The Formosa bond market - issuance to the onshore Taiwan investor base in offshore currency - seemed like a flash in the pan after a handy piece of regulatory tweaking opened it up a few years ago only to see a buyers strike when ambitious yield targets proved unattractive to would-be issuers.
Well, judging by a recent rush of issuance it seems onshore Taiwan investors, principally life insurers and pensions funds, are willing to play ball and have become more realistic with their internal rate of return targets.
You might argue that this has been done with the acquiescence of issuers to giving away optionality and monetizing it in the form of 30-year issuance with short dated calls attached - all the recent issuance has come in this format - but at least the market is open for business.
Indeed it underscores a prevailing theme in the Asian primary debt markets: issuers, particularly of the FIG variety are willing to shop around internationally and pull the trigger on opportunistic prints. It helps explain the recent run of FIG issuance in the Singapore dollar market as well as the renaissance of the Formosa market.
The latter has been propelled by a succession of regulatory moves from Taiwan’s Financial Supervisory Committee, beginning in late 2013 when permission for local and foreign banks to issue via listing on the Gre Tai exchange brought Chinese banks out en masse.
They accounted for 65% of Formosa issuance in 2014 and a further regulatory tweak which allowed issuance in the product to be classified as onshore effectively allowed the life insurers to break through the 45% ceiling hitherto imposed on them for the ownership of offshore investments in their portfolios.
The vast pool of dollars and renminbi sitting in Taiwan has proved an irresistible target for offshore issuers, in the latter case driven by a benign basis swap back to dollars. This also explains the recent surge in Panda bond issuance - issuance by offshore entities in onshore renminbi - where decent savings can be achieved versus taking the standard offshore dollar route.
Of course, that is not to say that standard issuance in Reg S format in offshore dollars is no longer an appealing prospect.
A regional DCM head noted that the recent recovery of dollar rates following volatility prompted by an unusually hawkish FOMC meeting which raised the prospect of another Fed rate rise had brought potential Asian issuers back into the offshore dollar arena. A healthy pipeline is building among issuers keen to print ahead of the UK’s vote on Brexit and the usual summer lull.
But to return to the Formosa market: I reckon the issuance bonanza is here to stay, simply because the market ticks so many boxes.
Size is there beyond the scrappiness which tends to characterise the Sing dollar and Reg S US dollar market; Qatar National Bank earlier this month raised US$1.1bn in a tapped FRN. And of course so is tenor, thanks to the willingness of Taiwan institutional money to book the ultra long point. If a Fed rate rise is imminent, issuers might well choose to raise zero coupon dollar funds, leave proceeds unswapped and pick their moment to hedge on a likely subsequent Treasury curve flattening.
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