Korea Housing Finance Corporation and First Abu Dhabi Bank sold US dollar bonds in Taiwan over the past few days, proving demand is resilient despite currency turmoil rocking the island’s markets.
KHFC on Tuesday priced a US$400m five-year floating-rate covered sustainability Formosa bond at SOFR plus 80bp, inside the initial guidance of the 115bp area.
FAB on Thursday sold a US$750m five-year floating-rate Formosa at SOFR plus 97bp, inside guidance of the 100bp area.
Both issuers took liberties with the usual Formosa script. The norm is to come out straight with final price guidance and price at the same level after bringing local investors onboard as anchors.
But KHFC and FAB both started guidance wider and tightened during the day, with KHFC taking a conventional Asian approach with a large tightening, and FAB opting for an SSA style, more popular in Europe, with only a small amount of tightening.
"The market is really good," said a banker with knowledge of the deals. "This strategy will give more optionality to the issuer."
The new approach, which the banker expects to see more of in the Formosa market, is in part a response to increased demand for Formosa bonds from non-Taiwanese investors.
Asian investors, who have been in search of US dollar paper, are keen to buy the notes alongside locals, forcing the Taiwanese buyers to give in a bit more on the price, said the banker. Deal statistics for FAB were not made public, but the banker said the offshore demand was "substantial".
Taiwan’s markets have recently been roiled by the surging Taiwanese dollar and rising hedging costs. The currency appreciated 8% in two days in early May, wreaking havoc for the country’s life insurers, which have traditionally been significant buyers of US dollar bonds.
On Friday, Fitch put five Taiwanese lifers on negative rating watch and others on evolving rating watch, reflecting the increased risks to the companies' capital and earnings.
Insurers already reported losses in April, and “the much sharper appreciation in May will create a more significant earnings strain”, said Kelvin Kwok, analyst at Moody’s.
Andy Chang, analytical manager for S&P in Taiwan, said the impact on insurers’ earnings is greater than on capital. “We believe that the current foreign exchange volatility is unlikely to hurt lifers’ credit profiles,” he said.
Sources say the situation is not having a significant impact on the Formosa bond market.
“The trades that we’re doing these days are more into banks and securities houses,” said a second banker. Lifers have not been buying Formosas the way they did a few years ago, before rising US Treasury rates hit them, he said.
“It’s an evolving situation,” said the second banker. “Overall, it’s clearly not ideal for any of those investors.”
Kwok does not see a direct impact of the Taiwan dollar on insurers’ bond allocations now, but more attention is on the very high hedging costs. This could slow down their allocations into US dollar bonds, onshore or offshore, but insurers will remain restricted in their options for domestic alternatives, keeping US dollar bonds necessary.
Insurers are investing less in the Formosa market than they used to because they have been hit by a decrease in new business, giving them less money to invest, said Chang. But Formosa bonds are still an attractive product.
“Diversification will definitely come back to lifers’ consideration,” said Chang. “Without sufficient domestic supply, there’s not much choice.”
The first banker believes Taiwanese insurers could be forced to sell more US dollar bonds as well, and he anticipates capital deals to come.
KHFC’s Reg S trade will be rated Aaa/AAA (Moody's/S&P), while the issuer is rated Aa2/AA/AA–.
Credit Agricole Taipei branch, Societe Generale Taipei branch and Standard Chartered Bank (Taiwan) were joint bookrunners.
FAB’s Reg S deal will be rated Aa3 (Moody's), while the issuer is rated Aa3/AA–/AA–.
Standard Chartered Bank (Taiwan) was the sole manager and First Abu Dhabi Bank the structuring agent.