Hong Kong outlines green future

IFR Asia 1232 - 16 Apr 2022 - 22 Apr 2022
4 min read
EMEA, Emerging Markets, Asia
Julian Lewis

The Hong Kong Special Administrative Region is to turbo-charge the sovereign retail green bond market, shrugging off both the UK’s feeble sales of a similar instrument and February’s pandemic-driven postponement of its own deal by unveiling revised plans for a huge debut “Bond with a Green Future” offering of up to HK$20bn (US$2.55bn).

The three-year new issue is set to go on sale to individual investors in the Chinese-controlled territory soon. “Given the epidemic situation is gradually subsided, we will relaunch the issuance shortly,” financial secretary Paul Chan wrote in an official blog.

The deal will combine the HK$6bn (US$750m) that the government sought to raise in February with some or all the volume allocated to the product in the new financial year which began on April 1.

Its initial size will be HK$15bn (US$1.9bn), Chan said. This could rise as high as HK$20bn depending on demand.

The inflation-linked deal’s 2% floor has also been raised to 2.5% to reflect “the hiking interest rate environment”.

This structure mimics Hong Kong’s non-green “iBond” and “Silver Bond” retail bonds. They are also three-year instruments with floored inflation-linked payouts based on the SAR’s composite consumer price index, calculated from the government’s household expenditure survey – though only the former is tradeable like the listed “Bond with a Green Future”.

All pay the higher of the floor rate and the average of the index’s six most recent monthly year-on-year rates of change.

It is unclear if the new green offering will retain the planned two-week subscription period or extend this in view of the significant increase in size. But combining deals after the severity of Hong Kong’s fifth Covid-19 wave forced the inaugural deal’s postponement in late February “could save issuance cost and administrative work and allow greater timing flexibility for the later issuance of iBond and Silver Bond”, Chan wrote.

HSBC and Bank of China (Hong Kong) are co-arrangers.

The SAR’s pioneering of sovereign retail green bonds reflects both its issuance track record and its policy stance. It is already an active institutional green bond issuer in euros, renminbi and US dollars. It upped its green programme to HK$200bn in the 2021–22 budget early last year.

Under its green bond framework, proceeds of both institutional and retail issues go to the SAR’s Capital Works Reserve Fund “to finance or refinance green projects that provide environmental benefits and support the sustainable development of Hong Kong”.

UK contrast

The deal comes in notable contrast to the UK’s “Green Savings Bonds”. The first sovereign green bonds targeted to individual investors, the product – a non-tradeable plain vanilla instrument priced flat to Gilts and with no yield enhancement features or inflation linkage and no defined marketing timetable – failed to attract significant demand.

Sales via the government-owned National Investments and Savings reached only £300m (US$394m) in the six months from launch in the run-up to the UK hosting the COP26 international climate summit in Glasgow last November.

“The green market is a new environment for NS&I,” a spokesman said. “Since we launched green savings bonds in October 2021, we have been understanding customer behaviour and the balance between the interest rate and the attraction to savers of the environmental benefits that investing in this product will deliver.”

Both in its size and its structure, Hong Kong’s deal is more like another sovereign retail ESG bond series. Italy has raised over €20bn (US$22bn) across four issues of its “BTP Futura” product, which supports national recovery from the Covid-19 crisis. Besides a step-up coupon, the deals pay holders a premium of 1%–3% at maturity, depending on the country’s GDP growth over the life of the bonds.

The Hong Kong deal's link to consumer prices also sets a precedent for France’s coming institutional green inflation-linker – set to be one of 2022’s key transactions for the green bond and SSA markets.

Corrected story: Corrects previous issuance currencies