Hong Kong’s airport authority to launch US$640 million retail bond, its first in 20 years, to finance third runway
- The 4.25 per cent retail bond, with a tenor of 2.5 years, will make interest payments every three months
- Hong Kong residents will be able to subscribe in HK$10,000 increments at select banks and securities brokers from January 17 to 25
Airport Authority Hong Kong (AAHK) will raise up to HK$5 billion (US$640 million) from a retail bond this month, its first offering to the general public in 20 years, to fund its third runway and other operations, the airport operator said on Friday.
The offering comes after the authority raised HK$4 billion earlier this week from a 3.5-year bond sale to institutional investors.
This is only the third time the airport authority has issued retail bonds following issuances in 2002 and 2003.
“We want to issue the retail bonds to give Hong Kong residents a chance to participate in the third runway project,” Julian Lee, executive director of finance at AAHK, said at a media briefing on Friday.
The third runway will allow the Hong Kong airport to handle an extra 30 million passengers each year, which will strengthen its status as an aviation hub. When the airport authority announced a finance plan in 2016, the government decided not to use tax payers’ money so that it would not need the approval of the city’s Legislative Council.
Instead, the AAHK added charges for airlines and introduced a levy of HK$180 each to be paid by departing passengers. It also decided to use its own savings, bank loans and bond issuances to finance the mega project.
Construction on the HK$141.5 billion third runway project began in 2016, with initial operations starting in 2022. The retail bond is the last leg of financing for the project, Lee said. The authority has raised HK$89 billion from institutional investors, including the HK$4 billion on Tuesday, and HK$17.5 billion of commercial bank loans, according to government data.
The retail bond’s interest rate is slightly higher than that offered to institutional investors, Lee said.
The 4.25 per cent, 2.5-year note will pay interest quarterly. Investors can request early redemption from the AAHK, allowing them to get their entire principal plus interest due on the date of redemption.
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The HK$4 billion, 3.5-year bond sold to institutional investors on Tuesday carries an interest rate of 3.83 per cent. However, AAHK’s retail bond’s interest rate is lower than the 4.75 per cent green bond offered by the Hong Kong government in September.
Hong Kong residents will be able to subscribe to the notes in increments of HK$10,000 at placing banks, securities brokers or the Hong Kong Securities Clearing Company from 9am on January 17 until 2pm on January 25. The bond will be issued on February 5, followed by a listing on the Hong Kong stock exchange the next day.
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Still, Bank of China (Hong Kong) (BOCHK), which together with HSBC is the co-arranger of the deal, expects the retail bond to be popular with investors.
“We expect the market reaction will be positive, and the possibility for oversubscription is high,” said Arnold Chow, deputy general manager of the personal digital banking product department at BOCHK, at the same briefing.
Chow said the interbank interest rates and the time deposit rates offered by banks have been dropping noticeably since December, so the 4.25 per cent interest rate was attractive.
“We believe the US rate hike has peaked, with the general expectation of a rate cut in the second half of this year,” Chow said. “The AAHK retail bonds provide a very good possibility to lock in returns for a relatively longer tenor.”
The early redemption option also enhances the attractiveness of the AAHK retail bonds, Chow said, as it allows investors the flexibility to exit without any losses.
“The bonds are suitable for those who want to invest in low-risk, relatively high-return products. BOCHK will allow investors to subscribe to the bond at its over 170 branch network as well as through digital channels,” Chow said.
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William Shek, managing director and head of markets and securities services at HSBC Hong Kong, said the deal will further diversify and strengthen the retail bond market in the city.
“With the anticipation of the rate hike cycle nearing its end, the issuance will provide retail investors with an appealing option that offers stable returns in the short to medium-term,” Shek said at the briefing.
The airport authority frequently issues US dollar bonds, raising US$3 billion last year and US$4 billion in 2022.
The AAHK completed most of the financing for the third runway through a series of bond offerings to institutional investors during the Covid-19 pandemic, which will be supplemented by the retail bond.
The authority’s cash flows are also recovering after travel gradually returned to normal since the border reopened in January last year.
Traffic at Hong Kong airport has recovered to 80 per cent of pre-pandemic levels and is expected to reach pre-pandemic levels by the end of 2024, AAHK said in a statement on December 27.
The airport saw a new post-pandemic record of 164,000 passengers on December 23 during the Christmas holiday travel peak.
“Our financing focus in the next few years will shift to refinancing,” AAHK’s Lee said.
