New issuance in the Formosa bond market has been declining since it reached its peak in 2021. Volume shrank 54.6% year-on-year to US$7.66 billion in 2023, with the number of deals halving to 71 from 142.

Borrowers have been put off by the higher cost of bond issuance. The aggressive interest rate hikes during the past year resulted in fewer redemptions, and current issuers were less willing to raise capital or seek refinancing in Taiwan’s foreign-currency bond market.

Taiwanese life insurance firms used to be the main investors in the market. But the appreciation of the US dollar has resulted in higher FX hedging costs. In addition, most life insurers have reached their investment cap in the market as profits and cash flow declined.

Rising interest rates have made newly issued Formosa bonds with higher coupon rates more attractive, while the value of bonds issued earlier have depreciated in varying degrees. As a result, many lifers find themselves holding Formosa bonds with low internal rates of return, thereby dragging down the overall demand in the market, a Taiwanese banker tells The Asset.

The reduced demand from institutional investors has led some issuers to tap into the retail side of the market. Last November, Société Générale, a regular issuer in the market, issued the largest-ever retail Formosa bond. The bond, with a tenor of eight years, raised A$415 million (US$273 million) at a coupon rate of 5.1%. From the issuer’s side, the AUD funding cost was cheaper than USD. From the investor side, Formosa bonds offer better returns than those denominated in the local currency.

Meanwhile, Korean issuers continue to play a major role in the market. Last year, the Korea Development Bank issued a Formosa bond amounting to US$300 million. ESG-labelled bonds are also gaining momentum in the market, as exemplified by Shinhan Bank’s US$500 million Formosa social bond. Issued last October, the five-year, dual-listed notes were priced at  Sofr+108bp. New Korean issuers such as the Korea Ocean Business Corporation also tapped the market in 2023.

The potential rate cuts might incentivize more issuers to come to the Formosa bond market in 2024. However, the timeline is still unclear, making the market recovery vague. The Federal Reserve held interest rates steady for the fourth straight meeting at the end of January, keeping its benchmark lending rate at a 23-year high and pushing back expectations of a rate cut in March.