The Rmb500 million ($81 million) formosa bond debut by France-based Air Liquide further indicates Taiwan’s attraction to bond issuers and insurance investors.
Air Liquide‘s deal comes at a difficult time for the market due to a lukewarm domestic economy, the slumping oil price and renminbi depreciation.
The onshore renminbi has been declining for 4 days since the new year’s trading started, following a 2.4% depreciation in the spot exchange rate versus US Dollar in 2014, the first annual decline since 2005 when China launched the reform of yuan’s currency exchange rate mechanism.
However, Air Liquide Finance, a subsidiary of Air Liquide, still pushed ahead with the renminbi bond issuance and sold the notes quickly on Friday.
The company, one of the world's largest providers of industrial gases, is diversifying its debt financing structure with a longer-term tenor, said a source close to the company. The company issued 7-year notes through the deal.
Taiwanese investors took 90% of the bond and others 10%. By investor type, insurance companies bought 85%, fund managers 14% and private banks 1%. HSBC was the sole bookrunner.
The bond deal, the first ever offshore renminbi bond issuance in Taiwan from an international corporate, continues the formosa bond spree in 2014.
Taiwan’s formosa bond issuance has hit a record high with companies tapping cheap long-term funding, investors striving for yield and banks raking in fat fees.
The flood of issues started in June after the Financial Supervisory Commission, Taiwan’s securities watchdog, allowed local insurers to exclude international bonds from their overseas investment quota, freeing insurers to buy as much as they want.
As of November 18, 2014, 40 companies had raised $18.9 billion worth of formosa bonds, a 27-fold increase in year-to-date volume versus 2013 based on Dealogic data.
A formosa bond is a bond issued in Taiwan but denominated in a currency other than the New Taiwan Dollar. Since early 2014, companies have chosen to sell notes in US dollars, renminbi, yen, Australian dollars and South African rand; US dollar-denominated bonds account for 79% of the total and renminbi bonds 16.3%.
The rise of Taiwan’s bond market provides good investment opportunities for cash-rich investors and cheap financing for capital-hungry companies in the region.
“Taiwan is keen on building itself into an international capital market and will continue opening up the market,” Bing-Jing Huang, deputy chief executive at GreTai Securities Market, told FinanceAsia. GreTai is an exchange that serves the over-the-counter market and provides a platform for bond trading in Taiwan.
The removal of Formosa bonds from insurers’ overseas investment quotas could release between $12 billion and $15 billion in 2015 for the purchase of formosa bonds, Taipei-headquartered Chinatrust Commercial Bank estimates. Taiwanese insurance companies manage about $600 billion of assets and are allowed to hold up to 45% of it in foreign-currency securities.
The island’s Financial Supervisory Commission in June also opened up the formosa bond market to a wider range of investor. In addition to institutional investors, corporates with audited assets of more than NT$50 million ($1.6 million) and professional individual investors with assets above NT$30 million can now participate. So local global giants, such as Taiwan Semiconductor Manufacturing Company, can buy formosa bonds too.
“Besides local lifers, we see increasing interest from other investors including banks, money-market traders, government funds, property insurers and cash-rich companies,” said Leon Huang, vice president at SinoPac Securities, which tops the bookrunner league table last year for formosa bonds.
To be sure, the nascent formosa bond market is still has challenges such as secondary market illiquidity. Because most of investors tend to hold the notes, there is not much trading of the bonds.
Political tension between mainland China and Taiwan also constrains the market. For example, only three types of mainland companies can issue bonds in Taiwan: banks, mainland subsidiaries of Taiwanese financial institutions, and Taiwan-listed companies. It’s also very hard for companies to remit the proceeds back to the mainland.
Higher yields, longer terms
Taiwanese investors are always seeking higher yielding investments but have a limited pool of investment opportunities. The one-year Taiwan-dollar government bond offers a yield of about 1.12% while its five-year benchmark yields 1.62%, making formosa bonds’ average yield of 4% to 5% highly attractive.
“Formosa bonds could offer a good alternative investment option for Taiwanese investors,” Matthew Liaw, head of global structured finance at Chinatrust Commercial Bank, said. “They don’t need to search around the world anymore if the local market has the same good investment opportunities and there is no limit in such investments.”
Issuers, on the other side, favor formosa bonds as they can be longer term.
Take renminbi bonds, for example. Currently, renminbi bonds issued in Hong Kong —so-called dim sum bonds — have a short tenor of two or three years. But companies that tap Taiwan’s renminbi bond market for funds can secure longer terms, such as a seven-year tenor and even more than 10 years, according to analysts.
So it’s no surprise financial institutions have flocked to Taiwan to seek stable and long-term capital to meet stricter Basel III requirements for capital adequacy ratios: more than 70% of the formosa bonds sold this year have been issued by local and international financial institutions.
Issuers can also find lower-cost funding in Taiwan than in other markets. For example, US telecommunication company AT&T on November 10 issued a $1.295 billion formosa bond, the largest-ever. The 30-year note was priced to yield 4.7%, compared with the 4.8% yield it achieved on the US bond AT&T issued in June with the same tenor.
Chinese financial institutions as of end-2013 had offered an average yield of 4.11% on their dim sum bonds. However, three big state banks — Bank of China, Agricultural Bank of China and Bank of Communications — that had issued formosa bonds by that time offered an average return that was 73 basis points lower at 3.38%, according to HSBC research.
“Until now most of the formosa bond issuers [have been] investment-grade rated. With the market becoming mature and more diversified, high-yield bond issuers may tap the market too,” SinoPac’s Huang said.
Taiwan’s securities houses are actively marketing formosa bonds, partly due to the fact they can charge fat underwriting fees.
Issuers pay fees of 30 to 50 basis points for underwriting renminbi bonds and 20bp for US dollar bonds, according to a senior banker who declined to be identified because the information is confidential.
“The formosa bond market is incredibly profitable,” said another banker at a global firm, which underwrote its own bond issuance in Taiwan and charged itself a big fee.
Global banks with a business presence in Taiwan such as Goldman Sachs, JP Morgan, Morgan Stanley, Standard Chartered and UBS have all issued formosa bonds.
Bankers said global issuers usually offer formosa bonds with a callable term or a zero yield — more complicated structures that would typically pay a higher fee to bookrunners.