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Hong Kong sells US$1 billion of Islamic bonds in regional hub bid

Hong Kong sold US$1 billion of Islamic bonds in its second sukuk issue since the city's debut in 2014, as it seeks to become a regional Shariah-compliant finance hub.

[KUALA LUMPUR] Hong Kong sold US$1 billion of Islamic bonds in its second sukuk issue since the city's debut in 2014, as it seeks to become a regional Shariah-compliant finance hub.

The five-year debt was priced at 1.894 per cent, with orders amounting to US$2 billion, according to a government statement. The city sold the same amount and tenor in September at 2.005 per cent, which drew bids for $4.7 billion. Those notes last yielded 2 per cent, data compiled by Bloomberg show.

"Building on the momentum from the successful issuance of the inaugural sukuk last year, the latest issuance strengthens our relationship with global investors and demonstrates the flexibility of Hong Kong's Islamic finance platform," Financial Secretary John C. Tsang said in the statement.

The UK pipped both Hong Kong and Luxembourg in tapping the global Islamic bond market for the first time last year as they bid to become Shariah finance centers in an industry whose assets Ernst & Young LLP forecasts will reach US$3.4 trillion by 2018 from $1.7 trillion in 2013.

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The city sold its latest bonds at a spread of 35 basis points above similar-maturity U.S. Treasuries. That compares with 23 basis points for its debut offering, which was the narrowest margin ever achieved on a benchmark dollar issue from an Asian sovereign outside of Japan, according to statement from the Hong Kong Monetary Authority at that time.

Standard & Poor's assigned a preliminary AAA credit rating to the debt, the highest investment grade, and the same as the government. HSBC Holdings Plc, Standard Chartered Plc, CIMB Group Holdings Bhd. and National Bank of Abu Dhabi PJSC were the lead managers for the sale.

The offering was taken up by 42 per cent of investors from the Middle East, 43 per cent in Asia and 15 per cent by Europe, the statement said.

The city is already attracting Islamic investment funds seeking a gateway into China's market, although last year's debut sukuk sale has yet to spur any corporate issuance. Malaysia's RHB Asset Management Sdn set up a Hong Kong fund targeting stocks and bonds in April 2014 and is planning more. Maybank Asset Management Group Bhd in Kuala Lumpur plans to register its existing Shariah-compliant equities fund there by the first quarter of 2016.

Hong Kong, Luxembourg and the UK are the only top-rated governments to have ever sold Islamic bonds in an industry that's dominated by the Middle East and Asia. Malaysia and Saudi Arabia are the biggest sukuk markets, while Singapore, Indonesia and Pakistan are the other main centres.

Hong Kong, which has a Muslim population of about 270,000, identified Islamic finance as a priority in 2007 and amended laws in 2013 to exempt sukuk issuers from paying tax on underlying assets and on capital gains. A bill was approved in March last year allowing the government to proceed with sales.

"The success of the two issuances demonstrates not only the viability of sukuk issuance using Hong Kong's platform, but also the recognition among international investors of Hong Kong's economic fundamentals and financial structure," the financial secretary said in the statement. "I hope that the sukuk issuance will catalyse further growth of the sukuk market in Hong Kong."