Wed, Dec 11, 2013 page13

• FSC investigates Formosa bonds underpricing claims

  TIP-OFF: Two state-run banks allegedly lowered underwriting fees and coupon rates in an attempt to facilitate sales of Formosa bonds issued by Chinese banks

  • By Crystal Hsu / Staff reporter, with CNA
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  The Financial Supervisory Commission (FSC) is demanding an explanation from local banks over underpricing allegations linked to their recent underwriting of Formosa bonds, or yuan-denominated bonds sold in Taiwan.

  “We are investigating allegations of unfair competition and may take action against unruly players if necessary,” FSC secretary-general Lin Tung-liang (林棟樑) said by telephone yesterday.

  Lin’s remark came after FSC Chairman William Tseng (曾銘宗) told lawmakers on Monday that the commission received information that two state-run banks allegedly lowered underwriting fees and coupon rates in an attempt to facilitate sales of Formosa bonds issued by Chinese banks.

  While Tseng and Lin declined to name the state-run banks, they are thought to be Mega International Commercial Bank (兆豐國際商銀) and Bank of Taiwan (台灣銀行), as the two are responsible for distributing Formosa bonds issued by China Construction Bank (中國建設銀行) and Bank of China (中國銀行).

  Yesterday, four Chinese banks listed their Formosa bonds on the over-the-counter (OTC) market for the first time.

  According to GRETAI Securities Market’s data, Bank of China, China Construction Bank, Bank of Communications (交通銀行) and Agriculture Bank of China (中國農民銀行) issued and listed 6.7 billion yuan (US$10.98 billion) in Formosa bonds in Taiwan.

  Bank of China issued 2 billion yuan in Formosa bonds in two tranches — two-year 1 billion yuan bonds with a coupon rate of 3.15 percent and three-year 1 billion yuan bonds with a coupon rate of 3.25 percent.

  Agriculture Bank of China sold two tranches of Formosa bonds — three-year 1.25 billion yuan and five-year 250 million bonds, with a coupon rate of 3.3 percent and 3.6 percent respectively.

  Bank of Communications also sold two tranches of yuan-denominated bonds — three-year 800 million yuan bonds with a coupon rate of 3.4 percent and five-year 400 million yuan bonds with a coupon rate of 3.7 percent.

  China Construction Bank was the only bank among the four to issue one tranche of three-year Formosa bonds, worth 2 billion yuan and carrying a coupon rate of 3.25 percent.

  Lin said the commission has requested local banks alleged to have underwritten the bonds to file reports detailing their pricing policies, operation costs and profit margins.

  “The commission will not sit by and watch competition practices that may squeeze reasonable profit margins and compromise investor benefits,” he said.

  Lin declined to elaborate on punitive measures, but Tseng on Monday suggested revoking underwriting business rights for a certain period of time.

  The two state-run lenders allegedly set underwriting fees at 15 to 20 basis points of issuance amounts, lower than the 25 to 30 basis points among private banks.

  Following in the footsteps of the four Chinese banks, 16 other Chinese lenders are eligible to issue Formosa bonds in Taiwan, according to the commission.

  Chinese subsidiaries set up by Taiwanese financial institutions, such as Bank SinoPac’s (永豐銀行) unit in Nanjing, are also allowed to sell Formosa bonds, it said.

  China-registered subsidiaries of Taiwanese companies that are listed on the local bourse are also eligible to issue yuan-denominated bonds here, according to the commission.

  The commission has set an initial limit of 10 billion yuan for Formosa bond sales by Chinese entities but the limit is subject to adjustments based on market conditions.

  Thus far, four Taiwanese companies and one German bank, along with the four Chinese banks, have issued a total of 10.6 billion yuan in Formosa bonds in Taiwan.
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