The Hong Kong government extended its yield curve in the Islamic capital markets when it priced on February 21 a 10-year sukuk offering amounting to US$1 billion, setting an important new benchmark for potential issuers in Hong Kong and globally. This is also a landmark transaction since Hong Kong is the first AAA-rated sovereign to launch a sukuk with a 10-year tenor.

The Reg S deal was priced at par with a similar profit rate and re-offer yield of 3.132%. This was equivalent to a spread of 68bp over the US treasuries, or at the tight end of the final price guidance of 70bp area (+/-2bp). The sukuk was initially marketed at an initial guidance of between 70bp and 80bp.

This was the third US dollar-denominated sukuk offering by Hong Kong, following similar issuances of US$1 billion each in September 2014 and in June 2015, both with a tenor of five years.

In executing the transaction, the issuer held a global roadshow commencing on February 13 covering Riyadh, Jeddah, Dubai, Abu Dhabi, Kuala Lumpur, Singapore, Hong Kong and London. Despite the uncertain global environment and the longer tenor, the sukuk garnered a healthy demand from global investors, attracting orders of over US$1.72 billion from 88 accounts.

The transaction generated interest from a diverse group of conventional and Islamic investors with 57% of the sukuk distributed in Asia, 25% in the Middle East and 18% in Europe.

By type of investors, banks accounted for 53%, fund managers 35%, sovereign wealth funds, central banks and supranationals 11% and private banks and insurance companies 1%. The sukuk, which was drawn under the government bond programme and issued through a special purpose vehicle Hong Kong Sukuk 2017 Limited, attracted new investors, with over half of them not having participated in the previous issuances.

“The success of the transaction is a testament to investor confidence in Hong Kong’s credit strength and economic fundamentals,” says Hong Kong Financial Secretary Paul Chan in a statement. “I hope that the sukuk issuance will provide momentum for further growth of the sukuk market in Hong Kong and attract more issuers and investors to participate in our bond market.”

The latest sukuk uses a wakala structure – similar to the second sukuk issued in June 2015 – with one-third of assets underpinned by selected units in commercial properties in Hong Kong, and two-thirds of assets underpinned by Shariah-compliant commodities. The first sukuk printed in September 2014 used the Shariah principle ijara.