The sale of the institutional tranches in the Hong Kong government's HK$6 billion ($769 million) securitization of tunnel revenues was completed last week. And, as expected, the deal - led jointly by HSBC Securities and Citibank Global Markets - was a complete blowout. Twenty-two institutions participated on the one-year A1 tranche and 40 on the 3.4-year A2 notes, both of which were rated AA+', Aa3' and AA-' by Fitch Ratings, Moody's Investors Service and Standard & Poor's, respectively.

Unsurprisingly with such strong investor interest, the leads were able to attain spreads at the tight end of the targeted range. The HK$450 million fixed-rated A1 notes offer a 1.19% coupon, 4 basis points over the one-year Hong Kong dollar swap rate, and were 3.2X oversubscribed. The HK$3.1 billion floating rate A2 notes came in at 36 basis points over three-month Hibor and were 4X oversubscribed. Both pieces priced at par.

According to a banker involved in the transaction, bank investors led demand for both tranches with central banks to the fore.

In addition, interest among retail buyers was overwhelming, which was not surprising given the government's involvement. At closing, HSBC - the sole bookrunner for the retail tranches - reported HK$7.6 billion of orders for the fixed-rate bonds.

The HK$880 million three-year bonds priced at 98.87% on a coupon of 2.75% and were 4.6 times oversubscribed. The HK$800 million five-year notes priced at 97.9% on a 3.6% coupon and were 1.6X oversubscribed, while the HK$790 million of seven

-year paper was 2.9 times oversubscribed for pricing of 97.4% on the 4.28% coupon.

All in all, the government's first venture into the securitization market must be considered a success, particularly in view of raising awareness and appetite for the product in the territory. Moreover, with Frederick Ma, secretary for financial services and the treasury, announcing recently that the government will seek to raise a further HK$20 billion from bond issues, it is tempting to believe there will be more deals like Hong Kong Link 2004 in the future.

However, the bottom line is ultimately what drives decisions. Rival bankers speculate the government's securitization cost 50 basis points over what could be achieved through a straight bond issue, for which there would also be no shortage of investors. So, having achieved its primary goal of deepening the capital markets with its first ABS deal, it seems unlikely that anything other than

cost will determine its decision for the remaining HK$20 billion

of issuance.

Elsewhere in the region

The Diet, the national legislature of Japan, last week began discussions on amendments to the Trust Business Law. The Financial Services Agency (FSA) wants to allow non-financial companies to enter the trust business and also wishes to allow new asset classes

to be put into trusts, particularly intellectual property rights

(IPR), with a view to them being securitized.

FSA wants the changes passed before the current Diet session ends on June 16 and fully implemented within six months. However, opposition to the legislation is likely to come from the Democratic Party, which questions whether non-financial companies are qualified to set up trusts and whether the FSA will have the powers to supervise the new entrants, who currently work outside of its jurisdiction.

Whatever the outcome, institutions from inside and outside the financial community are readying themselves for the inclusion of IPR such as music copyrights and patents into trusts. Japan Digital Contents, a consultancy firm who helps companies realize value from IPR, announced recently it wants to set up a trust company.

On the bank front, in November UFJ Bank lent 200 million over three years to American Silverwood Inc. with the collateral to be generated from the company's copyrights on building steel-framed homes. Not long after, UFJ established a specific IPR department and rival banks such as Bank of Tokyo Mitsubishi soon followed suit. Meanwhile, Mizuho Bank has spent over 2 billion ($18.3 billion) buying animation copyrights on 60 projects with a view toward securitizing them in the future.

Also in Japan, OMC Card, one of the country's biggest credit card issuers with 285.5 billion loan receivables and 7.2 million cardholders, has launched its third securitization through the Orangerie Trust. BNP Paribas arranged the 20 billion deal, which will be placed privately.

Moody's assigned a triple-A rating to the senior trust certificates, which have an expected maturity of five years and legal final of eight years. Credit enhancement will mainly come from the subordinated junior certificates, to be retained by OMC, which are equal to 19% of the transaction.

Copyright 2004 Thomson Media Inc. All Rights Reserved.

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