A rapidly evolving market
Before seizing the Formosa opportunity, pan-Asian fundraisers should also be aware that recent regulatory changes are altering the market’s dynamics, especially in regards to short-dated call options.
In the Formosa market, the most common tenor is 30 years, although many bonds historically came with call options as short as three years, much to the benefit of the issuer, who could call in the debt and refinance should rates start to fall.
In coming weeks, Taiwan’s Financial Supervisory Commission is expected to enact a rule that forbids companies from issuing bonds with call options shorter than five years. The purpose of the change is to help insurers better match assets and liabilities, foster more market stability and lower risks to insurers and other investors, who will face the fallout if rates creep lower and borrowers decide to call in a bond early.
On the other side of the equation, there is good news for foreign financial institutions, which are now permitted to issue subordinated debt up to the same value of outstanding senior Formosa bonds in the market, according to Reuters. As such, the market offers another source of regulatory capital for financial institutions seeking greater diversity in their prudential capital base.
Arriving too late to the party?
Also encouraging for first-time pan-Asia issuers is that Taiwan’s life insurers – who serve a market with more than US$620 billion in portfolio investments – are hungry for a greater diversity of issuers and risk/reward scenarios as they grow weary of lower-yielding sovereign bonds.
But if pan-Asian issuers wait too long to explore the Formosa market, Taiwan’s relatively concentrated investor base might already be inundated with options. In such an environment latecomers will inevitably lose pricing power, whilst investors will have the luxury to be pickier and might even charge a premium to invest in the bonds.
At the same time, Taiwan’s investors may start to look for other opportunities with lower risk and potentially higher yields, such as in the US market if rates keep rising on the back of Fed hikes. According to Pimco, as of the end of 2016 investors would have been able to build a portfolio of diversified US investment-grade corporate bonds with a potential yield above 4 percent, compared to Formosa bonds with similar risks averaging yields of over 4.50 percent.
Seizing the day
Despite ongoing regulatory changes and the market’s relatively small size, Formosa bonds will likely remain one of Asia’s most compelling opportunities, offering multinational and regional corporates the ability to issue offshore debt in their own currency and borrow at rates similar to those in their home market.
Given Taiwan’s stable regulatory regime, educated investor base, and ample pools of liquidity, pan-Asian corporates would be well served to explore the market before the secret is truly out and the market has evolved to the point where the appetite for new issuers is not as strong as it is today.