US banks including Goldman Sachs Group Inc and Citigroup Inc are rushing to issue US dollar bonds in Taiwan after a rule change unlocked US$586 billion of funds held by local insurance companies.
Goldman sold US$974 million of 30-year notes last month in the largest such issuance in Taiwan, leading US$7.3 billion in greenback debt offers this year, versus zero a year earlier.
JPMorgan Securities LLC estimates US issuers can obtain lower costs than they would at home, after lawmakers in May excluded locally issued foreign-currency bonds from a 45 percent cap on the amount insurance firms can invest in overseas assets.
“With Taiwan’s very low benchmark-rate environment, a lot of domestic-currency investments have low yields,” said Godwin Chang (張建西), Taiwan head at Societe Generale AG, which sold US$1.21 billion of bonds in Taiwan this year. “Life insurers are better off having more foreign-currency investments.”
The central bank cut its policy rate to a record low 1.25 percent in 2009 and has maintained it at 1.875 percent over the past 13 quarters.
Last week, Goldman issued its zero-coupon, 30-year bonds at a price-to-yield ratio of 4.96 percent. Morgan Stanley’s notes due 2044 paid a coupon of 4.7 percent and Citigroup’s similar-maturity, zero-coupon debt was sold at 4.88 percent.
All of the US dollar notes sold in Taiwan since May’s amendment are callable by the issuer and mature in 20 or 30 years, while 74 percent pay zero coupon, according to data compiled by Bloomberg. Foreign-currency notes issued in Taiwan are called Formosa bonds.
Callable notes are popular among insurers, which can demand higher yields to boost returns, JPMorgan said in a note on Aug. 22.
For insurers whose investments abroad have not yet neared the 45 percent limit, the locally issued foreign-currency bonds are not the most attractive.
Cathay Life Insurance Co (國泰人壽), the largest in the industry with NT$4.3 trillion of assets, has bought very few of the foreign-currency notes as they offer rates lower than similar securities overseas.
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