Formosa bond calls loom as issuers seek cheaper options
By William Hoffman
NEW YORK, Sept 19 (IFR) - US and European corporates could potentially exercise calls on as much as US$60bn of Taiwanese Formosa bonds over the next year or so, potentially creating a wave of issuance in their home markets, where funding costs have dropped dramatically.
Taiwan has been a popular port of call for such issuers ever since the country's regulators made it easier for local insurers to buy foreign currency bonds in 2014.
Since then, US and European banks telecom and tech companies have raised some US$120bn through the sale of 30-year bonds, with cheap short-dated calls that such issuers would have troubling selling anywhere else.
But those cheap calls are coming home to roost just a few short years after the 30-year bonds were issued as plummeting funding costs elsewhere make corporates reconsider their options.
"We're starting to see the calls hit, but there is a big question of where do the companies go?" said Jason Shoup, Head of Global Credit Strategy at Legal & General Investment Management America.
"Do they come back to US dollar on-shore market? Do they refinance them into a new Formosa issuance in Taiwan at a lower yield? Do they go to the euro market where yields are quite low, and you have the ECB technical at your back?"
Bank of America started this fledgling trend last month with the announcement of a redemption of its 4.7% Formosa bond, which was called over Labor Day weekend.
Shortly after Verizon followed suit with the announcement of a planned redemption of the US$2.1bn left outstanding on its 4.2% Formosa bond callable on September 22.
While both companies have yet to announce new bond issuance, investors are wondering which issuers might move first to take advantage of low US Treasury rates, which hit historic lows earlier this month, not to mention negative yields in Europe.
"With the collapse in yields it should be favorable for issuers in many cases to call and replace existing Formosa bonds with new debt at lower yields," Bank of America Merrill Lynch Research wrote in a report.
IDENTIFYING THE DEBT
Formosa bonds with coupons of 4% or higher, representing some US$21bn in debt, are the most likely to be called, assuming rates remain near current levels, according to a Barclays report.
Verizon 30-year bullet debt is trading at a yield of around 3.5% in the US dollar market, implying it could issue with a coupon substantially lower than the 4.2% on its Formosa bond, according to Barclays.
The circumstances are similar for other big name issuers such as AT&T, which has more than US$5bn of Formosa debt reaching first call dates in the next year. Comcast and Apple also have sizable debt loads of US$3.9bn and US$2.4bn, respectively, becoming callable in the coming year.
"The Formosa bonds do have embedded call options that are valuable to the issuer, but even after accounting for the value of the option, we find that it will likely be better to refinance this paper either in the US or in the Formosa market," Barclays wrote in the report.
Verizon's Formosa call date is on September 22, which is the earliest it may seek the alternative financing.
The telecom could reissue back into the Formosa market, which provides good diversification. However, Taiwanese insurers may not be keen to bid for the lower yields.
"In the past they have been very yield focused but as yields have plunged, they are going to have to recalibrate and mend their targets, which is happening" one syndicate banker told IFR.
"In the old days they were lucky enough to get 4.5% or 5% on Formosas but that is a bit of a dream scenario from an investment grade corporate name at the moment."
However, Verizon — like many corporates — is on a deleveraging plan and may take this opportunity to simply pay down a large slug of debt.
"With many of these issuers looking to deleverage anyway, we believe calling the high-coupon Formosa paper is a particularly attractive option," said Barclays
Matt Daly, managing director and head of corporate and municipal teams at Conning, said, "For some companies that want to delever it might make sense just to take that debt out if they have the wherewithal to do it."
(Reporting by William Hoffman; Editing by Paul Kilby)
((firstname.lastname@example.org; 646 223 6141;))
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.