Sukuk

(Translation)

The HKMA has recently assisted the Government of the Hong Kong Special Administrative Region (HKSAR Government) to successfully offer a 10-year Islamic bond (sukuk). The sukuk was well received by the market. Ronnie interviewed Mr Vincent Lee, Executive Director (External), to learn more about this sukuk offering.

Ronnie:

Vincent, this is the third time for the HKSAR Government to issue sukuk. Can you share with us anything special about this sukuk issuance?

Vincent:

This is the first 10-year sukuk issued by us. And we are also the first AAA-rated government to issue sukuk with a 10-year tenor, setting a new pricing benchmark for the bond market.

Ronnie:

What do you mean by a new pricing benchmark?

Vincent:

The previous two sukuk issued by the HKSAR Government were of a 5-year tenor. In the past, should Hong Kong corporates wish to issue 10-year sukuk, there was no benchmark available for their reference. This 10-year sukuk extends the yield curve to 10 years. In the future, any local or overseas institutions intending to issue sukuk of a longer tenor can refer to the yield of our sukuk as a benchmark.

Ronnie:

Why are you confident of offering sukuk with such a long tenor of 10 years at a time when the US has started its rate hike cycle?

Vincent:

Long-term sukuk with a high credit rating is scarce in the global market. The AAA-rated 10-year sukuk issued by the HKSAR Government is well-placed to fill the gap. Although the heightened market expectations of US interest rate hikes might affect investor appetite, this sukuk still saw strong demand from the market, attracting orders of US$1.72 billion. We have therefore upsized the issue size from the original US$500 million to US$1 billion. This is a testament to the confidence of international investors in Hong Kong’s fiscal positions and economic fundamentals. In fact, sukuk can attract a diverse group of investors, including both conventional and Islamic investors, widening the potential investor base. We note that this sukuk has attracted some new investors, such as insurance firms and private banks, which have never subscribed for sukuk offered by the HKSAR Government before. Some of these investors have a strong appetite for assets that can offer long-term and stable returns. This sukuk, with a 10-year tenor and AAA-rating, is a right match for their investment need.

Ronnie:

The yield of this sukuk is 3.132%, which is 68 basis points over 10-year US Treasuries and has been tightened from the initial price guidance. What does it mean?

Vincent:

From the issuer’s perspective, lower yield means lower funding cost. However, from the investors’ perspective, that means lower return. The yield of this sukuk is lower than the initial price guidance and also far below the yields of some other AA-rated 10-year sukuk in the global market. This shows that investors have strong demand for our sukuk. They are willing to accept a lower return given the safety and stability offered by our sukuk.

Ronnie:

I heard that you had a very tight schedule during the roadshow.

Vincent:

The colleagues from the External Department were split into two teams. One team was led by Mr. Eddie Yue, Deputy Chief Executive, and covered five cities, namely Riyadh, Jeddah, Dubai, Abu Dhabi and London, within four days. For four consecutive nights, they had to eat their dinner on the plane, reaching the hotel only in late evening. They then had to check out at 7 o’clock in the morning and rush to the meetings. It was literally non-stop. My team was slightly more “relaxed”, as we covered Malaysia, Singapore and Hong Kong in three days. Incidentally, there was a major international incident that happened at the Kuala Lumpur airport recently. It just so happened that I was also there on that very day ready for departure!

Ronnie:

The HKMA is normally on the buy side. You must feel quite differently to be on the sell side this time.

Vincent:

Promotional work is of course not easy: imagine doing the same presentation dozens of times in three days. Luckily we did not just talk about sukuk with the investors. We also exchanged views on the economy, property market and future development of Hong Kong, among other topics. I have benefitted a lot from these discussions.

Ronnie:

Going back to bonds – what is the difference between sukuk and conventional bonds?

Vincent:

Generally speaking, the economic substance of sukuk is very similar to that of conventional bonds. The biggest difference is that sukuk must not pay any interest to bondholders. According to Shariah law, money is regarded as a medium of exchange only and has no intrinsic value. Making money out of money is essentially forbidden. Therefore, the payment or receipt of interest is not allowed. As such, sukuk seek to generate book profit, by making use of assets and various commercial arrangements, as a return for bondholders. But as I have said, sukuk appeal to both traditional and Islamic investors, widening the investor base and helping reduce funding cost.

Ronnie:

Why is the HKSAR Government keen to issue sukuk? What are the future plans?

Vincent:

As an international financial centre, Hong Kong should have a wide range of investment products. Back in 2014, the HKSAR Government made a head start in promoting the development of Islamic finance by issuing an inaugural sukuk. This showcased the ability of Hong Kong’s legal, regulatory and tax frameworks in supporting the issuance of sukuk and set an example for the private-sector institutions interested in sukuk issuance. Going forward, we will continue to share our experience with corporates with funding needs, help them understand the potential of issuing sukuk, and encourage more issuers and investors to participate in Hong Kong's sukuk platform.