* US blue chips head for Taiwan to lock in flexible funding terms
By Daniel Stanton
SINGAPORE, Feb 13 (IFR) - Three US blue chips headed to Taiwan's Formosa bond market last week in a rush to lock in flexible funding ahead of changes in local regulations and a potential shake-up in US tax rules.
Verizon Communications issued a $1.475 billion 30-year non-call three bond at 4.95 percent, the largest Formosa issue of the year so far. Also last week, Apple was rumoured to be sounding investors for a potential $1 billion 30 non-call three, indicated at a yield in the 4.3 percent area, and Pfizer was heard to be eyeing the market, too.
Global issuers are rushing to Taiwan before a local rule change in March that will effectively prevent them from offering securities with call dates of less than five years. However, US companies have an additional incentive to lock in the most flexible terms possible, with potential changes to the US tax code looming over the horizon.
"A lot of issuers are thinking they want to get ahead of this," said a foreign banker. "If something changes in the US tax rules, they can call back their bonds later."
Many US multinationals keep large piles of cash offshore to limit corporate tax payments and sell bonds to fund dividend payments or share buybacks.
However, proposals to cut the US corporate tax rate and remove the deductibility of interest payments against income are likely to spur them to repatriate their cash and potentially reduce bond issuance.
Such proposals are unlikely to become law before the end of this year, if at all, but, in the meantime, yield-hungry Taiwanese investors remain an attractive alternative source of US dollar funding.
The Formosa market relies heavily on local life insurers, and foreign issuance has rocketed since 2014, when Taiwan's Financial Services Commission reclassified Formosa bonds as domestic debt. Taiwanese insurers, which cannot invest more than 45 percent of their assets in foreign bonds, were, therefore, freed up to buy more dollar bonds listed in Taiwan.
CALLING TIME Insurance investors typically prefer long maturities and the most popular tenor in the Formosa market is 30 years, but most bonds have call options, most commonly at three years.
Still, the structure of Formosa bonds is about to change. Last month, the FSC said it would prohibit Taiwanese insurance companies from buying bonds with call options earlier than five years.
Since insurers are, by far, the largest buyers of Formosa bonds with about an 80 percent share of all outstanding issues, according to a November estimate by asset manager PIMCO, issuers are expected to stick to non-call five structures after the new rule takes effect on March 25.