Formosa frenzy

Taiwan has emerged as a hotspot for overseas renminbi fundraising, drawing international issuers to an enthusiastic investor base. Although the market lacks the clout of Hong Kong or Singapore, it is becoming a growing rival to the larger hubs.

With the issuance of Dim Sum bonds all but collapsing earlier this year, Taiwan’s Formosa market has emerged as a fast-growing source of renminbi financings. The amounts raised were relatively modest, but the trail of deals caught the attention of bankers and international issuers, while the rest of the offshore renminbi market struggled. There were whispers that Taiwan, though a long way behind, could emerge as a strong challenger to Hong Kong’s dominance of Dim Sum issuance.

The prospects for Formosa bonds, particularly in renminbi, were excellent for the second half of 2015, said Tee Choon-Hong, managing director and regional head of capital markets for Greater China and North-East Asia at Standard Chartered. His bank recently obtained a licence to underwrite bonds in any currency in Taiwan.

“Investors there want higher yields and more diverse investment options,” said Tee. “It’s a very interesting market and the prospects for Formosa bonds are very good.”

The surge began in March with a three-year offering of Rmb1bn (US$161m) from the Export-Import Bank of Korea, or Kexim, at 4.4%. Yield-hungry Taiwanese insurers, which were recently given access to a more diverse menu of assets, heartily gobbled up the bonds. Next in line were Deutsche Bank, Societe Generale, BNP Paribas, Goldman Sachs, Morgan Stanley and a host of other Western lenders. Banks from Asia-Pacific and the Middle East also jumped on board with Nomura, Macquarie and First Gulf launching issues in offshore renminbi. Most of the deals had tenors of three to five years, with coupons ranging in the 4%-5% area.

Although banks and corporations had explored the Taiwanese market before the Kexim deal, conditions were particularly favourable in March as a result of one of the most attractive cross-currency swap rate in years. Selling bonds in renminbi and swapping the proceeds into US dollars allowed issuers to borrow more cheaply than through direct issuance in US dollars. Tellingly, most of the early Formosa issues in renminbi were from banks, which are usually faster than corporate issuers to spot opportunities and, subsequently, bring out issues quickly, through through a medium-term note programme for example.

After a while, the swap rate became less attractive and renminbi bond issuance decelerated, but this did not stop banks from continuing to tap the Taiwanese market. In the period from February through to mid-May, banks issued over US$5bn of 30-year callable, zero-coupon bonds denominated in US dollars.

“The Taiwanese are clearly becoming more aggressive in attracting deals, and they can do it because they have an investor base willing to buy almost anything.”

Several factors then combined to make offshore renminbi issues more attractive. Offshore liquidity increased with the help of the Shanghai-Hong Kong Stock Connect scheme and when China cut onshore interest rates for the third time in six months on May 10, with expectations of more cuts to come as early as the summer. Sentiment also improved regarding the value of the renminbi, which had lost considerable ground to the US dollar in January and February, but started stabilising in April.

Taiwan’s Dim Sum market was jolted back to life on May 14, when Deutsche Bank issued the island’s biggest renminbi-denominated bond of the year, a five-year Rmb1.65bn at 4.3%. The issue had 10 firms working on it as bookrunners.

Bankers say the Deutsche deal received a lot of attention from other potential issuers, confirming Taiwan’s ability to devise new ways of attracting borrowers, be it in renminbi or other currencies.

“The Deutsche deal is actually kind of annoying for us,” said a Hong Kong-based Dim Sum specialist. “Since then, everyone is calling us and trying to get the same rate, but we can’t offer that to everyone. Some companies may not feel as comfortable working in that market, but, if they are, it’s basically free money. However, the Taiwanese are clearly becoming more aggressive in attracting deals, and they can do it because they have an investor base willing to buy almost anything.”

Many bankers remain bullish on the country’s prospects to be an important hub for offshore renminbi issuance, citing its strong investor base and supportive regulators. The market is also expected to launch a yield curve for corporate bonds some time soon. Taiwanese insurance firms, with collective assets of hundreds of billions of dollars, are on the prowl for what they view as higher-yielding assets, but which, for some foreign corporation, can represent cheaper sources of funding.

The country is unlikely to rival the clout of either Hong Kong or Singapore, as the size of its market is nowhere near those of the two. Hong Kong had renminbi deposits of Rmb1.1trn at the end of 2014, according to the Hong Kong Monetary Authority. In contrast, even though renminbi deposits in Taiwan more than doubled from May 2014 to the end of the year, they are still far behind at Rmb310bn, according to its central bank.

Nonetheless, Taiwan is beginning to flex its muscles and make good use of its advantages. A number of foreign banks recently applied for licences to issue bonds in Taiwan, suggesting they see it as an important market in coming years.