Sunny prospects seen for Formosa bond issuance in 2H14

Thanks to regulatory changes.

Formosa bond issuance is expected to pick up in H2-2014, following a series of regulatory changes that have paved the way for easier issuance and broader international participation.

According to the report entitled "Offshore RMB – A guide to Formosa investments" from Standard Chartered, Gross issuance in 2014 could reach CNY 15-20bn, assuming that mainland banks’ issuance quotas will be increased. We also expect an increase in foreign issuance.

Formosa bonds are foreign currency-denominated bonds issued in Taiwan’s onshore market, Standard Chartered noted.

It also said that the first Renminbi-denominated Formosa bond was issued by Chinatrust Commercial Bank in March 2013. So far, 18 Formosa bonds worth a total of CNY 14.1bn have been issued.

The report also noted that the local media has reported that the European Bank for Reconstruction and Development (EBRD) and British Petroleum (BP) are among potential issuers of Formosa bonds. YTD issuance has been light at CNY 3.5bn.

Here's more from Standard Chartered:

On the demand side, we believe local investors will remain key investors in Formosa bonds. Local investors benefit from their familiarity with local issuers and local regulations.

They face similar tax issues between Formosa and Dim Sum bonds. Local public-sector funds will likely be keen buyers of Formosa bonds in an effort to show their support.

Insurance companies should prefer Formosa over Dim Sum bonds, owing to Formosa bonds being excluded from foreign investment positions, but they are also likely to retain material investment positions in the Dim Sum bond market given their sizeable investments.

Participation by international investors is likely to increase from the currently very low base, but we believe the bulk of their investment will remain in the Dim Sum bond market.

After all, the Dim Sum bond market is much larger than the Formosa bond market, and the liquidity of Dim Sum bonds is greater.

From an international investor’s prospective, the recent improvements have only brought their access to Formosa bonds on par with that to Dim Sum bonds, but do not offer any additional benefits.

We expect international participation in the Formosa bond market to mainly be in bonds issued by non-Taiwan issuers (subject to 0% tax) and limited in bonds issued by Taiwan issuers (subject to 15% WHT).