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November 16, 2022

Why HKMC’s dual currency social bond is significant

The world’s first Hong Kong dollar and renminbi social bond points to a market that is no longer behaving like an outlier.

By Adrian Murdoch

HKMC, Hong Kong, Social bond
Stronger together. The HKMC’s social bond was significant in the sense that it was “business as usual”. (Photo by Pictrider via ShutterStock)
  • Hong Kong Mortgage Corporation sold a $1.4bn social bond denominated in Hong Kong dollars and renminbi.
  • Proceeds will be used to finance or refinance loans made to small businesses to alleviate cash flow pressures since the Covid-19 pandemic.
  • Social bonds have been comparatively neglected this year; there has been a pick-up in interest from local currencies.

The social bond has been unloved this year. Their global issuance was down 57% to $63.6bn in the first half of the year according to the Climate Bonds Initiative, most of it led by Europe, which made up two-thirds of volumes.

Issuance has always been muted thanks not only to a weaker overall environment for debt issuance but also that they are slightly trickier to assess.

“Social impact is harder to measure than science-based environmental outcomes that often can be captured by a single indicator – greenhouse gas emissions,” noted the World Economic Forum in a report at the end of last week (11 November).

Although social bonds and loans have been especially slow to take off in Asia – the first to appear was Bank of Ayudhya’s $200m so-called gender bond in Thailand to expand credit lines to women-led small and medium-sized enterprises in October 2019 – there is a sense of pick-up in 2022.

The world’s largest social loan appeared earlier this year, a $1.1bn syndicated three-year social loan from India’s Housing Development Finance Corporation in August.

And there has certainly been a noticeable bump in local currency social bond issuance. It is true that the euro and US dollar still dominate – issuance in those currencies made up 46% and 38% of issuance in the first half respectively – but other currencies are starting to get in on the act.

The Australian dollar saw $2.4bn issuance and Korean won issuance was dominated by the Korea Housing Finance Corporation’s $1.3bn in the first half of the year, says Climate Bonds Initiative.

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A regional boost

A regional boost to the market from Hong Kong was given this summer when Hong Kong property conglomerate New World Development (NWD) sold a $700m US dollar-denominated green and social bond – a world first.

But at the end of October, the Hong Kong Special Administrative Region (HKSAR) government-owned Hong Kong Mortgage Corporation (HKMC), which provides mortgage financing services, sold a $1.4bn social bond that was denominated in Hong Kong dollars and renminbi.

HKMC published its green financing framework in October. Along with aims to help promote affordable housing and renewable energy, sustainable water, energy efficiency and access to infrastructure specifically, it highlighted that it would use funds for loans to small and medium-sized enterprises (SMEs).

This is aligned with the United Nation’s Sustainable Development Goals 8 and 9 – to promote sustained, inclusive and sustainable economic growth, full and productive employment and decent work for all and build resilient infrastructure, promote inclusive and sustainable industrialisation and foster innovation.

Sustainalytics, which provided the second party opinion on the framework, described it as “credible and impactful”.

Although guarantees had been running since May 2012, Hong Kong’s financial secretary Paul Chan in his budget speech announced a 100% guarantee of up to HK$50bn ($639m) in April 2020 specifically to alleviate cash flow pressures on SMEs during the Covid-19 pandemic. This is in addition to 80% and 90% guarantee schemes that had already existed.

HKMC says that at the end of last week it had guaranteed HK$122bn loans.

The net proceeds from the bond will mainly be used to finance or refinance these loans.

Social bonds: A maturing market

The bond is significant for a number of reasons. First and foremost it is the first dual-tranche bond in Hong Kong dollars and renminbi.

Tim Fang, head of debt capital markets for Greater China at Crédit Agricole, which was joint global coordinator, joint lead manager and joint bookrunner on the deal along with HSBC and Standard Chartered as well as social structurer of the deal with HSBC, says that there was “strong investor support” to do a deal in these two currencies.

For both tranches, the book was overwhelmingly dominated by banks, central banks and financial institutions.

But perhaps more significantly for the market, the dynamic of the HK$8bn 5% two-year tranche and the Rmb3bn ($416m) 3.4% tranche shows a maturity to the green, social, sustainability and sustainability-linked (GSSS) bond market.

HKMC, which is rated AA+/Aa3 (S&P/Moody’s), has visited the public markets only once before – it tends to prefer the private markets – in February last year, with a similarly structured deal. It sold a HK$7bn 0.5% two-year and a Rmb2.5bn 2.7% three-year tranche.

“From initial price thoughts (IPT) to final pricing and allocations, the deal very much follows the standard that you would expect from international bond offerings,” says Fang.

As such, the deal was market driven in style rather than the type of club-style deal that is often seen in the domestic market.“It is a very defensive name and ticks all of the boxes, he says.

This saw both tranches of the bond upsized slightly thanks to books that, at their peak, hit HK$10.3bn for the Hong Kong dollar tranche and Rmb5.1bn for the renminbi tranche, and pricing that came in from IPTs of 5.25% for the Hong Kong dollar tranche and 3.75% for the RMB tranche.

More to come

The HKMC has made it clear that further issuance should be expected and that it would continue to “support the development of sustainable finance and the debt market in Hong Kong”.

The market is a long way from requiring explanations about what GSSS bonds are. Fang says that there were some questions on the roadshow about the rationale of setting up the framework and how proceeds would be used, but during the marketing process, HKMC had explained that funds would be used to support SMEs that had been affected by Covid-19.

There was a premium paid to get the issue away. It was around ten basis points (bp) in HKD and 20bp in RMB. This was certainly lower than a corporate or lower-rated name, but exactly what might be expected for an organisation rated like HKMC. More to the point, the lack of so-called 'greenium' suggests that this deal is being treated as normal debt.

If it sounds like business as usual, then it is. Bankers and investors are now treating GSSS bonds as part of the market rather than a financial curiosity

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