HSBC has been appointed to advise the government on its plan to sell bonds backed by toll revenues. The securitization is expected to raise HK$6 billion ($778 million) as part of the territory's asset disposal programme.
The choice of HSBC is hardly suprising given its dominance in Hong Kong and number one position in the Asian bond league tables. However, some rival banks believe they offered better experience from working on similar deals in other markets and argue the new deal will do little more than tap into local liquidity.
As such they grumbled that the government is putting the development of Hong Kong's bond market ahead of its need to maximize proceeds. They also doubt whether the local market is really mature enough to absorb long-term debt in this quantity. And with the government facing a budgetary crisis they had expected a deal with tried-and-tested distribution to overseas bond investors as well as locals.
To be sure, the government is interested in raising cash. This year's shortfall is expected to be HK$78 billion ($10 billion) and financial secretary Anthony Leung announced in his 2003 budget that the government would securitize or sell HK$112 billion of assets in the next five years to make up for the territory's revenue shortage. Budget projections reckoned the sales could raise HK$21 billion for the financial year ending March 31 2004.
The drive to get the deal done before the end of the financial year might help explain the government's decision to test the local bond market's liquidity. "There's plenty of it, says one banker. It may also explain the accelerated timetable -- the market had not originally expected the government to move this quickly in appointing an adviser.
Whatever the capacity of the local market though, few doubt the quality of the assets. The bonds will be backed by 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 negotiate Hong Kong's mountains and deep-water channels.
The tolls from these tunnels and bridges were identified early on as a potential source of quick cash. The income they generate is both substantial and stable, and therefore ideally suited for packaging to ABS investors. "A figure of six billion is not unrealistic at all," says a banker familiar with the deal. In total the bridges and tunnels contribute revenues of about HK$1.7 billion a year to the government purse.
The quality of these kinds of assets was demonstrated last year when Hong Kong's Western Harbour tunnel, which is privately operated, succesfully refinanced for a total of HK$3.5 billion in a deal that prompted banks to fall over themselves to get involved. So the government's much larger portfolio of toll-generating assets will undoubtedly prove tempting, but some are asking if Hong Kong has the appetite.
Of course, the government has not yet formally announced which bank, or banks, will arrange the deal and the market's hunch that the deal will be sold locally by HSBC is not a certainty. But its recent self-managed taxi and public light bus securitization and the lead role on the Hong Kong Mortgage Corporation's securitization may suggest the government sees HSBC as its natural partner in developing securitization as a viable funding tool.