Hong Kong furthers digital assets agenda
The Hong Kong Special Administrative Region (Aa3/AA+/AA–) on Monday raised US$1.3bn-equivalent from its third annual digital bond offering as it pushes for digital hub status.
The four-tranche multicurrency green transaction comprised a US$300m 3.625% three-year bond priced at 99.977 to yield 3.633%, or Treasuries plus 3bp, a €300m 2.5% four-year bond priced at 99.955 to yield 2.528%, or mid-swaps plus 23bp, a HK$2.5bn (US$320m) two-year bond priced at 2.5% and a Rmb2.5bn (US$351.1m) five-year priced at 1.9%.
The deal forms part of a series of initiatives aimed at building out digital assets in Hong Kong, which despite a scattering of deals this year remain in their infancy.
At the Hong Kong FinTech Week on November 3, the Hong Kong Monetary Authority presented a five-year blueprint to develop the city's fintech industry, with the tokenisation of real-world assets as one of the pillars. As part of this, the de facto central bank said it would "lead by example" by regularly issuing tokenised government bonds.
"We have more client enquiries on the benefits and process for digital bonds; that's why the government is doing this, it's not only about the financing," said a banker on Monday's deal.
"To be honest, it is developing fast but it's still new and in the early stages," she said.
The territory was in the offshore market as recently as June, raising US$3.4bn-equivalent from non-digital green and infrastructure bonds in the same four currencies.
The handful of non-government issuers of digital bonds in Hong Kong include securities firm Guotai Junan International, which issued a US$300m debut digital bond in July, and Bank of Communications Hong Kong, which raised US$300m from digital bonds in January.
"Treasury teams and CFOs will need to understand the setup – at the issuance stage but also for maintenance. What is required operationally – reporting, accounting, et cetera – they would likely need to set up a dedicated team for this," the banker said.
It also remains unclear whether the increased efficiency and faster settlement achieved with digital bonds translate into better pricing for issuers.
The banker said the latest trade offered investors "a few basis points" of pickup to encourage participation.
A second banker on the deal said the small tranche sizes were part of the plan to develop digital bonds. Bankers were able to market the deal directly at final price guidance because of the small size requirement, he said.
The first banker said marketing at final guidance was done to remove uncertainty.
The Reg S bonds will be rated in line with the issuer.
World first
The bonds, which leverage HSBC's Orion as the distributed ledger technology platform, are digitally native, meaning they are issued directly on a distributed ledger or blockchain. Conversely non-native digital bonds, like Hong Kong's debut tokenised offering in 2023, are issued conventionally and represented as tokens on the DLT platform.
For the Hong Kong dollar and renminbi tranches, settlement in central bank digital currency was also enabled in what the HKMA called a world first.
However, settlement via Hong Kong's Central Moneymarkets Unit was retained to allow investors to access the deal via traditional market infrastructure, indicating investors are not yet set up for a fully digital process.
Eventually, clearing via traditional channels could be eliminated, but during this transition phase traditional clearing is necessary, the first banker said.
The bankers said final pricing was not benchmarked against the People's Republic of China's US$4bn deal the week before, which comprised a three-year portion priced flat to Treasuries and a five-year at plus 2bp, as Hong Kong has its own outstanding curve and investor base.
The territory last sold digital bonds in February 2024, raising the equivalent of US$752.3m across a US$200m 4.625% tranche at 4.749%, an €80m 3.5% portion at 3.647%, a Rmb1.5bn 2.9% piece and a HK$2bn 3.8% part, all with two-year maturities. Hong Kong first issued digital bonds in February 2023 with an HK$800m 4.05% one-year note.
"Hong Kong managed to lengthen the tenors on this deal compared to last year; that shows investors are gaining acceptance of digital bonds," said a third banker. He also highlighted the larger number of accounts in each tranche this year and the larger deal size.
The US tranche garnered over US$5.2bn of final orders, including US$565m from the lead managers, from 107 accounts. Investors in Asia took 97% and EMEA 3%. Banks and financial institutions bought 56%, asset and fund managers 26% and central banks, official institutions and insurers 18%.
The final book for the euro tranche was €7.5bn, including €585m from the lead managers, from 175 accounts. Asian investors received 76% and EMEA 24%. Banks and financial institutions accounted for 52% of the book, asset and fund managers 40% and central banks, official institutions and insurers 8%.
The Hong Kong dollar and renminbi tranches were allocated solely to Asian investors.
The final book for the Hong Kong dollar tranche was HK$10.6bn, including HK$5.15bn from the leads, from 35 accounts. Banks and financial institutions were allotted 77% and asset and fund managers 23%.
Final orders for the renminbi tranche were over Rmb13bn, including Rmb4.3bn from the lead managers, from 42 accounts. Banks and financial institutions took 75%, asset and fund managers 17% and central banks and official institutions 8%.
The renminbi and Hong Kong dollar tranches traded around par on Thursday, the US dollar 1bp–2bp tighter and the euro 7bp–8bp tighter.
The third banker attributed this to the relative scarcity of euro supply from the issuer.
HSBC, Bank of China (Hong Kong), Bank of Communications, BNP Paribas, Credit Agricole, ICBC (Asia) and JP Morgan were global coordinators, and lead managers and bookrunners with Societe Generale, Standard Chartered and UBS.
Proceeds will be used in line with the government's green finance framework.
(Additional reporting by Morgan Davis)