sold $1 billion of sovereign Islamic bonds in its first-ever issue of the securities, attracting orders for 4.7 times the amount on offer.
The dollar-denominated five-year notes were priced at a 2.005 percent profit rate, according to a on the government’s website today. The U.K., which along with Hong Kong is rated the highest investment grade, sold sukuk for the first time in June at a coupon of 2.036 percent. Those notes yielded 1.75 percent today, data compiled by Bloomberg show.
Hong Kong and the U.K. are both vying to become Shariah-compliant hubs in a market with $2 trillion of Islamic banking assets. The city is the fourth Asian issuer of sovereign sukuk, following, and Pakistan, while Luxembourg and are planning inaugural sales this year.
“The orders for the Hong Kong sukuk show that there’s still strong demand for Islamic debt,” Jesse Liew, Kuala Lumpur-based head of global Islamic bonds at BNP Paribas Investment Partners Malaysia, which oversees more than $900 million, said in a phone interview. “This could encourage others issuers to tap the Shariah-compliant market.”
The Hong Kong sale drew $4.7 billion of orders, and the bonds were allocated to more than 120 global institutional investors, 47 percent in , 36 percent in the , 11 percent in the U.S. and 6 percent in , according to the government statement.
Indonesia sold 10-year dollar sukuk last week that attracted $10.23 billion of bids, or 6.82 times the $1.5 billion on offer. The debt was issued at a coupon of 4.35 percent and yielded 4.27 percent yesterday. Moody’s Investors Service rates the notes at Baa3, the lowest investment grade.
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 aren’t subject to double taxation on and levies on the assets.
The Hong Kong sukuk was priced at 23 basis points above similar-maturity U.S. Treasuries, the narrowest spread ever achieved on a benchmark dollar issuance from an Asian government outside , according to the official statement.
“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,” Financial Secretary John C Tsang said in the release.
The city, which U.S. government data shows has a Muslim population of about 270,000, changed its tax laws in July last year to help pave the way for sales of Shariah-compliant debt. The legislature then approved a in March that opened the door for the government to issue sukuk.
HSBC Holdings Plc, Standard Chartered Plc, CIMB Group Holdings Bhd. and National Bank of Abu Dhabi PJSC were the joint arrangers for the Hong Kong sukuk. The city’s 2.16 percent conventional local-currency notes due in December 2019 yielded 1.42 percent today, four basis points more than at the end of last week, according to data compiled by Bloomberg.
Hong Kong has tried to develop an Islamic financial market since as far back as , when Airport Authority Hong Kong announced it was interested in selling as much as $1 billion of debt that complies with Shariah law. That proposed sale never came to fruition.
Offerings of sukuk worldwide have climbed 39 percent to $32.1 billion in 2014 from a year earlier, after reaching $43.1 billion in 2013 and a record $46.5 billion in 2012, data compiled by Bloomberg show. Sales from the six-member Gulf Cooperation Council, which includes , the United Arab Emirates and , represent 37 percent of the total.
“The new Hong Kong sukuk will give investors more choice in the sovereign Islamic debt space other than the GCC,” Hakim Azaiez, head of investment at GCA Asset Management in , said in an e-mail today. “We hope that this will encourage other sovereigns to tap the sukuk market which will eventually increase the investment spectrum.”