Hong Kong retail credit-linked bond is latest victim of 'atypical pneumonia'

SHK Fund Management, a unit of Hong Kong conglomerate Sun Hung Kai, has postponed the sale of a retail minibond linked to the credits in the Standard & Poor’s 100 Index, due to the deteriorating social and economic environment in Hong Kong caused by the outbreak of 'atypical pneumonia'.

SHK Fund Management has not set any tentative re-launch date yet, said Christophe Lee, the fund management company’s chief executive. He noted that the decision to postpone the launch was based on the disruptions caused by the epidemic.

As of yesterday, the World Health Organisation said there were 1,804 cases of people infected with atypical pneumonia - also known as severe acute respiratory syndrome (SARS) - and 62 deaths, in 15 countries. Of the total, 685 cases with 16 deaths are in Hong Kong, 200 of which were from the same apartment block. The epidemic has caused widespread fear in Hong Kong, disrupting business,including entertainment activities and air transport, and caused the closure of some bank branches where employees were suspected of having contracted SARS. Goldman Sachs has revised its forecast for Hong Kong's gross domestic productin 2003 to a 1.7% from 3.0%.

The US investment bank said in a report that it assumes SARS will cause a 31% loss on Hong Kong’s GDP. “We have already seen a reduction in travel and discretionary expenditure in March, and given the recent acceleration in reported SARS cases, we expect consumers and tourists to remain wary through Q2 2003," Goldman’s report said. JP Morgan Chase has lowered its 2003 GDP growth forecast for Singapore to 1.9% from 3%, partly due to SARS.

SHK Fund Management's retail product was postponed yesterday, one day after its initial launch date. According to the terms issued on Monday, the principal-protected five-year minibonds would have paid a guaranteed fixed rate coupon of 6% in the first year. The coupon, in subsequent years, would be linked to the 100 credits included in the S&P 100 on March 25. The list of credits would not have changed throughout the life of the minibonds.

The coupon on years two to five was calculated each year and would have decreased as the cumulated number of defaults within the pool of credits rises. If there was no default, the minibonds would pay a 6% coupon. If there was one default, it would pay a 4.50% coupon; 3% for two defaults, 1.5% for three defaults and zero for four or more defaults.

The minibonds were to be issued through a special purpose vehicle called Pacific International Finance, and are denominated in US dollars, with denominations of $5,000 and a maximum issue size of $100 million. Lehman Brothers was arranging the deal.

SHK Fund Management has previously issued three series of minibonds linked to Hong Kong conglomerate Hutchison Whampoa’s credit, one Hong Kong dollar-denominated series in May last year and two US dollar-denominated series in January and March this year.