuers are looking toward the long end.
Despite the lower cost of funding that the Hong Kong syndicated loan market provides, it can only supply the short term funding needs of domestic issuers. Therefore as issuers seek longer term exposure, the local bond market becomes a natural option that can meet cheaper funding levels than the international bond market.
Furthermore the market has seen a substantial up-tick in the 10-year plus space recently as insurers look toward the longer end of the curve to hedge their extended liabilities.