Taiwan targets $30 billion of offshore debt issuance by 2009

At a GreTai Securities Market bond conference in Hong Kong, industry experts discussed the nuances of the Taiwanese bond market and its future development.
On Tuesday, GreTai Securities Market held its inaugural Taiwan Bond Market Roadshow, where the topic of discussion was how to expand the market. The event, held in Hong Kong, was aimed at bringing together fixed-income investors with local experts in the Taiwanese bond market.

A veritable whoÆs who of Taiwanese regulators and bankers presented their viewpoints on the various sectors explaining the trends and the marketÆs future directions.

The conference was opened by Dr Edward Chow, a supervisor of GreTai and Dean of the College of Commerce at the National Chengchi University. Dr Chow, was graceful enough to step in for Daung-Yen Lu, chairman of GreTai, who was scheduled to speak but was unable to attend due to being denied a Hong Kong visa (the visa was rejected the evening before the event, two weeks after the application was initially made). According to his colleagues at GreTai, Lu had very much wanted to be at the event, which was Taiwan's first bond market roadshow.

The keynote address was provided Dr Shyan Yuan Lee, commissioner of TaiwanÆs Financial Supervisory Commission.

The seminar included: Josephine Chiu, director of debt capital markets at Deutsche Bank; Albert Ding, executive vice president of regional fixed-income for KGI Securities; Eric Lin, vice president, Asia principle and structured finance at Lehman Brothers; and Jack Wang, chairman of Citibank Securities Taiwan.

About 200 bankers, security house and insurance company executives and fund managers rounded out the audience who gathered to discuss how to develop the market and the opportunities for foreign investors.

The main point that the speakers made was that Taiwan should encourage clear guidelines and integrate its debt markets with the regional markets to become a team player and leader.

ôThe most important goal of the Taiwan fixed-income market is to not get left behind in the race between bond markets in Asia,ö said Lee. ôBut we must address some underlying issues. The systems for bond trading, clearing, settlement and custody have not yet been connected to and integrated with international markets. Additionally we must promote the market of non-government bonds, and companies are needed to begin pursuing credit ratings enthusiastically.

ôBuilding non-government bond markets is an important and urgent matter, especially ensuring there is adequate liquidity in the market,ö said Lee.

One of the key initiatives that was centre stage at the conference was the launch of the Formosa bond market and the listing of Deutsche Bank 2006-1.

The transaction, issued by Deutsche Bank Frankfurt, is denominated in dollars with a three-year maturity. Launched on October 11, with an initial size of $230 million, the managers exercised the greenshoe to the tune of $250 million. The deal was listed on Gretai Securities Market on November 1 with smooth settlement between Euroclear and local custodian Taiwan Depositary Clearing Corp.

Formosa bonds can successfully be issued and traded, while the mid-office and back-office systems for clearing and settlement are now interconnected with international systems such as Euroclear. A key hurdle in the marketÆs development.

ôA transaction of this nature will further raise the profile of an issuer illustrating the sophistication and savvy nature of the borrower to take advantage of such an opportunity,ö said Chiu. ôGiven the strong appetite for the transaction, we would expect to see numerous similar deals to print in this space in the very short term. Borrowers will benefit from great publicity, having tapped a new niche market, and taking part in the development of the Taiwanese bond market.ö

Indeed, the specialists were almost unanimous in the estimation that the Formosa market could top $30 billion by 2009.

However the market would be nowhere without its investors; specifically, KGIÆs Albert Ding outlined four key investment and arbitrage opportunities in the markets. Expressly, the straight convertible bond and convertible bond asset swaps for foreign investors.

ôWe suggest that foreign fixed-income fund managers evaluate not only interest rates but also FX trends in tapping the Taiwanese government bond market,ö said Ding. ôThe foreign institutions with a local presence have long been able to arbitrage the always lower than government bond yield CCS rate. They can also take advantage of the favorable FX swap quotation whenever CCS [cross-currency swap] rate was twisted downward by strong one-side foreign investment demand.ö

Another key area of growth that was addressed was the Taiwanese asset securitisation market, which has grown like wildfire in three short years. The securitisation market has grown tremendously since regulations were passed in July 2002, with $11.4 billion raised from 76 deals. Still, the market requires some attention to reach its full potential.

ôEnterprises in Asia are mostly SMEs, which would get a low rating if they were given a credit rating, resulting in lower access to capital,ö said Lee. ôThis lowers their willingness to get a credit rating and that is why so few private enterprises have a credit rating. Throughout Asia, this slows down the building of non-government bond markets, and the story is no different in Taiwan. These are structural problems that are unique to Asia. Taiwan is working to solve this problem through developing securitisation markets and by using credit guarantees. These products will allow the debt market to grow further.ö

ôThe variety of securitisation in Taiwan is more diverse than other countries in Asia,ö added CitigroupÆs Wang. ôThe well developed regulatory setup and actively institutional participation have been great support to the securitisation market in Taiwan.ö

However, a considerable hindrance in TaiwanÆs securitisation market is that the local banks lack incentives to securitise their own assets; most banks are cash rich, they lack good re-investment opportunities, the potential adverse impact on NPL ratios, an overall longer preparation time than issuing corporate bonds and higher costs for sub-scale issues.

So what motivations do they have? Quite a few points out Lehman BrothersÆ Lin: ôSecuritisation increases financial transparency and improves managerial controls due to the rigorous review process by third parties, additionally it helps to enhance reputation, particularly the cross-border deals, and it provides issuers with a more diversified funding source.ö

Indeed, there is a lot of optimism that the environment is right to fuel growth in the sector. ôWith the friendly regulatory environment, continued government support and sustainable demand as investors seek yield pick-up products, RMBS and CBO/ABCP issuance is expected to show strong growth in TaiwanÆs securitisation market in 2007,ö said Lin.

Overall, the future of Taiwan fixed-income market will be dependant on its ability to integrate with the regional market, to internationalise, to globalise, and to grow.

Indeed, Lee concluded his remarks with a very clever sports metaphor involving two Asian athletes, Yao Ming of the Houston Rockets and Wang Chien Ming of the New York Yankees.

ôWe need to challenge ourselves and compete on the world stage just as these two people challenged themselves to compete on the world stage,ö said Lee. ôJust think, if Yao Ming never left the Shanghai Eastern Sharks and didn't join the NBA in the USA, he would never have shaped himself to greatness and he would never compete with the best in the world. He never would have faced off with Shaq O'neill, and he never would have become the number one centre in the NBA. If he had stayed in Shanghai, he would become a sardine, not a shark. For the same reasons, if Wang Chien Ming didn't leave Taiwan and didn't become a pitcher for the New York Yankees, he would never have become the best pitcher in the 2006 Major League Baseball season; maybe he would only have become the most famous Taiwan pitcher. The world would never have known his greatness.ö
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