Our Deal of the Month feature for May focusses on the government of Hong Kong Special Administrative Region (HKSAR)’s institutional green bond offering earlier this year. Priced on January 5, it marked the largest green bond issuance in HKSAR’s history and the largest multi-trance green bond issuance in Asia Pacific, with a total size of $5.75 billion.
The offering also constituted the largest US dollar green bond issuance in Apac, and the first ever sovereign multi-currency green bond priced concurrently in euro (EUR), US dollar (USD) and yuan (CNH).
The transaction helped to reopen the Asian bond markets after a volatile fourth quarter of 2022 and set new reference points for other issuers to come, Tim Fang, head of DCM for Greater China at Crédit Agricole CIB told FinanceAsia.
“The HKSAR government was able to capture a positive window at the start of January as investors had little supply in Q4 of the previous year. Investors’ performance KPIs are reset in the new year, so generally there is more appetite for new issues in January. The government’s credit profile made offered a safe and low risk investment opportunity in a volatile market,” he shared.
The offering comprised eight tranches:
- USD500 million 3-year tranche at 4.494% (35 basis points over 3-year US Treasuries);
- USD1 billion 5-year tranche at 4.585% (70 basis points over 5-year US Treasuries);
- USD1 billion 10-year tranche at 4.672% (95 basis points over 10-year US Treasuries);
- USD500 million 30-year tranche at 5.318% (145 basis points over 30-year US Treasuries);
- EUR750 million 2-year tranche at 3.920% (70 basis points over 2-year EUR mid-swap rate);
- EUR500 million 7-year tranche at 3.964% (110 basis points over 7-year EUR mid-swap rate);
- RMB5 billion 2-year tranche at 3.000%; and
- RMB5 billion 5-year tranche at 3.300%.
The green bonds were assigned credit ratings of AA+ by S&P Global Ratings and AA- by Fitch.
According to the government’s official announcement, the green bonds attracted $36 billion in orders, garnering interest from both green and conventional bond investors alike, and participation from new and existing holders of HKSAR bonds.
The strong demand from high-quality investors proved solid testament to the market’s recognition of the HKSAR government’s strong credit profile and ESG efforts, Alvin Yeo, head of Green and Sustainable Finance at UBS Global Banking Asia, told FA.
Banks made up 84% of the investor base in the RMB green bonds; 5% of investors were central banks, sovereign wealth funds and international organisations; and the remainder comprised fund managers, private banks and insurance companies. For the USD and EUR bonds, banks made up 31% and 38% of investors, respectively; and central banks, sovereign wealth funds and international organisations comprised 10% and 32%, respectively.
Mainland investors were able to access the opportunity by leveraging the southbound trading lane of Bond Connect, which launched between the mainland and Hong Kong in September 2021. The equivalent for derivatives, Swap Connect, went live on May 15.
The HKSAR’s green bond offering confirms Hong Kong’s position as the leading offshore RMB hub and promotes RMB internationalisation, the government announcement said.
“The bond saw strong performance in the secondary market and set the benchmark for Hong Kong issuers to tap the market subsequently,” Manoj Agarwal, Apac head of debt capital markets (DCM) at BNP Paribas, told FA.
BNP, BofA Securities, Morgan Stanley and UBS acted as joint lead managers and joint bookrunners in the USD and EUR tranches, while Crédit Agricole CIB, HSBC (B&D Bank), Citigroup and JP Morgan were joint lead coordinators, joint lead managers and joint bookrunners.
For the CNH tranche, Crédit Agricole CIB, HSBC (B&D Bank), Bank of China (Hong Kong) and ICBC (Asia) acted as joint lead coordinators, joint lead managers and joint bookrunners; while Bank of Communications, Mizuho and Standard Chartered Bank were joint lead managers and joint bookrunners.
Crédit Agricole CIB and HSBC were ESG structuring advisors, while Allen & Overy advised the HKSAR government and Linklaters advised the joint lead managers.
The green bonds were issued under the government’s Global Medium Term Note (GMTN) Programme, dedicated to green bond issuances. Proceeds will be used to finance or refinance projects that benefit the environment and support the territory’s sustainable development. Details on how the government should use green bond proceeds are outlined in the its Green Bond Framework, published in 2019.
Based on indications in the 2023-24 Budget speech, Fang expects further sustainable debt supply from the HKSAR government. “We also expect other regional governments to continue to access the international bond market in the coming months as they are a frequent issuer in this market,” he shared.
“The successful offering also paves the way for other borrowers in Greater China region to follow with ESG-labelled financings to accelerate their own decarbonisation plans,” reiterated Yeo.
A number of firsts
Just one month after this flagship issuance, the HKSAR Government made headlines again when it issued the first tokenised green bond by a government globally, and the first tokenised bond under Hong Kong law.
The HK$800 million ($102 million) offering using distributed ledger technology (DLT) attracted strong interest from institutional investors.
“This breakthrough deal has the potential to shape the future of the capital markets in Hong Kong and beyond, as well as opening up possibilities for digitising other types of products in Hong Kong,” said Agnes Tsang, partner at Allen & Overy.
“As the first digital issuance of any kind in this market, the issuance could inspire similar innovations in other types of assets.”
The government leveraged Goldman Sachs’ tokenisation platform, GS DAP, which is built on Digital Asset’s Daml smart contract language.
“Overall, tokenisation increases operational efficiency and reduces pre and post trade costs,” Digital Asset president, Shane Akeroyd, told FA.
“The Hong Kong government has been a global leader in providing a certain and stable regulatory environment for digital assets and promoting Hong Kong as a global centre for tokenised new issuances, including bonds…. We fully expect and would be delighted to see more issuance from the Hong Kong government and its peers in the near future,” he added.
Major financial institutions to have issued bonds on the blockchain include the European Investment Bank (EIB), which since 2021 has issued several digital bonds in euro and pound sterling; and Singapore’s DBS bank, which priced a SGD15 million ($11 million) digital bond that same year. However, Hong Kong remains a trailblazer among government institutions and unique in combining two leading trends in debt capital markets – tokenisation and sustainability – into a single offering.
More broadly, the SAR continues to cement its position as a leading green bond hub for the region.
A recent report by the International Capital Markets Association (ICMA) showed that 35% of international sustainable bonds issued is Asia last year were arranged in Hong Kong, and a presentation by the Hong Kong Monetary Authority (HKMA) at FA’s Sustainable Finance Forum in April, showed that total green and sustainable debt issued in Hong Kong amounted to $81 billion in 2022, up from $12 billion in 2020.
What’s your view on the outlook for green, social and sustainable debt in 2023? We invite investors and issuers across APAC to have your say in the 6th annual Sustainable Finance Poll by FinanceAsia and ANZ.
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