The Hong Kong government on September 10 priced its maiden sukuk offering, raising US$1 billion from a well-oversubscribed transaction.

The five-year offering marks the world’s first US dollar-denominated sukuk originated by an AAA-rated government and is a key step towards the development of the Islamic finance industry in the city.

The Reg S/144A sukuk were priced at 2.005% profit rate, which represents a spread of 23bp over five-year US treasuries. The spread of 23bp represents the tightest spread ever achieved on a benchmark US dollar issuance from an Asian (ex-Japan) government, setting an important new benchmark for Hong Kong and the rest of the region.

The deal, which followed an extensive global roadshow covering Riyadh, Dubai, Abu Dhabi, Doha, Kuala Lumpur, Hong Kong, Singapore, London and New York, attracted interest from a diverse group of conventional and Islamic investors, garnering an order book of more than US$4.7 billion.

The strong demand from investors allowed the issuer to tighten the pricing by 7bp from its initial price guidance.

The sukuk was allocated to over 120 global institutional investors, with 36% of the sukuk distributed to the Middle East, 47% to Asia, 6% to Europe and 11% to the US. By investor type, 11% was distributed to fund managers, 56% to banks and private banks, 30% to sovereign wealth funds, central banks and supranationals, and 3% to insurance companies.

“The success of this transaction demonstrates that issuance of sukuk using Hong Kong’s platform is a viable fund-raising option and widely accepted by investors around the world,” says financial secretary John C Tsang in a statement. “I hope that the sukuk issuance will catalyze the further growth of the sukuk market in Hong Kong by encouraging more issuers and investors to participate in our market.”

The issuance comes after Hong Kong made legislative changes in July 2013 to provide a taxation framework for sukuk issuances comparable to that for issuances of conventional bonds.

The sukuk are rated AAA by Standard and Poor’s and Aa1 by Moody’s.

“Hong Kong’s first ever sukuk demonstrates the keen interest in Islamic finance in the global capital markets, as well as the growing connectivity between Asia and the Middle East,” says Rafe Haneef, CEO of HSBC Amanah Malaysia. “This pioneering transaction also signals a bright future for Islamic finance in Hong Kong, where policymakers have created a conducive environment for issuers and investors to raise capital and invest in accordance with Islamic principles.”

The transaction uses an ijarah structure backed by selected units in two commercial properties in Hong Kong. The sukuk are issued by a special purpose vehicle, Hong Kong Sukuk 2014, established and wholly owned by the HKSAR government. The sukuk are expected to be listed on the Hong Kong Stock Exchange, Bursa Malaysia (exempt regime) and NASDAQ Dubai.

HSBC and Standard Chartered acted as the joint global coordinators for the transaction as well as joint bookrunners and lead managers along with CIMB and National Bank of Abu Dhabi PJSC.