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SCMP Reporter

THE World Bank's three-year HK$1 billion bond issue launched yesterday injected a fresh outlook into the market by its new pricing system and a new mechanism to bolster the issue's secondary market liquidity.

  Instead of basing its yield on the US treasury bills of the same maturity, the World Bank issue was priced at 10 basis points above the newly-launched three-year Exchange Fund notes.

  This was the first time a Hong Kong dollar debt instrument issued by supranationals had used the Exchange Fund notes as benchmark in deciding its interest margin.

  The issue price was 100.2 bearing a coupon rate of 4.608 per cent.

  ''This is the right time to link these Hong Kong dollar instruments to the Government's notes. This ought to be the way in the future,'' said Mitchell Lim, vice-president of Union Bank of Switzerland, the arranger of the issue.

  Another new feature is the commitment by syndicate members to quote prices when requested by investors.

  ''This is not a market-making system where the market-makers are obliged to quote two-way prices all the time, but one that will provide the much-needed liquidity in the secondary market,'' Mr Lim said.

  Lacking short-selling ability, there is no guarantee the ''semi-market-makers'' can quote both a bid and offer price. However, a bid price will be made.

  The mechanism aims to help attract investors who would otherwise be thwarted by the poor liquidity in the secondary market.

    The premium over the equivalent government notes was due to two factors.

   ''Government notes are qualified as collateral when banks use the liquidity adjustment facility by the end of the day to get overnight assistance,'' Mr Lim said.

  Furthermore, with a well-established market-making system, which allows short-selling in the government notes programme, the liquidity is much higher compared with other papers.

  So, even though both papers are tax-exempted under existing regulations, the World Bank issue yield is higher.

   ''To investors, the difference in the credit rating for the two is not a issue. The perception by investors on the credit quality varies a great deal,'' he said.

  However, Mr Lim conceded that while it was undeniable the World Bank paper should yield higher, how wide the margin should be posed a big question mark. ''While there is no reference in this regard, the market has to explore itself.''   It is also uncommon to have supranationals issuing papers of such a short maturity. Usually the maturity is seven to 10 years.

  Apart from US treasury bills, another yardstick arrangers usually use in determining the price is the swap rate.

     However, Mr Lim said the swap rate, although widely used, was less representative than government notes.

  The swap rate refers to the rate at which two parties exchange their fixed and floating rate interest obligations.



World Bank launches new fashion in bonds