Citi's debut Formosa bond sets new benchmark for Taiwan

Hot on the heels of Kexim’s three-and-a-half-year Formosa bond, Citigroup launches its maiden deal in Taiwan. With an expected size of $330 million, it will be the largest Formosa deal ever.

Citigroup could become the third non-Asian bank to source funding via Taiwan's Formosa bond market after the launch on Wednesday of a three-year dollar-denominated bond that will carry a 2.8% coupon. The size has been set at $330 million and the deal is self-led by the debut Formosa issuer.

If successful, this will be the largest deal in the short four-year history of the Formosa bond market, which refers to foreign currency-denominated bonds sold by foreign institutions in the Taiwan market.

The Citi bond will be listed on the GreTai Securities Market with Citigroup Global Markets acting as the arranger. The joint lead managers include Mega International Commercial Bank and Bank of Taiwan, while SinoPac Securities, Chang Hwa Commercial Bank, Taiwan Cooperative Bank and First Commercial Bank are joining as co-managers.

The bond will be open for subscription from June 29 to July 16 and will only be offered to onshore Taiwanese investors. It is expected to receive a single-A rating by Standard & Poor's and the proceeds will be used for general corporate purposes.

The issuer has granted the managers a conditional right to purchase additional notes with an aggregate principal amount of up to $70 million, such that the total issuance amount of the notes may be increased to $400 million. The deal is said to be part of a $1 billion issuance programme.

The announcement comes hot on the heels of Export-Import Bank of Korea's (Kexim) three-and-a-half-year bond that ended its two-and-a-half-week offering period on June 22. When the subscription opened on June 6, Kexim said that if there was strong investor demand for the notes, it would cap the deal size at $500 million. However, the anticipated appetite from the large domestic retail base did not quite materialise and in the end Kexim printed a $270 million deal -- equal to the minimum expected deal size.

Like the Citi bond, Kexim's issue also marked a debut in the Formosa bond market, both for Kexim and for a Korean issuer into Taiwan. Analysts familiar with the deal said that the less-than-expected demand may be attributed to the unfamiliarity of onshore Taiwan investors with South Korean credits, as well as concerns within the region about the ongoing geopolitical tension between North and South Korea.

With a second Formosa bond due to price in as many weeks, it begs the question why these issuers are looking to Taiwan to sell debt.

"Taiwan investors have liquidity in US dollars," said one banker, "and for retail investors bank deposit rates are very low."

From a cost perspective, the Formosa bond market also offers issuers lower funding costs versus funding in the international markets. So when a potential borrower, such as Citi, looks for an opportune market in which to sell debt, Formosa bonds provide a lot of motivation.

As the first Formosa bond to be issued by a US financial institution, it may still be too early to tell how the Citi bonds will fare in comparison to Kexim. However, one source familiar with the deal said onshore Taiwan investors know the Citigroup name.

"It is a well-recognised name in Taiwan and has been one of the top foreign banks for the last 10 years," said the source. "Therefore this will be recognised as a strong credit among Taiwanese investors and we can expect strong demand."

Although this issue is a first for a US financial institution, there have been a couple of other deals from global financial institutions from outside of Asia with Deutsche Bank and BNP Paribas both having issued self-led deals.

Deutsche Bank has been particularly active in the Formosa market. Since it was formally set up in 2006, the German bank has arranged three out of the five Formosa bond transactions to date, including the recent Kexim issue and two self-led deals in October 2006 ($250 million) and June 2009 ($260 million). Deutsche's 2006 issue was the first Formosa bond ever to be launched.

BNP Paribas launched its one and only Formosa bond in April 2007 when it came to market with a A$308 million ($269 million) deal.

¬ Haymarket Media Limited. All rights reserved.
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