HKMC to offer first zero-coupon bond to retail sector

PUBLISHED : Saturday, 02 September, 2006, 12:00am
UPDATED : Saturday, 02 September, 2006, 12:00am

Bankers say investors used to earning interest from fixed-income products may be difficult to attract

The Hong Kong Mortgage Corp, a government-owned agency to promote the home loan market, plans to sell at least HK$700 million bonds to retail investors, including a first-ever zero-coupon tranche offered in the city.

The 10-year bonds do not pay interest but give a 35 per cent discount at purchase and can be redeemed at full face value upon maturity in 2016. That translates into a yield of 4.4 per cent.

The agency will also offer two tranches - a two-year Hong Kong dollar bond with a coupon rate of 4.38 per cent and a two-year US dollar bond with a coupon rate of 4.88 per cent.

HKMC, the largest bond issuer in the city that raises money to finance purchases of mortgage loans from banks, said it expected to raise HK$700 million to HK$800 million from the bond sale.

Bankers are concerned that retail investors, who are used to earning interest from fixed-income products, may shy away from zero-coupon bonds, as such products are traditionally sold to institutional investors such as insurance companies.

However, Andrew Fung Hau-chung, deputy general manager and head of investment and insurance of Hang Seng Bank, said the timing was just right as interest rates were expected to fall next year.

'By paying less money up front and receiving no interest payment afterwards, it would help investors reduce [interest-rate] risk,' Mr Fung said. '[However], I don't think investors will rush for the zero-coupon products.'

Peter Pang Shing-tong, executive director of HKMC, said zero-coupon bonds were intended for 'investors who wish to save up funds for longer-term use'.

'They do not need the cash flow from the interest payments on conventional bonds but they would wish to save up the principal and interest for future retirement or children's education,' Mr Pang said.

Hongkong and Shanghai Banking Corp and Bank of China have signed up to underwrite a total of HK$600 million for the two-year Hong Kong dollar tranche but not the US dollar bonds or the zero-coupon bonds.

Investors could buy the bonds from 17 banks from Monday.