Deal Analysis: Hong Kong’s HK$6bn digital green bond offering

Last month on February 7, the government of the Hong Kong Special Administrative Region (SAR) announced the successful issuance of  a multi-currency, digitally native bond, equivalent to HK$6 billion ($766.8 million).

The two-year notes were trailed as the first digitally native bond issuance in the SAR, as well as the first multi-currency digital bond issuance in the world, denominated in four currencies including Hong Kong dollar (HK$), offshore Chinese yuan (CNH), US dollar ($) and euro (€).

Detailed pricing information is as follows:

Investors across the four currency markets oversubscribed to the bond, with the final issuance size exceeding the initial expectation of $300 million (or equivalent), FinanceAsia has learned. More than 50 investors, which consists of asset managers, banks, insurance companies, private banks, and other non-financial institutions, participated in the deal.

A SAR government spokesperson told FA that the transaction is significant for several reasons. This includes a broader investor participation via existing infrastructure; streamlined issuance process in digitally native format; built-in standardisation elements; and integration of green bond disclosures.

“We believe that this issuance shows that the tokenised bond is moving from ‘proof of concept’ into ‘production’,” the spokesperson said.

“We will continue to work with the industry to advance development on this front, including exploring more use cases and new aspects in future project(s), with a view to further unlocking the potential of the relevant technologies in the bond market,” she continued.

Transactions were settled through the Hong Kong Monetary Authority’s (HKMA) Central Moneymarkets Unit (CMU), which was connected to Euroclear and Clearstream, allowing it to tap into a greater international investor base.

HSBC Orion functioned as the digital asset platform, which was also connected to CMU and operated by CMU in this case. The platform’s direct participants include Bank of China (Hong Kong), Crédit Agricole CIB, HSBC and ICBC (Asia).

HSBC also acted as joint global coordinators, joint lead managers and joint bookrunners of the deal, together with Bank of China (Hong Kong), Crédit Agricole CIB, Goldman Sachs (Asia), ICBC (Asia) and UBS.

Crédit Agricole CIB and HSBC were joint green structuring banks of the issuance. HSBC was the sole fiscal agent and principal paying agent of the deal. Law firms involved include Allen & Overy, Ashurst and Linklaters, who acted as legal advisors to the issuer, platform provider and banks and agents, respectively.

Digitally native

One of the key features of the issuance is its “digitally native” nature. The bond was issued directly via HSBC’s digital asset platform onto the blockchain, and the tokens being transacted represent legal titles of the bond itself.

Direct participants on the platform are able to hold the legal titles directly on distributed ledgers, eliminating the traditional role of intermediaries in bond issuances.

“The entire life cycle is on the blockchain for the duration of the bond,” explained John O’Neill, global head of digital assets strategy at HSBC. “This compares with tokenised bonds, where the token is just a copy of a bond that lives elsewhere.” 

Tokenised bonds are first issued in traditional notes, which are then tokenised into digital formats.

Ben Hammond, partner at Ashurst, which advised HSBC as platform provider, said that traditional bonds issued usually sit with trustees, and what is traded on the public market are beneficiary titles of the issuances. Put simply, bondholders do not legally own the bonds as trustees do.

“While with digitalised issuances, a direct relationship between bondholders and the issuer is created, eliminating the need for intermediaries,” he explained. “This is one of the promises of digital instruments.”

On top of that, a connection between HSBC Orion and CMU, the traditional settlement and clearing system, offers the option of transferring beneficiary titles of the digitised bonds to those who are not direct participants of the platform. Along with CMU’s existing connection with European settlement and clearing systems, the issuance managed to offer a wider range of access options.

“We think it’s critical that digital bonds are as easy to access as conventional bonds,” O’Neill at HSBC emphasised.

From a legal perspective, carrying out issuances on-chain brings complexities.

Hammond told FA that one of the preeminent features of distributed-ledger technology (DLT) is that it exceeds geographical boundaries – the locations of registers, exchanges, investors, custodians, among others, were re-examined in such issuances.

Despite a licensing regime for virtual asset service providers introduced in June 2023, a standalone statutory digital asset framework is yet to be developed in Hong Kong. Therefore, a key achievement of this transaction for the legal teams involved, is to have “accommodated innovation within the common law system”, as he pointed out.

Gloria Cheung, capital markets partner at Linklaters, explained that great efforts were put to align documentations of the digital platform, CMU and the bond itself to ensure consistency and compatibility.

