Investors have snapped up the institutional tranches of Hong Kong's HK$6 billion ($769 million) tunnel securitization despite it being priced at the bottom of the expected range. And the order book for the ground-breaking retail tranches is also comfortably over-subscribed.
The offer, which securitizes toll revenue from five tunnels and the Lantau Link, is unparalleled in the region and, in some respects, the world. These asset-backed bonds, typically a specialist product bought by professional investors and disregarded by just about everyone else, will be listed on the local stock exchange and sold to the public. Moreover, this will be the government's first securitization offer and, in effect, the first time it has tapped the bond market.
Backed by the toll revenue from five tunnels and a road-and-rail link to Lantau Island the notes are offered through a special purpose vehicle called Hong Kong Link 2004 and split into five tranches, two for institutional investors and three for retail investors. The two institutional tranches closed on Tuesday, two days ahead of schedule, and priced on Thursday after the close of the retail book.
Both tranches are rated AA-, Aa3 and AA+ by Standard & Poor's, Moody's and Fitch. The fixed-rate HK$450 million A1 tranche has a one-year maturity and pays a coupon of 1.19%, which represents a spread of 4bp over the one-year Hong Kong dollar mid-swap rate. The HK$3.1 billion floating rate A2 tranche has a weighted average life of 3.4 years, a legal maturity of 12 years and pays 36bp over three-month Hibor. Both are offered at par.
One-third of the 22 orders for the A1 tranche, which was 3.2-times over-subscribed, came from central banks. On the A2 tranche 40 investors, mainly banks, over-subscribed the notes on offer by more than four times. Overall, 35% of the deal was sold to investors outside Hong Kong. The marketed range was 8bp to 10bp over the mid-swap rate for the first tranche and 36bp to 48bp for the second tranche.
"This is hugely positive for the Asian market," says Sarwar Ahmad, Asia-Pacific head of structured capital markets for HSBC, which acted as global coordinator and also joint-bookrunner with Citigroup. "Everyone involved is very, very happy with the deal."
And they're happy for a good reason. The deal has met the goals of all concerned, but not least HSBC. Such a high-profile mandate, coming on the back of its own taxi deal and a HK$3 billion offer for the government mortgage corporation last year, has firmly established HSBC as king of the nascent Hong Kong dollar securitization market.
The government gets a double benefit. Cashing in on its future toll revenues will help meet a revenue shortfall that is expected to add up to a consolidated deficit of HK$42.65 billion by fiscal year-end. And, at the same time, it has blazed a trail for the rest of the market. "It's a fantastic deal," says Jeremy Amias, head of fixed income at Citigroup. "It's created a lot of liquidity and has also created the confidence for other issuers to follow on. The government has done a great service with this deal."
Some securitization professionals, while not faulting the execution or structure of the deal, question why the government decided to do it in the first place. "I think it was an idea that just took on a life of it's own," says one. "The government has ended up paying about 50bp more than it would have done on a straight bond deal. With that kind of money you could do an awful lot to developing the capital markets."
Ahmad dismisses these criticisms. Governments all over the world use securitization, not because it is the cheapest way to raise capital, but because it allows them to borrow from a different group of investors, he says. That might seem slightly premature for a borrower that has never even offered a bond before, but perhaps not particularly suprising for a government with a taste for grabbing headlines.
The HK$2.47 billion retail offer closed after lunch on Thursday and prices next Tuesday. It comprises three tranches, all paying a fixed coupon. The size of each slice is not yet announced but it is expected that they will be evenly sized. Either way, there is plenty of demand for each portion: the three-year has attracted HK$4 billion of orders, the five-year HK$1.3 billion and the seven-year HK$2.3 billion.
Getting the deal this far after starting in earnest only two months ago is another feather in the cap of the bankers, though much of the credit for the swift execution goes to Clifford Chance, which ploughed through a lot of the time-consuming legal issues associated with the sale last year.