The Financial Supervisory Commission (FSC) yesterday downplayed concerns about a new regulation that would require issuers of Formosa Bonds to wait at least five years before redeeming the bonds.
“The new rule is not expected to have a significant effect on issuance volume and liquidity, due to overwhelming demand for the debt instruments among local life insurers,” Insurance Bureau Deputy Director-General Shih Chiung-hwa (施瓊華) told a news conference in response to a report by the Wall Street Journal on Monday.
Shih said the change is aimed at ensuring that life insurers have the ability to meet yield targets to fulfill ratings requirements and obligations to policyholders with their NT$67 billion (US$2.16 billion) in combined assets.
The five-year rule would help minimize reinvestment risk — as proceeds from the payment of principal and interest must be reinvested in alternative instruments at a lower rate than the original investment, Shih said.
Shih said that Taiwan has more stringent debt issue requirements, with about 70 percent of callable Formosa Bonds issued not redeemable for at least five years, compared with 20 percent in the US.
“While we feel that the ideal bond duration for life insurers is six years, the proposed change is five years to accommodate issuers’ concerns,” Shin said.
The report said that the relative ease and low cost of redeeming debts issued in Taiwan are features that have attracted blue-chip issuers from the US, such as Apple Inc, Pfizer Inc, Verizon Communications Inc and Comcast Corp.
The call option on Formosa Bonds adds only an extra 0.1 percentage points to 0.15 percentage points in yield, compared with 0.8 to 1 percentage point in other markets, Doug Stephen, head of private placement for Asian markets at Deutsche Bank, was quoted as saying by the newspaper.
Formosa Bonds issuance has surged 81 percent annually to US$17.1 billion since the beginning of this year, following a 50 percent annual rise to US$50 billion last year, the paper said.
US blue chips, such as AT&T Inc, earlier this month issued US$1.43 billion-worth of 30-year Formosa bonds with a 5.5 percent coupon, the report said.
In related news, the commission on Monday eased regulations on local enterprises accessing foreign funds. The move is in a bid to encourage more strategic partnerships with foreign investors.
According to the revised regulations, foreign investors would be allowed to direct 100 percent of inbound remittances toward convertible bonds private placements made by local companies.
In the past, foreign investors were only allowed to allocate 30 percent of funds into private placements, as rules stipulated that 70 percent of the funds must be invested in the local equity market.
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