Moody's Investors Service has assigned a provisional rating of (P)Aa1 to the Trust Certificates issued by Hong Kong Sukuk 2014 Limited, a special purpose vehicle established in Hong Kong by the Government of the Hong Kong Special Administrative Region (HKSAR).
The (P)Aa1 rating assigned to the Trust Certificates is at the same level as the long-term local-currency and foreign-currency issuer ratings of Hong Kong.
Moody's explains that the sukuk certificate holders will effectively be exposed to Hong Kong's senior unsecured credit risk; abd not be exposed to the risk of performance of the underlying assets relating to the Certificates.
Holders will also have rights to the proceeds of payments from the HKSAR Government ranking pari passu with other senior unsecured obligations.
The proceeds of the sukuk certificates will be used by the Issuer to purchase certain properties now owned by the HKSAR Government. Subsequent to the purchase, the Issuer will enter into a lease agreement with the Government.
Pursuant to the terms of the agreement, the Government will periodically pay an amount sufficient to fund distributions payable by the Issuer to investors in the sukuk.
At the end of the sukuk term, the Government will purchase the lease assets at the exercise price, thus providing the principal amount payable by the Issuer to Certificate holders.
If the dissolution is triggered by a total loss event and the insurance proceeds are not sufficient to cover the amount payable by the Issuer, the Government will pay an amount equal to the shortfall.
Effectively, the obligation to pay is that of the Government and is not dependent on the performance of the assets.
Hong Kong's Aa1 government bond rating reflects a strong, competitive economy, very high institutional strength, very high government financial strength, and considerable resilience to shocks. However, the SAR's risk profile also includes vulnerability to credit shocks that might emanate from China.
Hong Kong's economic strength is evident from its growth record. Although the pattern of growth is somewhat volatile, real GDP increased by an average of 4.5% annually during the past decade.
Underpinning this growth have been Hong Kong's role as an international financial center and strong increases in international trade and related activities. Much of this activity is focused on China, supporting strong growth in Hong Kong.
The HKSAR Government's financial position is among the strongest of any government rated by Moody's and strengthened further in the last fiscal year.
The budget has been in surplus for the last ten consecutive years, allowing the Government to build up large fiscal reserves that are now equivalent 36% of GDP. These reserves far exceed the very low level of government debt.
Hong Kong as a whole also has a very large net international asset position. External assets exceed liabilities by an amount equivalent to 280% of GDP at the end of 2013, the largest such position of any country rated by Moody's.
The significant build-up of assets has resulted from continuous current account surpluses over a long period of time.
A final factor supporting the rating is the strength of the banking system, which carries an average Moody's Bank Baseline Credit Assessment that is among the strongest in the world.
Unlike banking systems in many other countries, Hong Kong's banks did not exhibit significant stress during the global financial crisis. At some time in the next few years, they may face the prospect of a decline in the housing market, but the last time that occurred around the turn of the century the banks were able to manage this without seriously affecting their financial strength.
Element of risk
Despite these demonstrated strengths, Moody's Aa1 rating for Hong Kong also incorporates an element of China risk because of the significant, and increasing, interconnections. Politically, Hong Kong is a Special Administrative Region of China.
Economically, Hong Kong companies derive a significant portion of their revenues from activities elsewhere in China and are major investors there.
The financial markets have also become interconnected to a significant degree, with Chinese companies making up the majority of the market capitalization of the Hong Kong stock exchange, Chinese banks having significant market share in Hong Kong, and Hong Kong banks having increasing exposure to China.
While this degree of interconnectedness leaves Hong Kong vulnerable to developments in the Mainland, Moody's Aa3 rating of China indicates a low probability of adverse developments that would affect Hong Kong's ratings.