Deal Evaluation: Hong Kong’s HK$6bn digital inexperienced bond providing

Final month on February 7, the federal government of the Hong Kong Particular Administrative Area (SAR) announced the profitable issuance of  a multi-currency, digitally native bond, equal to HK$6 billion ($766.8 million).

The 2-year notes have been trailed as the primary digitally native bond issuance within the SAR, in addition to the primary multi-currency digital bond issuance on the earth, denominated in 4 currencies together with Hong Kong greenback (HK$), offshore Chinese language yuan (CNH), US greenback ($) and euro (€).

Detailed pricing Information is as follows:

• HK$2 billion ($255.6 million) tranche at 3.8%
• Rmb1.5 billion ($208.4 million) tranche at 2.9%
• $200 million tranche at 4.749%
• €80 million ($86.8 million) tranche at 3.647%

Buyers throughout the 4 forex markets oversubscribed to the bond, with the ultimate issuance measurement exceeding the preliminary expectation of $300 million (or equal), FinanceAsia has discovered. Greater than 50 buyers, which consists of asset managers, banks, insurance coverage firms, personal banks, and different non-financial establishments, participated within the deal.

A SAR authorities spokesperson informed FA that the transaction is critical for a number of causes. This features a broader investor participation by way of present infrastructure; streamlined issuance course of in digitally native format; built-in standardisation components; and integration of inexperienced bond disclosures.

“We consider that this issuance exhibits that the tokenised bond is transferring from ‘proof of idea’ into ‘manufacturing’,” the spokesperson stated.

“We are going to proceed to work with the trade to advance growth on this entrance, together with exploring extra use circumstances and new elements in future venture(s), with a view to additional unlocking the potential of the related applied sciences within the bond market,” she continued.

Transactions have been settled by the Hong Kong Financial Authority’s (HKMA) Central Moneymarkets Unit (CMU), which was linked to Euroclear and Clearstream, permitting IT to faucet right into a larger worldwide investor base.

HSBC Orion functioned because the digital asset platform, which was additionally linked to CMU and operated by CMU on this case. The platform’s direct individuals embody Financial institution of China (Hong Kong), Crédit Agricole CIB, HSBC and ICBC (Asia).

HSBC additionally acted as joint world coordinators, joint lead managers and joint bookrunners of the deal, along with Financial institution of China (Hong Kong), Crédit Agricole CIB, Goldman Sachs (Asia), ICBC (Asia) and UBS.

Crédit Agricole CIB and HSBC have been joint inexperienced structuring banks of the issuance. HSBC was the only fiscal agent and principal paying agent of the deal. Legislation companies concerned embody Allen & Overy, Ashurst and Linklaters, who acted as authorized advisors to the issuer, platform supplier and banks and brokers, respectively.

Digitally native

One of many key options of the issuance is its “digitally native” nature. The bond was issued straight by way of HSBC’s digital asset platform onto the blockchain, and the tokens being transacted symbolize authorized titles of the bond itself.

Direct individuals on the platform are capable of maintain the authorized titles straight on distributed ledgers, eliminating the standard function of intermediaries in bond issuances.

“Your entire life cycle is on the blockchain in the course of the bond,” defined John O’Neill, world head of digital property technique at HSBC. “This compares with tokenised bonds, the place the token is only a copy of a bond that lives elsewhere.” 

Tokenised bonds are first issued in conventional notes, that are then tokenised into digital codecs.

Ben Hammond, accomplice at Ashurst, which suggested HSBC as platform supplier, stated that conventional bonds issued normally sit with trustees, and what’s traded on the general public market are beneficiary titles of the issuances. Put merely, bondholders don’t legally personal the bonds as trustees do.

“Whereas with digitalised issuances, a direct relationship between bondholders and the issuer is created, eliminating the necessity for intermediaries,” he defined. “This is likely one of the guarantees of digital devices.”

On high of that, a connection between HSBC Orion and CMU, the standard settlement and clearing system, provides the choice of transferring beneficiary titles of the digitised bonds to those that aren’t direct individuals of the platform. Together with CMU’s present reference to European settlement and clearing methods, the issuance managed to supply a wider vary of entry choices.

“We expect IT’s important that digital bonds are as simple to entry as typical bonds,” O’Neill at HSBC emphasised.

From a authorized perspective, finishing up issuances on-chain brings complexities.

Hammond informed FA that one of many preeminent options of distributed-ledger Technology (DLT) is that IT exceeds geographical boundaries – the places of registers, exchanges, buyers, custodians, amongst others, have been re-examined in such issuances.

Regardless of a licensing regime for digital asset service suppliers launched in June 2023, a standalone statutory digital asset framework is but to be developed in Hong Kong. Due to this fact, a key achievement of this transaction for the authorized groups concerned, is to have “accommodated innovation inside the widespread regulation system”, as he identified.

Gloria Cheung, capital markets accomplice at Linklaters, defined that nice efforts have been put to align documentations of the digital platform, CMU and the bond itself to make sure consistency and compatibility.

