Securitization issue gets thumbs up
By Don Gasper (China Daily)
Updated: 2004-04-20 08:58

The Hong Kong government's first asset-backed securitization issue received a positive evaluation from major international ratings agencies as a roadshow was launched to promote it yesterday.

The issue, to be made by the government through its subsidiary Hong Kong Link 2004 Ltd this week, will consist of two classes of notes and three tranches of retail bonds. It is expected to raise as much as HK$6 billion (US$769 million), with the proceeds earmarked to help fund infrastructure projects.

This should help relieve the pressure on the finances of the government, which is facing a budget deficit of an estimated HK$42.6 billion in the current fiscal year.

Given the low prevailing interest rates, it is expected that there will be a great demand for the issue from retail and institutional investors, who will get a chance to share in the revenues from the toll facilities. Interest rates on Hong Kong bank accounts currently average only 0.0605 per cent.

Retail investors will be able to subscribe to the secured retail bonds from today. They are offered in three-year, five-year and seven-year terms, with coupon rates of 2.75 per cent, 3.6 per cent and 4.28 per cent, respectively. Each of the three tranches will be worth at least HK$50 million. Terms of the floating rate notes have yet to be determined. The three tranches of the bonds will fall due in 2007, 2009 and 2011, respectively, while the secured floating rate notes will fall due in 2016.

Subscription will also be available to institutional investors, with details to be given later.

The transaction will be a securitization of toll revenues deriving from several toll facilities owned by the government. Apart from those at the Lantau Link, which includes the city's biggest bridge, the Tsing Ma Bridge, the facilities consist of five government-owned tunnels - the Cross-Harbour, Aberdeen, Lion Rock, Shing Mun and Tseung Kwan O.

Of the toll facilities, the Cross-Harbour Tunnel, which connects Hong Kong Island to the Kowloon Peninsula, is the most important asset in the portfolio, accounting for about 60 per cent of the total toll revenue, said Raymond Woo, credit analyst at Standard & Poor's Rating Services, which gave a preliminary "AA-" rating to the issue yesterday.

The agency said it had tested cash-flow models to determine the transaction's ability to withstand various levels of stress and found the projected performance of the toll facilities to be consistent with an "AA-" rating.

"Historical traffic volumes for all the tunnels have remained very stable despite difficult economic conditions," S&P noted. "The facilities have competitive toll rates and are vital links in Hong Kong's road network."

The debt service coverage ratio on the tolls transaction is projected at between 1.5 times and 2 times. This provides the issuer, Hong Kong Link, with sufficient flexibility should its cash flow be disrupted, S&P said. There is also a cash reserve that is equivalent to four months' interest and scheduled principal on the notes.

Hong Kong Link is a special-purpose vehicle set up by the government to securitize its toll revenue and is wholly owned by the government through Financial Secretary Inc.