The attractions of Taiwan’s Formosa bond market – issuance brought to Taiwan by foreign entities and denominated in offshore currency – have long been manifold. But the fast alignment of the island-state with international environmental, social and governance (ESG) norms suggests that the market could also become a key component of that turbo-charged arena within the Asia-Pacific region.
Despite the country’s glaring risk as a geopolitical entity it presents some stunning attractions as a venue for debt capital raising, thanks to abundant onshore liquidity, streamlined issuance procedures courtesy of enlightened regulators (dual-debt listings are a salient feature) and the ability to absorb ultra-long tenor.
“Undoubtedly the Formosa bond market is a valuable arena for corporates and financial institutions, and it offers a differentiated path from other offshore bond markets,” says Edward Tsui, head of APAC debt syndicate and North Asia debt capital markets at Deutsche Bank in Hong Kong. “Some of the explicit positive features include the market’s ability to absorb zero-coupon callable issuance, often at ultra-long tenor.
“This year is going to be a big year for the calling of outstanding paper in the Formosa market, with around US$25 billion to US$30 billion up for call. And, if there will be a theme to issuance in 2022, it will be the introduction of new issuers to meet some of the redemptions.”
That theme was underlined this week when State Bank of India (SBI) made its Formosa debut printing a US$300 million five-year Reg S with a change of control put at 101 if the bank’s Indian government ownership falls below 51%.
Striking aspects of SBI’s debut were the tight pricing of treasuries plus 100bp (some 30bp inside the initial guidance area), the heavy participation of Taiwanese banks, and the powerful offshore bid with around 85% of the deal going to accounts based in Asia and Europe, the Middle East and Africa (EMEA) and the rest onshore, demonstrating the pricing power to be derived from the deal’s triple listing in Taipei, Singapore and India’s GSM.
“We anticipate bringing new names into the Formosa market this year, names which value investor diversification and who may seek to issue in dual-listed Formosa format with Taiwan investors as the transaction’s anchor investors,” Tsui says. Recent developments suggest the Formosa bond market could become a significant arena for ESG and transition finance issuance, and one to which international corporate treasurers looking to tap the ever-swelling pool of ESG money should pay keen attention.
Taiwan is leading the way in Asia’s ESG stakes, with the island’s investors holding more ESG-aligned mutual and exchange-traded funds as a total share of assets under management (AUM) than any other Asian country in 2020, according to a 2021 Fitch Ratings report.
The hope is that in Taiwan a homegrown ESG fund management sector can emerge in tandem with this rising investor focus. The signs are there, with around 15% of new funds launched in the country in 2020 labelling themselves as ESG versus just 2% in 2019.
And, in April last year, the Financial Supervisory Commission’s securities and futures bureau set out guidelines for fund managers to disclose ESG-alignment in portfolios. Just prior to that a Fitch report conducted among local asset managers found that ESG was rising sharply as an investment input.
This can only be superb news for CFOs and treasurers looking to diversify the debt investor base via Formosa issuance and for the Taiwanese government as it embarks on the journey to net zero and looks to beef up green projects with the help of onshore capital as well as foreign direct investment (FDI). The strong Asian and EMEA bid potential of Formosa paper for ESG-focused accounts as well as the burgeoning ESG onshore sector can only bode well for green and sustainable issuance from the island state.
Taiwan is ranked number one in terms of ESG disclosure in Asia, according to think-tank CSRone. Governance and sustainability considerations, in line with the UN’s Sustainable Development Goals, are central axioms for the country’s corporations and are the direct result of moves made by the Taipei Stock Exchange and Financial Supervisory Commission over the past decade or so.
All of this bodes well for FDI and for Taiwan’s capital markets, where increasingly aligning with international standards and taxonomies is key to attracting institutional capital.
Taiwan is undergoing a green energy “revolution” in line with its net zero by 2050 commitment – confirmed by President Tsai Ing-wen last November despite Taiwan’s exclusion from the COP26 – and aims to ramp up renewable energy to 20% of the nation’s power supply by 2025.
Taiwanese companies like Sun Rise E&T, Swancor, SRE and Sysgration have innovated in solar and wind energy, with Swancor participating in the building of the giant Formosa 1-4 wind power projects. The potential for foreign participation is immense, given a relatively stable pricing backdrop and the availability of transparent off-take agreements.
Deutsche Bank twice visited the Formosa bond market between August and October last year in green format, printing two US$200 million 34-year zero-coupon deals with proceeds to be used in funding renewable energy, and more financial institutions are expected to visit the Formosa market with green-labelled deals.
Another somewhat quirky aspect of the Formosa market is its apparent ability to absorb “transition” paper that is not fully compliant with green norms, something which might appeal to Japanese issuers who are keen to adopt transition taxonomy norms other than those exemplified in the European Union’s Green Taxonomy that came into force in early January.
Japan Tobacco found a strong bid for the US$400 million 30-year Formosa tranche of a US$1.025 billion dual-tranche Reg S deal last September, indicating an onshore willingness in Taiwan to embrace issuers with a transition story.