Taiwan’s formosa bond market has seen a huge amount of interest from European borrowers this year, notably financial institutions, keen to tap a market buoyed by savvy investors and deep pools of liquidity.
As part of their diversification plans, banks such as Credit Suisse, Lloyds Bank and Standard Chartered have raised long duration dollar-denominated bonds, while Deutsche Bank and Société Générale have sold offshore renminbi notes (see table).
Switzerland-based UBS was the latest financial institution to tap the formosa market. On May 12, the bank priced a $50 million offering shortly after it raised a $205 million note on April 24.
These two bonds follow UBS's second dollar-denominated formosa offering back in January, when it sold $100 million. Last September, it raised a $750 million debut deal. All these instruments are 30-year zero-coupon bonds with a callable option in year one.
On the corporate side, French multinational industrial gas supplier Air Liquide raised a debut Rmb500 million ($81 million) seven-year formosa bond — debt instruments issued in Taiwan but denominated in a currency other than the New Taiwan dollar — back in January.
Foreign issuers have been the biggest beneficiaries of Taiwan’s ongoing drive to deregulate its capital markets. Because local cash-rich investors are starved of yield, borrowers have been able to raise longer-term funding — up to 30 years in some cases — and have put together more flexible structures.
This has lifted volumes to new heights. According to Dealogic, formosa bond issuance from non-Taiwanese issuers has already reached $13 billion year-to-date. So it is on course this year to comfortably exceed the $16.7 billion raised in 2014.
“The legislator since last year has been more accommodating to foreign issuers who would like to access local funding,” Devan Selvanathan, head of global Asia Pacific debt platform at Natixis, told FinanceAsia. “There has been far more visibility to what the Taiwanese investor market can do for international issuers.”
The flood of issues picked up after the Financial Supervisory Commission (FSC), Taiwan’s securities watchdog, announced in June that it would allow local insurance firms — a key market segment — to exclude international bonds from their overseas investment quota, freeing insurers to buy as much as they want.
Taiwanese insurance companies manage about $600 billion of assets and are allowed to hold up to 45% of it in foreign currency securities. So the removal of formosa bonds from their overseas investment quotas could free up between $12 billion and $15 billion in 2015 for the purchase of formosa bonds, Taipei-headquartered CTBC Bank estimated.
The FSC in June also opened up the market to professional investors — individuals and corporations with minimum net worth of NT$30 million ($1 million) and NT$50 million respectively are allowed to buy these bonds.
“Taiwanese institutional investors are looking to diversify their interests outside of domestic instruments and are very yield-hungry,” Selvanathan said. “They are internationalising some of their investment prospects.”
The move will enable these investors to purchase renminbi-denominated debt instruments other than the Chinese currency’s deposits, furthering the island’s goal of becoming an CNH trading hub in the region.
One key advantage of the Taiwanese formosa bond market is that foreign borrowers can build structures that appeal to both themselves as well as investors. This is proving especially true in the financial institution space, which has seen a flurry of 30-year callable bonds, some of which can be called as early as year one.
Fixed income experts estimate that 90% of the market’s dollar-denominated issuances are callable.
“With this number of call options, the issuers can opt to have an early repayment option, should they not need the money anymore. They don’t get that in the generic dollar space,” Frank Kwong, head of syndicate for Asia-Pacific at BNP Paribas, said.
The French bank priced a $300 million 30-year non-call one bond with a zero-coupon last September.
Andrew Stephen, Asia head of private placements and local currency issuance at Deutsche Bank, said that the premium paid by foreign borrowers looking to raise callable formosa bonds in dollar terms are similar to what they would pay for a bullet instrument — notes that cannot be redeemed early by an issuer — in another local market.
By his reckoning, debut formosa bond issuers would have to pay a new issue premium of approximately 10 basis points to 20bp on top of their outstanding dollar paper. “That’s akin to what you would pay in new issue premium anyway if you were to raise a new bond in a new market,” Stephen said.
Insurance companies investing in the instruments, meanwhile, can better match their underlying liabilities and assets because they can now access higher-grade, longer-dated securities.
Local investors generally also benefit because formosa bonds pay more than local instruments. The five-year Taiwan dollar government bond, for example, currently offers a yield of about 1%, making the formosa bonds’s average yield of 4% to 5% highly attractive.
The dwindling size of money market funds in Taiwan is an indication that investors have increasingly been turning to international bonds, Taiwan Ratings, the first credit rating agency in Taiwan, said in an April report. Money market funds declined to about NT$740 billion ($23.8 billion) in December from NT$840 billion last May, shortly before the Insurers Act was amended.
However, as one syndicate banker told FinanceAsia, the formosa bond market is currently only open for high-quality issuers. That is because a large amount of local Taiwanese investors, notably insurers, only have mandates for high-grade names.
“Taiwan has a sophisticated investor base,” Deutsche Bank’s Stephen said. “However, the preference is for high triple-B names at the very least, with single-A credits highly preferred.”