“It is important to make sure digitalised trading instructions are acknowledged and recognised as they go through; so is to sort out three layers of documents on top of each other to make sure everything can come together,” she said.

Being able to do so under the current legal landscape reflects “the strength of Hong Kong’s current base framework, which is tech-agnostic”, she said.

She added that both the HKMA and the Securities and Futures Commission (SFC) have released circulars and consultations to introduce risk-adjusting conducts and requirements, and that this has created a more friendly legal environment for future digital asset securities.

Hammond said: “A well-established legal framework is indeed helpful to bring in clarity and certainty to the market. While on the other hand, confidence could be injected by demonstrating the possibility of such sovereign issuances.”

He concluded: “It demonstrates that adopting a new technology does not mean throwing away everything that we’ve had – it allows people to move along the spectrum to progress into this. It is a digitally native bond, but remains functional in the real world.”

On February 27, HSBC completed with the Bank of East Asia (BEA) the first repo transaction using the digital bonds as collateral for financing purposes, marking a first-of-its-kind repo deals involving digital bonds.

Bryan Wong, general manager and head of treasury markets division of BEA, said in the press release that the Hong Kong dollar repo transaction has been “a smooth process”.

Government-led progress

The early February issuance follows the Hong Kong government’s successful offering of a tranche of tokenised green bonds in February 2023. A total issuance of HK$800 million ($102.2 million) of one-year green bond priced at 4.05% was issued, also through CMU, marking the first government-issued tokenised green bond globally.

Tokens in the 2023 issuance represented only beneficial interests in the bond, with cash tokens representing a claim for HK$ fiat against the HKMA. Goldman Sachs acted as the platform provider, with Bank of China (Hong Kong) and HSBC as custodians.

Despite a relatively small amount, the HK$800 million issuance set a precedent under Hong Kong’s legal framework for an innovative form of issuance, demonstrating the possibility of implementing a concept that has been discussed for years.

The two issuances were completed against a project named Evergreen launched by the HKMA in 2022, targeting green bond tokenisation experiments in the city.

As one of the participants of both transactions, Tim Fang, Crédit Agricole CIB’s head of debt capital markets, Greater China, said, the second transaction has taken huge steps forward in terms of connecting more market participants and issuing in larger sizes.

“The way that the infrastructure worked allowed investors to participate in more and easier ways, similar to how they participate in other institutional offerings,” he said.

Alvin Yeo, head of sustainable finance, Asia debt capital markets, at UBS, agreed that being able to address a wider investor base, one which is comparable to that of a typical vanilla bond transaction, is one of the greatest breakthroughs.

Globally, such innovative digital bond issuances have been mainly led by governments or supranational entities, with the European Union (EU) leading the way.

The European Investment Bank (EIB) issued its first ever digitally native bond in pound sterling worth £50 million ($63.2 million) in January 2023. Later in June, another tranche of a $96.2 million digital climate awareness bond, denominated in one billion Swedish Krona, was again issued by the EIB.

Both deals were carried out in Luxembourg, where the legal framework is more friendly to embrace such innovative structures – Luxembourg’s lawmakers have updated its Blockchain III Law to recognise DLT-based issuances, which went into effect March 23, 2023.

The new set of rules has extended the notion of financial instruments to cover instruments issued based on DLT, or on blockchains. It also made clear that securities held on a blockchain are covered under Luxembourg’s Collateral Law.

In Hong Kong, Fang believes that government trials will help pave the way for a more diverse range of issuers in the future.

“In the short term, it remains both costly and time-consuming for corporate issuers to explore such formats. While government-led issuances are crucial to lead the way, before the digital format matures to take greater parts of the overall bond market,” he said.

“This is a long journey and ongoing process for the government to take a leading role in innovation, and I don’t expect this is the end.”

HSBC’s O’Neill is also expecting a wider range of issuers to participate in the digital bond space.

“We are very committed to creating a pipeline of digital bond issuances in Hong Kong, bringing new issuers to this approach and fostering the development of this market further,” he said.

“Our ambition is that all issuers should have a digital debt option – anyone who wants to issue digital debt should be able to do so in a confident and liquid manner.”

Meanwhile, the Hong Kong government, as revealed in the recent Budget, is readying to issue around HK$120 billion of bonds between April 1, 2024, and March 31, 2025 -- the upcoming 2024/5 financial year. Digital bonds could well be on the SAR’s agenda again soon.

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