In a move to limit the disruption to investors, a coming rule change has triggered a surge of Formosa bonds: Issuance is up 81% year-to-date to $17.1 billion
Source: The Wall Street Journal
Big U.S. companies like Apple Inc. and Pfizer Inc. have the world’s largest corporate bond market in their backyard. So why have they been rushing to Taiwan lately to issue debt?
The reason: a feature of the Taiwanese bond market that–for now–makes it easy and relatively cheap for companies to redeem any debt they issue there before its due date.
That could be changing. Taiwanese regulators have proposed a rule change, likely to go into effect by May, that will require issuers to wait at least five years before redeeming, or “calling,” their bonds in a move to limit the disruption to investors. Previously there was no restriction.
The coming shift has triggered a surge of so-called Formosa bonds, which are sold in Taiwan, but denominated in major global currencies such as the U.S. dollar: Issuance is up 81% year-to-date to $17.1 billion, according to Dealogic. That follows a 50% rise in issuance last year to nearly $50 billion, according to Deutsche Bank.
“The whole call feature is one of the attractions of the Formosa market [for issuers],” said Doug Stephen, head of private placement for Asian local markets at Deutsche Bank.
For sure, the Formosa bond market–so-called after the Portuguese name for the island–is tiny compared with the U.S.’s $8.6 trillion corporate bond market. Yet blue-chip companies including Apple, Pfizer, Verizon Communications Inc. and Comcast Corp. have each issued north of $1 billion of such debt this year. AT&T Inc. issued a $1.43 billion 30-year Formosa bond with a 5.5% coupon earlier this month.
AT&T said the company continues to see strong demand from investors and “we like the investor diversification this issuance brings.”
The ability to redeem a bond early is good for issuing companies because it enables them to pay back their bonds when interest rates are low and reissue when funding costs are cheaper.
This “call” feature isn’t so swell for investors, who can get stuck with cash that the borrower has paid off earlier than expected, with few attractive alternative places to put their money. That’s why investors tend to get paid more in the form of higher coupons when they buy “callable” bonds.
In Taiwan, life insurers have a $670 billion pool of assets–almost double the size of the local bond market–shopping for a shrinking supply of investments that meet their ratings requirements and yield targets. That dynamic makes investors more willing to buy callable debt from big U.S. corporate issuers they recognize–such as Apple and Pfizer–at a relatively cheap cost for the company.
In the Formosa market, the call option adds only an extra 0.1 percentage point to 0.15 percentage point in yield, compared with 0.8 percentage point to a full percentage point in other markets, according to Deutsche Bank’s Mr. Stephen.
“There’s no other way [Taiwanese investors] can achieve their yield target by investing in regular bonds,” said Lorna Greene, director of debt syndicate and origination at National Australia Bank in Hong Kong. “They would rather choose names they feel comfortable with. But rather than taking credit risk, they opt for the risk of the call option.”
Having greater flexibility to move cash around could come into play if the Trump administration makes good on its plan for a one-off lowering of the tax rate on overseas earnings, as it tries to entice multinational firms to bring more of the roughly $2.5 trillion of cash they hold overseas back home.
U.S. drugmaker Pfizer, which issued a $1.065 billion 30-year Formosa bond with a 4.2% coupon late last month, said it hadn’t made a U.S. tax provision on about $86 billion of unremitted earnings from international subsidiaries, as of Dec. 31, 2016.
The company said it considered President Donald Trump’s proposals and Taiwan’s new rules, among other factors, when deciding to issue in the Formosa market for the first time, according to a company spokesperson.