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Sleepy Taiwan bonds set for reawakening

29 Jun 2008

The Taiwanese bond market has shrunk in terms of size and new issuance levels over recent years and with offshore issuance all but barred, Taiwan’s bond market seemed to be fading from the map. But that could be changing.

Larry Hsu, head of investment banking at Chinatrust Commercial Bank in Taipei, is optimistic. He sees a number of signs that the onshore debt markets are on the up, and one sign is the growing interest of foreign investors.

"Five or six years ago, we asked foreign investors if they were interested in fixed income products — and 99% of the portfolios of qualified foreign institutional investors were all in equity-related products," he recalls. "Starting from this year, there has been a diversification of investment portfolios into bonds."

This has partly been a currency play — as traders anticipate a stronger Taiwan dollar — but it is also a reflection on the political rapprochement with China. Following the election of a Kuomintang president in March most observers expect the new government will lift sanctions on financing companies working in China later this year.

And better cross-Straits relations imply more business opportunities — and more funding requirements.

Another factor: as the effects of the sub-prime mortgage crisis were felt around the world, Taiwan’s credit spreads held in quite well and Taipei bankers started to see the return of old corporate clients that had moved their businesses to China. "Before, they sorted out funding on the mainland or in Hong Kong — or they all talked about doing euro-convertible issues," says Hsu.

With these options becoming more expensive, they are increasingly tapping funds in Taiwan — which has so far been seen most clearly in the syndicated loan market.

That may be the case for a while. The ample liquidity in the banking sector encourages loans rather than direct capital market funding. That makes it more likely that it will be the banks themselves and other financial institutions that will dominate the market in the coming months. Indeed, of the NT$140bn ($4.6bn) of non-government bonds issued last year over 57% came in the form of bank debentures.

Boosting supply is the priority, and many suggest it should come from offshore.

"The hurdles set by the central bank for foreign issuers are high, focusing on ensuring their credit quality and relevance to Taiwan," says Sean Henderson, head of debt syndicate Asia at HSBC in Hong Kong. "However we expect to see the process becoming easier over time as the market becomes more used to offshore names, which will hopefully broaden offshore participation and pave the way for more frequent offshore supply." Nick Parsons

Taiwan dollar bond house of the year

as voted for by market participants


1. Chinatrust Securities

2. Yuanta Core Pacific Securities

3. KGI Securities

29 Jun 2008