MTR Corp has launched a HK$1 billion bond catering for retail investors, the first Hong Kong-dollar denominated retail bond issued by a listed company. The retail bond issue, divided into three tranches and carrying an interest rate up to 5 per cent, is the corporation's second retail bond offering in 14 years. Finance director Lincoln Leong said the issue was mainly prompted by strong demand for debt. 'We have seen demand for these bonds and we want to diversify our investor base,' Mr Leong said. Standard Chartered Bank head of sales management and wealth management Elaine Lai said investor appetite for investment products with stable returns, such as bonds, had grown steadily recently in an environment of low interest rates. 'Sales of Hong Kong Airport Authority and Hong Kong Mortgage Corp's retail bonds were very popular in the last few months, which indicated investors' strong appetite,' she said. Standard Chartered Bank, HSBC and Bank of China are underwriters of the MTRC issue. Analysts expected demand for the bonds to be strong despite expectations of a rise in interest rates soon. Andrew Fung Hau-chung, treasurer and head of Asia capital markets of Commonwealth Bank of Australia, said: 'Many local investors who got burned in the property and equity markets are more cautious about investing. Since MTRC is a familiar name and is regarded as a government entity, the retail bond is a defensive product.' Standard Chartered Bank head of debt capital markets Brian Yiu estimated Hong Kong would see HK$8 billion to HK$10 billion worth of retail bonds issued this year in response to growing demand for low-risk, stable-return investment alternatives. To date, almost HK$4 billion worth of retail bonds have been offered in Hong Kong's market. With substantial spending on railway projects, the MTRC has been relying on lower-interest financing such as debt and bonds. Proceeds from the retail bond issue will be used to replenish working capital and refinance and repay existing debts. Between this year and 2004, the corporation's capital spending would amount to HK$10.6 billion, Mr Leong said. 'We will see the response of the retail bond and will decide if we will issue more,' he said. The three tranches of the bond will mature in 2004, 2005 and 2006, respectively. The 2004 tranche carries an annual interest rate of 3.75 per cent, the 2005 tranche returns 4.5 per cent and the 2006 tranche 5 per cent. Standard & Poor's assigned an AA-minus rating to the bond issue, while Moody's assigned an Aa3 rating to the retail bond. In the prospectus for the bond issue, MTRC again highlights the risks of losing out in its bid for the HK$30 billion railway project between Sha Tin and Central. It warns that its revenues will suffer if the Government decides to award the project to rival Kowloon-Canton Railway Corp (KCRC). The bidding result is expected to be announced after June, or following an inquiry into KCRC's controversial contractual arrangement with West Rail contractor Siemens.