Peter Pang: Hong Kong Mortgage Corporation mortgage-backed securities
issues
Speech by Mr Peter Pang, Deputy Chief Executive of the Hong Kong Monetary Authority and
Executive Director of the Hong Kong Mortgage Corporation Limited, at the signing ceremony for the
HK$2 billion mortgage-backed securities issue drawn under the US$3 billion Mortgage-Backed
Securitisation Programme Bauhinia MBS Limited, Hong Kong, 27 November 2006.
* * *
Good afternoon, ladies and gentlemen,
Let me first extend to all of you a very warm welcome to today's signing ceremony. Today's issue of
mortgage-backed securities (MBS) under the Bauhinia Mortgage-Backed Securitisation Programme of
the Hong Kong Mortgage Corporation (HKMC) is unique in two ways.
First, this is the first time the HKMC has sponsored an MBS issue as a triple-A rated institution. On 30
October, Moody's announced the upgrade of the HKMC's domestic currency rating to Aaa and the
HKMC's foreign currency rating to Aa1. The HKMC has therefore made history as the first entity in
Hong Kong, and so far the only one, to have a triple-A rating.
The upgrade in credit ratings reflects the financial strength of the HKMC and the strong support of the
Hong Kong SAR Government for the Corporation. With this strong credit rating, the HKMC is well
positioned to play a more active and strategic role in promoting the development of the debt and
securitisation markets in Hong Kong.
Secondly, today's issue of two billion dollars marks the launch of the first-ever partially un-guaranteed
MBS sponsored by the HKMC.
The nine MBS issues sponsored by the HKMC so far, totalling $11 billion dollars, have all been
guaranteed by the HKMC. These issues were all welcomed by investors. The HKMC prides itself on
being a financial institution that spearheads product innovation in Hong Kong's capital markets. For
this issue, after consulting the market, the HKMC has decided to adopt a MBS structure along the
lines of a Collateralised Mortgage Obligation. The CMO structure divides the pool of underlying
mortgage assets into credit tranches or classes with different tenors and interest rates to suit the
appetites of a wider range of investors in Hong Kong and the region.
In today's two billion dollars MBS issue, the Class A portion accounts for 87% of the issue and does
not carry any guarantee. Class B accounts for 13% of the issue and is guaranteed by the HKMC.
Class A has been assigned a triple-A rating by both Moody's and S&P's. The award of this top rating
to Class A reflects the good credit quality of the underlying mortgage pool and the credit enhancement
through subordination provided by Class B, which absorbs the first loss in the mortgage pool. The low
level of subordination at 13% reflects the high quality of the collateral, the innovative structuring of the
issue and market's confidence in the HKMC's ability to manage the credit risk of the mortgage
portfolio.
While there have been other un-guaranteed MBS transactions in Hong Kong, today's issue sponsored
by the HKMC is the largest un-guaranteed Hong Kong dollar MBS in Hong Kong. Moreover, it is the
first-ever un-guaranteed Hong Kong dollar MBS that carries a triple-A rating. I believe that the HKMC's
introduction of triple-A-rated MBS through credit tranching will become a benchmark for other MBS
issuers in Hong Kong.
With today's MBS issue, the HKMC now accounts for about a quarter of the total securitisation
transactions in Hong Kong in the past ten years and is the largest issuer of asset-backed securities in
Hong Kong. For the future, the Corporation has plans to expand the scope of its business to cover
non-mortgage assets and selected overseas markets - as always, in a prudent commercial manner.
These new business initiatives will help to further broaden the local debt market, and strengthen Hong
Kong's role as an international financial centre and funding hub in the region.
We are grateful for the enthusiastic response of the banks joining the management group for this issue
and find it very encouraging. We are also very pleased to learn that a diverse group of investors
including retirement funds, insurance companies, banks and other institutional investors have shown a
keen interest in the issue.
Let me conclude by thanking HSBC, the sole arranger and lead manager, for their highly professional
work to make this issue a great success. I would also like to thank the Co-lead Managers, DZ BANK
AG, Hong Kong Branch, ICBC (Asia) and BMO Capital Markets Corp and Co-Managers, ANZ
Investment Bank and Commonwealth Bank of Australia, for managing and distributing the issue.
I look forward to your continuing support of our Corporation and its debt issuance activities. Thank
you.