Hong Kong craves retail bonds

THE flagship company of Asian tycoon Li Ka-shing has paved the way for foreign and local companies to tap a new source of funding in Hong Kong.

The company, property developer Cheung Kong, raised HK$800m (£61m) by issuing a retail bond, the first it has offered to the public. The offer was massively oversubscribed, underlining the appetite of individuals for the paper.

'A new source of funds is opening up and I expect more companies to tap this market,' said Brian Yiu, head of Asian debt-capital markets at Standard Chartered, the Asia-focused banking group. 'The appetite for yield among local investors is strong.'

The market is also expected to attract more foreign firms. Ford Motor last month became the first foreign group to offer retail bonds to the public in Hong Kong.

Through its financing arm, Ford Motor Credit, it will issue at least $124.1m (£73.3m). A recent HK$500m offer, also handled by Standard Chartered, sold days before deadline.

Retail bonds are an attractive funding source for companies and equally appealing to investors. Cheung Kong's bonds had an average yield of 3.3%, far higher than 0.4% available on local deposit accounts. For the company, it represents a saving of one percentage point on the payout to institutional investors.

Some see the retail bonds opening new avenues of financing to smaller concerns than Li's giant corporations. 'The market could eventually open up to mid-sized companies in Hong Kong,' Standard's Yiu said. He added that Li Ka-shing's imprimatur had been a big factor in the success of the Cheung Kong issue.

The opening up of the retail market is a boon to the HK$5bn local bond market, which is still in its infancy.

The secondary market is still highly illiquid and most analysts expect Cheung Kong's bondholders to keep the paper until maturity.

The Hong Kong government has been trying to underpin and develop the market with big issues of retail bonds for public works.

In June, government-owned Kowloon-Canton Railway doubled its retail bond issue to HK$1bn after receiving applications totalling HK$1.28bn, more than twice the original issue size.

Sales of bonds to individuals have become a key plank in the fund-raising efforts of the railway company, which needs HK$30bn up to 2008 to build two new rail projects.

It has so far raised HK$1.8bn, from the retail bond issue and a HK$800m 10-year bonds issued to institutions in May.

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