In May this year, the Hong Kong Mortgage Corporation (HKMC) priced a pilot $404.78 million project finance and infrastructure collateralised loan obligation (CLO), in a deal that would mark the first asset-backed securitisation to be issued by a Hong Kong-incorporated special purpose vehicle (SPV) listed on the market’s stock exchange.
The transaction came about as part of the Hong Kong government’s efforts to promote the special administrative region (SAR) as an infrastructure financing and securitisation centre. To achieve this aim, in 2018, the government established the HKMC’s infrastructure financing and securitisation (IFS) division, explained Francis Edwards, head of the Greater China Derivatives and Structured Finance practice at Clifford Chance, in a conversation with FinanceAsia.
Owned by the Hong Kong Monetary Authority’s (HKMA) primary investment arm and de facto sovereign wealth fund (SWF), the Hong Kong Exchange Fund, the HKMC was set up in 1997 to promote liquidity in the local mortgage market. As of the end of December 2022, its total assets amounted to HKD191.37 billion ($24.5 billion).
The IFS division was created with the objective of acquiring a portfolio of infrastructure financing loans with a view to arranging a securitisation transaction, Edwards explained.
Building a portfolio of infrastructure financing loans and developing track record would be a process to culminate in an announcement by Hong Kong financial secretary, Paul Chan, detailing a planned infrastructure financing securitisation. In his 2022-2023 budget speech, Chan proposed that the transaction would diversify the Hong Kong infrastructure market and enable “the inflow of market capital to high‑quality infrastructure projects”.
According to a Moody’s Investors Service report, the securitisation was backed by a portfolio comprising 35 bank-syndicated, senior secured project finance and corporate infrastructure loans to 25 projects. These spanned nine industry subsectors across 12 countries in Asia Pacific, the Middle East, and South America.
Issued through a Hong Kong-incorporated orphan special purpose vehicle (SPV), Bauhinia ILBS I, the CLO comprised five tranches totalling $364.35 million, including a sustainability tranche:
- $100 million Class A1-SU notes priced at 6-month term secured overnight financing rate (SOFR) + 160 basis points (bps), the sustainability tranche;
- $199.60 million Class A1 notes priced at 6-month term SOFR + 170bps;
- $36.50 million Class B notes priced at 6-month term SOFR + 250bps;
- $18.25 million Class C notes priced at 6-month term SOFR + 395bps;
- $10.00 million Class D notes priced at 6-month term SOFR + 595bps.
Additionally, the HKMC retained a $40.43 million unrated subordinated tranche, as required by risk retention policies, taking the total transaction value up to $404.78 million.
Investors in the deal included multilateral, local and international financial institutions, insurance companies and asset managers, as well as the Asian Infrastructure Investment Bank (AIIB), which participated as an anchor investor, a release published by the HKMA detailed.
“Many of these were first timers in infrastructure loan-backed securities (ILBS),” Mike Cheng, chief investment officer of IFS at HKMC, told FA.
ING Bank, MUFG and Standard Chartered served as joint global coordinators (JGCs), bookrunners and lead managers on the transaction. Clifford Chance acted as counsel to the JGCs, while Linklaters advised HKMC.
Bauhinia-bespoke
Commenting on the timing and pricing of the deal, Weili Chen, head of commercial asset-backed securities (ABS) at Standard Chartered Bank, drew distinction between the structure of the Hong Kong transaction as compared to the other deals that are typically executed across the $1 trillion, US-dominated global CLO market.
“This transaction achieved tighter senior pricing compared to recent US CLO deals, which is very encouraging,” he told FA.
With regard to the junior tranches, the pricing was more competitive than deals in the US CLO market and on par with recent similar Asia Pacific CLO or infrastructure CLO transactions, he said.
Edwards explained that the deal achieved more attractive pricing than US CLOs because the risk associated with the underlying loans in the Bauhinia ILBS I portfolio, was perceived to be lower by comparison.
“It accomplished good pricing, particularly for a debut issue. We’re very happy with the way it was valued,” he added.
Reviewing the sustainable tranche, Chen noted that the 10bps greenium on offer was more attractive than similar structures used in other deals, where only 5bps is usually achieved.
