* US blue chips head for Taiwan to lock in flexible funding
By Daniel Stanton
SINGAPORE, Feb 13 (IFR) - Three US blue chips headed to
Taiwan's Formosa bond market last week in a rush to lock in
flexible funding ahead of changes in local regulations and a
potential shake-up in US tax rules.
Verizon Communications issued a $1.475 billion
30-year non-call three bond at 4.95 percent, the largest Formosa
issue of the year so far. Also last week, Apple was
rumoured to be sounding investors for a potential $1 billion 30
non-call three, indicated at a yield in the 4.3 percent area,
and Pfizer was heard to be eyeing the market, too.
Global issuers are rushing to Taiwan before a local rule
change in March that will effectively prevent them from offering
securities with call dates of less than five years. However, US
companies have an additional incentive to lock in the most
flexible terms possible, with potential changes to the US tax
code looming over the horizon.
"A lot of issuers are thinking they want to get ahead of
this," said a foreign banker. "If something changes in the US
tax rules, they can call back their bonds later."
Many US multinationals keep large piles of cash offshore to
limit corporate tax payments and sell bonds to fund dividend
payments or share buybacks.
However, proposals to cut the US corporate tax rate and
remove the deductibility of interest payments against income are
likely to spur them to repatriate their cash and potentially
reduce bond issuance.
Such proposals are unlikely to become law before the end of
this year, if at all, but, in the meantime, yield-hungry
Taiwanese investors remain an attractive alternative source of
US dollar funding.
The Formosa market relies heavily on local life insurers,
and foreign issuance has rocketed since 2014, when Taiwan's
Financial Services Commission reclassified Formosa bonds as
domestic debt. Taiwanese insurers, which cannot invest more than
45 percent of their assets in foreign bonds, were, therefore,
freed up to buy more dollar bonds listed in Taiwan.
Insurance investors typically prefer long maturities and the
most popular tenor in the Formosa market is 30 years, but most
bonds have call options, most commonly at three years.
Still, the structure of Formosa bonds is about to change.
Last month, the FSC said it would prohibit Taiwanese insurance
companies from buying bonds with call options earlier than five
Since insurers are, by far, the largest buyers of Formosa
bonds with about an 80 percent share of all outstanding issues,
according to a November estimate by asset manager PIMCO, issuers
are expected to stick to non-call five structures after the new
rule takes effect on March 25.
That means US corporate issuers, in particular, are trying
to take advantage of the short-dated call options available in
the Formosa market while they can.
That may also mean the mix of issuers looking to court
Taiwanese investors may change after March.
"I don't think it will mean that we get fewer US corporates
issuing into the Formosa market since the economics for them to
issue dollars from an economic standpoint is still the most
attractive," said Rick Chan, EVP and portfolio manager, interest
rate derivatives, at PIMCO.
"There is a potential that it may be different names. We
have seen a decrease in Formosa bond issuance from US financials
with the slack being made up from Middle East issuers and other
corporates. Pfizer, Apple and Vodafone are all working on
potential deals this week, for example. The binding constraint
will be more from the demand side."
However, another mooted rule change is expected to encourage
issues from lower-rated names.
Currently, it is impractical for life insurers to buy
Formosa rated below Single A, as there are restrictions on how
much lower-rated paper they can purchase. However, it is
expected that requirement will be eased and it will soon be
practical for them to buy Formosa rated BBB+ and above.
That could be good news for some foreign financial issuers
that want to raise capital in Taiwan, as they are now allowed to
sell Tier 2 bonds there up to the same amount they have
outstanding in senior bonds in the Formosa market.
A head of DCM at a Taiwanese securities house said the huge
expected supply of primary deals meant that investors could
afford to be selective when it came to yields and industry
"The market will continuously grow, while the demand still
remains strong," said the DCM head. "However, investors'
appetites for those foreign-denominated notes have almost
reached their portfolio limit."
US dollar-denominated Formosa bonds tend to price in line
with issues in the US dollar market, but undervalue the call
option, making them relatively cheap for issuers. In theory,
bonds with an embedded call option ought to pay a higher yield
than those without, since issuers should pay extra for the
option to redeem early and investors ought to be compensated for
having their expected flow of coupon payments cut short.
Investors in Taiwan and Asia, in general, have tended to
take the view that, if a 30-year bond is called after three
years, the extra yield over a typical three-year issue is
Formosa bond issues are typically sized to meet demand, and
investors usually buy and hold.
(Reporting by Daniel Stanton; Editing by Vincent Baby and Steve