Hong Kong makes no secret of its ambition to be an important regional centre for green finance – part of its quest to stay relevant through reinvention. So the arrival – at long last – of its first sovereign green bond is an important event in the development of its markets, and bankers hope it will inspire other borrowers from Hong Kong and Greater China to follow suit.
The sovereign deal has been in the works for more than a year, after chief executive Carrie Lam first raised the prospect of a green bond in October 2017. This May, Hong Kong finally priced the $1 billion, five-year bullet at a yield of 2.555%, equivalent to a spread of 32.5 basis points over US Treasuries. That was at the tight end of final price guidance or, as one syndicate head familiar with the deal put it, the pricing looked “very attractive” for the issuer.
The order book was worth more than $4 billion, with orders from more than 100 accounts at reoffer. Asian investors took half of the notes, while 27% went to Europe and 23% went to the US.
About 41% was allocated to sovereign wealth funds, central banks and sovereigns, supranationals and agencies; 30% went to fund managers, insurers and private banks; and the remaining 29% to banks. The banks did not specify the allocations to green-specific funds.
Crédit Agricole CIB and HSBC acted as joint global coordinators, lead managers and bookrunners for the deal.
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So far, only a handful of Hong Kong borrowers have sold green bonds publicly, according to Dealogic. Now, with a sovereign bond taking the green label mainstream, other blue-chip companies in the city could be tempted to follow, industry experts say.
And Hong Kong could also follow up with further transactions of its own. The city’s 2018/19 budget included plans to issue up to HK$100 billion ($12.7 billion) in bonds linked to financing green infrastructure projects.
“The Asian green market was a bit slower in its development, but in the last year or so we have seen [some progress],” says a banker involved in the deal.
“Paving the way often starts with government entities and state-owned banks,” the banker notes, adding that there is a strong pipeline for green bonds and loans in Asia right now.
“This type of transaction is very useful to mobilize investors,” says an expert in green finance, referring to the sovereign bond.
For potential issuers, the deal shows best market practices, the banker says.
The sovereign bond is just one part of a wider plan. The Hong Kong government recently became the first Asian signatory on the international Green Bond Pledge, joining an initiative started by a number of international climate finance and sustainability groups.
In September, Hong Kong launched a green finance association, dedicating resources to encourage the private sector use of green financing.
The association is led by Ma Jun, former economist at the People’s Bank of China, and links Hong Kong’s green efforts to those of the mainland. China has been a leader in green bond issuance globally in recent years, and the country produced the second-largest green bond volume in 2018.
The Hong Kong Monetary Authority, which acts as the central bank, has also unveiled a three-phase plan to promote green and sustainable banking.
The efforts include increasing awareness about green finance, developing an assessment framework in line with international standards and monitoring banks’ green progress.
The HKMA will also establish a centre for green finance under the Infrastructure Financing Facilitation Office. The new office will offer technical support for Hong Kong’s banking and finance industry’s green efforts.
“These are all concerted efforts to make Hong Kong a green banking hub,” says the industry expert.
Hong Kong has made it clear that future infrastructure in the Greater Bay Area, which encompasses parts of southern China, Hong Kong and Macau, will be green, the expert says.
For now, many Hong Kong banks are still unsure of the definition of green assets and may need to take a critical look at their own portfolios, says the industry expert, adding that the HKMA’s step to create clear guidance and benchmarks will give them the basis they need to do more than pay lip service to green financing.