“Thanks to strong oversubscription levels, the sustainability tranche has set a new benchmark for pricing differentials versus prior transactions seen in this asset class,” John Stormon, managing director of Securitised Products at MUFG Securities Asia, told FA.
He noted that the market volatility experienced earlier this year – alluding to bank runs in the US and the fallout to follow Credit Suisse’s demise – did not impact the timing of the transaction, which occurred during its planned window.
HKMC conducted a non-deal roadshow in late 2022 before a formal deal roadshow in the lead up to execution, to ensure that investors were comfortable with the assets associated with the deal, its structure and proposed pricing levels, he said.
Pioneering debut
Commenting on the significance of the transaction, the HKMC team noted its limited precedents globally.
“We wanted to execute a landmark transaction in Hong Kong to showcase that the market has the capability to deliver this type of securitisation deal,” said Cheng.
“Our coming to market adds to supply and helps to bring more investor awareness to this asset class,” added Francis Or, head of Infrastructure Risk, IFS at the HKMC.
“Since the global financial crisis (GFC), there hasn't been a publicly listed securitisation in Hong Kong and more importantly, we haven't seen one that is listed on Hong Kong Stock Exchange using a Hong Kong SPV,” reiterated Standard Chartered’s Chen.
“This deal deserves to be recognised as ‘Deal of the Century’ rather than ‘Deal of the Month’,” he mused.
“Bauhinia 1 has helped put Hong Kong on the map in terms of its development into an infrastructure financing and securitisation hub,” Jordan Batchelor, head of Global Balance Sheet Distribution for Asia Pacific at ING, told FA.
Its only Asian precursors include infrastructure project finance securitisations issued in Singapore by Temasek-backed Clifford Capital, the first of which was issued in 2018 – the same year that the HKMC set up its IFS division. Since then, the specialist arranger has issued two more securitisations under its special purpose vehicle, Bayfront Infrastructure Capital, with a similar aim at channelling investor capital into Asian infrastructure debt through financial innovation.
Batchelor noted that the HKMC transaction bears similarities to Bayfront’s securitisation deals, including in terms of its capital structure, sequential repayment structure, the inclusion of a non-call period and the incorporation of a dedicated sustainability tranche – for which ING acted as sole sustainable finance advisor.
“Many of these features are also found in US CLOs, but Bayfront’s programme is the appropriate benchmark, given the similarity in underlying collateral...whereas US CLOs are typically backed by lower-rated corporate loans with historically higher default rates.”
A catalyst for infrastructure CLOs
Experts lauded the $404.78 million HKMC deal and its forerunners in Singapore, for taking an important first step to address the regional infrastructure funding gap that the Asian Development Bank (ADB) estimates to require $1.7 trillion of investment per annum, up to 2030.
Each agreed that the recent deal would support the further advancement of Asia’s infrastructure asset class.
"Infrastructure CLOs are interesting because they bring capital markets investors into infrastructure, so we're tapping a different pool of liquidity,” explained Victor Wan, capital markets partner at Linklaters.
“Let’s say you have the HKMC doing one a year, and if you've got other issuers also arranging these types of deals, it starts to become quite material,” he explained.
“We're still trying to suss out who else [besides HKMC and Temasek-backed Clifford Capital] might be doing these deals,” he added.
“It is clearly the intention of both platforms to execute multiple issuances at a pace that can be supported by investor appetite, the availability of loans from banks, and market pricing. If these conditions are met, I think all of them would be keen to tap the Hong Kong market more frequently and sooner,” Chen said.
“Frequency from the HKMC in this space will be subject to many factors such as asset origination, market technicals, economic backdrop and investor demand; however, we would hope that the team will visit the capital markets regularly – perhaps annually, if conditions permit,” reiterated Harriet Campbell, vice president of Securitised Products at MUFG Securities Asia.
Cheng confirmed with FA that the HKMC team has plans to sponsor additional infrastructure securitisations, but the timing is yet to be determined.
“I think the most important thing for now, is that we’re digesting and absorbing the experience gained from this issuance and reflecting on how to make it more efficient next time.... We don't have a definite timeline yet, but we're working on various things.”
