Aberdeen Says Time Ripe for New Hong Kong Islamic Bond Offering

  • City has signaled possibility of third sukuk after 2014 debut
  • Islamic dollar bond sales at record high for this time of year

The worst of times for global markets may be the best of times for Hong Kong’s government to carry out its planned third Islamic bond sale.

QuickTake Islamic Finance

Aberdeen Islamic Asset Management Sdn. says the time is “ripe” for a sukuk, after the Hong Kong Monetary Authority said on May 16 it was considering issuing when conditions are “conducive.” The yield on the city’s five-year Shariah-compliant bonds sold in September 2014 has fallen 32 basis points to 1.56 percent since Financial Secretary John Tsang first mentioned the idea on Feb. 24.

Demand for top-rated bonds is growing globally ahead of the U.K.’s June 23 referendum on whether to stay in the European Union and after the U.S. flagged a slower path for interest-rate increases amid a fragile global economic recovery. Sales of dollar sukuk are at an all-time high for this time of year, suggesting there’s appetite for an issue by Hong Kong, rated AAA by S&P Global Ratings.

“The market is certainly ripe for quality issuers such as the Hong Kong government,” said Hasif Murad, an investment manager at Kuala Lumpur-based Aberdeen Islamic Asset, whose parent oversees the equivalent of $2.9 billion. “Investors, us included, still have a bit of cash to put to use.”

The yield on the city’s 2020 sukuk issued in May last year has dropped 18 basis points since Feb. 24 to 1.66 percent, data compiled by Bloomberg show. The $1 billion offering of five-year sukuk drew bids for $2 billion. It issued the same amount and tenor in 2014 and attracted orders for $4.7 billion.

Dollar issuance of Shariah-compliant notes globally has climbed 19 percent to $14.3 billion in 2016 from a year earlier.

The HKMA “is currently examining practical issues in order to formulate a sukuk issuance plan having regard to market conditions,” a HKMA spokesperson said in a statement in response to e-mailed questions on Monday. “More details will be announced in due course as appropriate.”

Hong Kong is vying with other financial centers such as London to become a hub for the $2 trillion Islamic finance industry. The city took the first step in changing its tax rules in July 2013, when it put corporate sukuk on an equal footing with conventional bonds. The HKMA said in May last year that the main objectives of selling sukuk are to demonstrate the legal framework is accepted internationally and to attract more issuers and investors.

While no companies have so far taken up the initiative, the new regulation paves the way for corporates from China, where 1.8 percent of the 1.4 billion people are Muslim. In Hong Kong, only 270,000 people adhere to the teachings of the Koran.

“Hong Kong has a well-publicized ambition to be an Islamic finance center and issuing a third sukuk would help to reinforce that ambition,” said Neil Campbell, a partner with law firm K&L Gates in Hong Kong. “It would certainly encourage corporates to consider issuing in an Islamic format, but ultimately, that will depend on pricing and demand.”

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