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Strong Demand For Hong Kong's First Sukuk Gov't Bond

by Mary Swire, Lowtax.net, Hong Kong
15 September, 2014

The Hong Kong Monetary Authority, acting as the Hong Kong Government's representative, announced on September 11 the successful offering of the first sukuk (Islamic bond) under the Government Bond Program.

The sukuk, with an issuance size of USD1bn and a five-year tenor, is also the world's first USD-denominated sukuk issued by an AAA-rated government.

The issue saw strong demand from global investors, attracting orders exceeding USD4.7bn. It was said that its pricing, at a spread of 0.23 percent over the corresponding yield of US Treasuries, represents the tightest spread ever achieved on a benchmark USD issuance from an Asian (excl-Japan) government, setting an important new benchmark for Hong Kong and the rest of Asia.

The deal attracted interest from a diverse group of conventional and Islamic investors, with allocations to over 120 global institutional investors, and with 36 percent distributed to the Middle East, 47 percent to Asia, 6 percent to Europe, and 11 percent to the United States. It is expected to be listed on the Hong Kong Stock Exchange, Bursa Malaysia, and NASDAQ Dubai.

"We are pleased to see such strong demand for the HKSAR Government's inaugural sukuk, as evidenced by the significant order book size and tight pricing," said Hong Kong's Financial Secretary John C Tsang. "[It] signifies an important milestone in the development of the Islamic capital market in Hong Kong."

He added that: "The success of this transaction demonstrates that issuance of sukuk using Hong Kong's platform is a viable fund-raising option and widely accepted by investors around the world. I hope that the sukuk issuance will catalyze the further growth of the sukuk market in Hong Kong by encouraging more issuers and investors to participate."

The issuance comes after legislative changes made in Hong Kong in July 2013, which provide a taxation framework for sukuk issuances, giving effect to tax and stamp duty relief so that their tax treatment is comparable to that for issuances of conventional bonds.

Shariah law precludes the payment or receipt of interest. As a result, the issuance of sukuk involves more complex structures to achieve a similar Shariah-compliant outcome as for conventional bond issues, often using special purpose vehicles and multiple asset transfers. Without concessionary provisions for sukuk, their issuance may attract additional profits or property tax exposure or stamp duty charges.

In fact, the sukuk uses an Ijarah structure, underpinned by selected units in two commercial properties in Hong Kong, and is issued by a special purpose vehicle, established and wholly owned by the Government.

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