Hong Kong Raises US$1B in Debut Sovereign Islamic Bond Issue

Hong Kong raised US$1 billion in its debut Islamic bond issue bringing 2014 sukuk bonds volume globally to US$21.8 billion, up 9.5% YTD, according to data from Thomson Reuters.

Islamic bonds pay returns from an underlying asset such as property to conform with a ban on interest. Countries seeking to sell such debt need to amend legislation to ensure the securities are not subject to double taxation on capital gains and levies on the assets.

The Sukuk, with an issuance size of US$1 billion and a tenor of 5 years, marks the world's first USD-denominated sukuk originated by an AAA-rated government. It attracted almost $5 billion or 4.7 times the amount on offer.

The deal attracted interest from a diverse group of conventional and Islamic investors.  The Sukuk was allocated to over 120 global institutional investors, with 36% of the Sukuk distributed to the Middle East, 47% to Asia, 6% to Europe and 11% to the United States. 

By investor type, 11% was distributed to fund managers, 56% to banks and private banks, 30% to sovereign wealth funds, central banks and supranationals, and 3% to insurance companies.

"We are pleased to see such strong demand for the HKSAR Government's inaugural Sukuk, as evidenced by the significant orderbook size and tight pricing," said the Financial Secretary, John C. Tsang.

The deal is the fourth largest Islamic bond this year, following Malaysia, Indonesia and Pakistan. Luxembourg and South Africa are planning inaugural sales this year.

The Sukuk issuance comes after the legislative changes made in Hong Kong in July 2013, which provide a taxation framework for sukuk issuances comparable to that for issuances of conventional bonds. 

The strong investor demand for the Sukuk is a testament of investor confidence in Hong Kong's credit strengths and strong economic fundamentals. The Sukuk was assigned credit ratings of AAA by Standard and Poor's and Aa1 by Moody's.

"I hope that the Sukuk issuance will catalyse the further growth of the sukuk market in Hong Kong by encouraging more issuers and investors to participate in our market," says Tsang.

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