The Financial Supervisory Commission is considering policies to protect local insurance companies from difficulties with investment planning as bond issuers exercise options to pay off debt early.
Foreign issuers that sold callable notes in Taiwan have rushed to repay the securities before maturity to lock in lower financing costs. Life insurers face risks if issuers pay off bonds before maturity, Insurance Bureau Deputy Directory-General Shih Chiung-hwa (施瓊華) said in a telephone interview on Wednesday.
The commission has yet to make any decision on a new policy, and is in talks with life insurers concerning the risks, Shih said.
About US$6.7 billion of foreign-currency notes sold by international borrowers in Taiwan were repaid this year ahead of maturity, including those sold by Verizon Communications Inc, Goldman Sachs Group Inc, Morgan Stanley and Citigroup Inc.
That is up from US$2.1 billion for all of last year.
The trend is fueling debate about securities that can be redeemed early, with some brokerages saying the ability to sell debt with shorter-term call dates helps attract issuers to Taiwan. Some life insurance firms have focused more on potential losses.
About 80 percent of longer-tenor international bonds sold by foreign issuers in Taiwan are callable notes, according to Sunny Hsu (徐順鋆), vice president at Shin Kong Life Insurance Co (新光人壽).
If issuers repay the securities before the original maturity, investors will lose future coupons and the repayment might not be reinvested at as high an interest rate as when the note was initially purchased. Longer non-callable securities might help eliminate such risks.
“There should be a policy limiting issuers from buying back notes within three to five years,” Hsu said. “This could lower the period mismatch between the insurance policy payout and bond payment income.”
However, stripping borrowers of the ability to issue bonds callable in the short-term would lead to higher issuance costs and companies could opt to take their offerings elsewhere, said Alvin Yang (楊宗威), executive vice president at KGI Securities Co (凱基證券).
“It is not like Taiwan is the most popular place to issue bonds to begin with,” Yang said. “It is with overall low cost of deals and callability that we have been able to attract more deals.”
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