“IT is vital to verify digitalised buying and selling directions are acknowledged and recognised as they undergo; so is to kind out three layers of paperwork on high of one another to verify every part can come collectively,” she stated.

Having the ability to take action underneath the present authorized panorama displays “the energy of Hong Kong’s present base framework, which is tech-agnostic”, she stated.

She added that each the HKMA and the Securities and Futures Fee (SFC) have launched circulars and consultations to introduce risk-adjusting conducts and necessities, and that this has created a extra pleasant authorized setting for future digital asset securities.

Hammond stated: “A well-established authorized framework is certainly useful to herald readability and certainty to the market. Whereas then again, confidence may very well be injected by demonstrating the opportunity of such sovereign issuances.”

He concluded: “IT demonstrates that adopting a brand new Technology doesn’t imply throwing away every part that we’ve had – IT permits folks to maneuver alongside the spectrum to progress into this. IT is a digitally native bond, however stays purposeful in the actual world.”

On February 27, HSBC accomplished with the Financial institution of East Asia (BEA) the primary repo transaction utilizing the digital bonds as collateral for financing functions, marking a first-of-its-kind repo offers involving digital bonds.

Bryan Wong, common supervisor and head of treasury markets division of BEA, stated within the press launch that the Hong Kong greenback repo transaction has been “a easy course of”.

Authorities-led progress

The early February issuance follows the Hong Kong authorities’s profitable providing of a tranche of tokenised green bonds in February 2023. A complete issuance of HK$800 million ($102.2 million) of one-year inexperienced bond priced at 4.05% was issued, additionally by CMU, marking the primary government-issued tokenised inexperienced bond globally.

Tokens within the 2023 issuance represented solely helpful pursuits within the bond, with money tokens representing a declare for HK$ fiat towards the HKMA. Goldman Sachs acted because the platform supplier, with Financial institution of China (Hong Kong) and HSBC as custodians.

Regardless of a comparatively small quantity, the HK$800 million issuance set a precedent underneath Hong Kong’s authorized framework for an progressive type of issuance, demonstrating the opportunity of implementing an idea that has been mentioned for years.

The 2 issuances have been accomplished towards a venture named Information/press-release/2023/20230824e3a1.pdf”>Evergreen launched by the HKMA in 2022, focusing on inexperienced bond tokenisation experiments within the metropolis.

As one of many individuals of each transactions, Tim Fang, Crédit Agricole CIB’s head of debt capital markets, Larger China, stated, the second transaction has taken big steps ahead when it comes to connecting extra market individuals and issuing in bigger sizes.

“The best way that the infrastructure labored allowed buyers to take part in additional and simpler methods, much like how they take part in different institutional choices,” he stated.

Alvin Yeo, head of sustainable Finance, Asia debt capital markets, at UBS, agreed that with the ability to tackle a wider investor base, one which is akin to that of a typical vanilla bond transaction, is likely one of the best breakthroughs.

Globally, such progressive digital bond issuances have been primarily led by governments or supranational entities, with the European Union (EU) main the best way.

The European Funding Financial institution (EIB) issued its first ever digitally native bond in pound sterling price £50 million ($63.2 million) in January 2023. Later in June, one other tranche of a $96.2 million digital climate awareness bond, denominated in a single billion Swedish Krona, was once more issued by the EIB.

Each offers have been carried out in Luxembourg, the place the authorized framework is extra pleasant to embrace such progressive constructions – Luxembourg’s lawmakers have up to date its Blockchain III Law to recognise DLT-based issuances, which went into impact March 23, 2023.

The brand new algorithm has prolonged the notion of monetary devices to cowl devices issued based mostly on DLT, or on blockchains. IT additionally made clear that securities held on a blockchain are coated underneath Luxembourg’s Collateral Legislation.

In Hong Kong, Fang believes that authorities trials will assist pave the best way for a extra various vary of issuers sooner or later.

“Within the quick time period, IT stays each expensive and time-consuming for company issuers to discover such codecs. Whereas government-led issuances are essential to cleared the path, earlier than the digital format matures to take larger components of the general bond market,” he stated.

“It is a lengthy journey and ongoing course of for the federal government to take a number one function in innovation, and I don’t anticipate that is the tip.”

HSBC’s O’Neill can be anticipating a wider vary of issuers to take part within the digital bond area.

“We’re very dedicated to making a pipeline of digital bond issuances in Hong Kong, bringing new issuers to this strategy and fostering the event of this market additional,” he stated.

“Our ambition is that each one issuers ought to have a digital debt possibility – anybody who desires to situation digital debt ought to find a way to take action in a assured and liquid method.”

In the meantime, the Hong Kong authorities, as revealed within the current Funds, is readying to situation round HK$120 billion of bonds between April 1, 2024, and March 31, 2025 — the upcoming 2024/5 monetary yr. Digital bonds might properly be on the SAR’s agenda once more quickly.

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