The Hong Kong SAR government made its debut in the international bond market yesterday (Thursday), pricing a $1.25 billion issue slightly through its initial indicative range of 75bp to 79bp over Treasuries.
The 10-year transaction was priced at 99.233% on a coupon of 5.125% to yield 5.224%. This equates to 74bp over Treasuries and 25.2bp over Libor. Lead managers were BOCI, Goldman Sachs, HSBC, Merrill Lynch and Morgan Stanley.
Pricing at this level was about 5bp wider than most debt specialists were anticipating at the beginning of roadshows. However, most believe Hong Kong has provided a rare example of an Asian sovereign prepared to set a realistic benchmark, which should trade well. Taking a sensible view of market conditions was particularly important given the poor secondary trading performance of most recent Asian bond deals, which has left investors in an unforgiving mood towards the primary market.
Hong Kong's strategy also stands in stark contrast to the People's Republic of China, which decided to squeeze out every last basis point and a few more from its $1 billion 10-year offering last October. The deal was priced at only 10bp over Libor, but had traded out to 14bp within the space of a week.
The PRC's 4.75% October 2013 bond provides one of the main benchmarks for Hong Kong's deal. Yesterday, it was bid at 77bp over Treasuries or 32bp over Libor. However, on an interpolated Treasuries basis, the PRC's deal is trading at about 80bp over, meaning Hong Kong has priced about 6bp through China.
The other main comparable is a 5% September 2013 deal by the Hong Kong Airport Authority. This was trading yesterday at 75bp bid, or about 78.5bp on an interpolated basis. This means Hong Kong has priced about 4bp to 5bp through its main quasi-sovereign benchmark, a very tight differential compared to other regional sovereigns and their proxies.
In Asia, the Republic of Korea also provides a good benchmark since the two sovereigns share similar ratings. Hong Kong is rated A1/A+/AA- some two notches higher than Korea's A3/A-/A. In turn, Hong Kong is rated three notches higher than China's BBB+/A- ratings from Standard & Poor's and Fitch, and one notch higher than Moody's A2 rating.
The Republic of Korea has typically been trading a couple of basis points wide of China all year and yesterday was no different. The ROK's June 2013 bond was bid at 78bp over Treasuries or 35bp over Libor. However, the Treasury curve is relatively steep between May's 4.36% Treasury note and October's 4.46%.
On a like-for like basis, Hong Kong has priced about 14bp tighter than Korea, given the latter was being quoted by non-syndicate banks at 88bp over Treasuries on an interpolated basis.
On a global basis, Hong Kong appears to have a lot of value compared to a recent debut issue by the Czech Republic, which has an A1/A-/A- rating. The latter is rated at the same level as Hong Kong by Moody's, two notches lower by Standard & Poor's and three notches lower by Fitch.
In the middle of May, it made its international bond market debut with a 10-year deal priced at 12bp over mid-swaps. Bankers say it is still trading around these levels, which equates to about 15bp to 16bp over on a Libor basis, or 10bp through Hong Kong.
This kind of relative value is said to have driven a lot of international accounts into Hong Kong's order book, although unsurprisingly there was a very large bid from Asia itself. The order book is said to have closed at the $5 billion mark, with about $3.2 billion of demand coming from Asia, $1.5 billion from the US and $300 million from Europe.
By allocation, the US was bumped up to 47%, with Asia receiving 48% and Europe 5%.
About 147 accounts are said to have participated, of which roughly 85 came from Asia itself. The vast majority of Asian demand was from Hong Kong and China, although detailed breakdowns have not yet been compiled.
Specialists conclude the deal went remarkably smoothly given the controversy surrounding the original mandate, the large number of bookrunners appointed and the additional complication posed by the Hong Kong dollar denominated tranches.
These are due to be priced today. The government hopes to raise a further $1.25 billion split between four tranches. Two retail tranches have coupons of 2.13% on a two-year note and 3.38% on a four-year note. This equates to 9bp and 20bp over Exchange Fund Notes (EFN's) or roughly 29bp and 12bp through mid-swaps.
Two institutional tranches are being marketed at 7bp to 10bp through mid-swaps (five-year tranche) and 10bp to 13bp over swaps (15-year tranche).
Non-syndicate bankers say it will be interesting to see how the 15-year tranche is sized and received given the lack of an established long-term government yield curve. The government has never issued a 15-year EFN and has only ever raised $70 million equivalent in 10-years.
