Why Apple and Pfizer Are Piling Into Taiwan's Bond Market
March 13 2017 - 7:55AM
Dow Jones News
By Rachel Rosenthal
Big U.S. companies like Apple Inc. and Pfizer Inc. have the
world's largest corporate bond market in their backyard. So why
have they been rushing to Taiwan lately to issue debt?
The reason: a feature of the Taiwanese bond market that--for
now--makes it easy and relatively cheap for companies to redeem any
debt they issue there before its due date.
That could be changing. Taiwanese regulators have proposed a
rule change, likely to go into effect by May, that will require
issuers to wait at least five years before redeeming, or "calling,"
their bonds in a move to limit the disruption to investors.
Previously there was no restriction.
The coming shift has triggered a surge of so-called Formosa
bonds, which are sold in Taiwan, but denominated in major global
currencies such as the U.S. dollar: Issuance is up 81% year-to-date
to $17.1 billion, according to Dealogic. That follows a 50% rise in
issuance last year to nearly $50 billion, according to Deutsche
Bank.
"The whole call feature is one of the attractions of the Formosa
market [for issuers]," said Doug Stephen, head of private placement
for Asian local markets at Deutsche Bank.
For sure, the Formosa bond market--so-called after the
Portuguese name for the island--is tiny compared with the U.S.'s
$8.6 trillion corporate bond market. Yet blue-chip companies
including Apple, Pfizer, Verizon Communications Inc. and Comcast
Corp. have each issued north of $1 billion of such debt this year.
AT&T Inc. issued a $1.43 billion 30-year Formosa bond with a
5.5% coupon earlier this month.
AT&T said the company continues to see strong demand from
investors and "we like the investor diversification this issuance
brings."
Apple declined to comment beyond the content of its latest
earnings call, which occurred before it issued its Formosa bond in
mid-February. Comcast and Verizon declined to comment.
The ability to redeem a bond early is good for issuing companies
because it enables them to pay back their bonds when interest rates
are low and reissue when funding costs are cheaper.
This "call" feature isn't so swell for investors, who can get
stuck with cash that the borrower has paid off earlier than
expected, with few attractive alternative places to put their
money. That's why investors tend to get paid more in the form of
higher coupons when they buy "callable" bonds.
In Taiwan, life insurers have a $670 billion pool of
assets--almost double the size of the local bond market--shopping
for a shrinking supply of investments that meet their ratings
requirements and yield targets. That dynamic makes investors more
willing to buy callable debt from big U.S. corporate issuers they
recognize--such as Apple and Pfizer--at a relatively cheap cost for
the company.
In the Formosa market, the call option adds only an extra 0.1
percentage point to 0.15 percentage point in yield, compared with
0.8 percentage point to a full percentage point in other markets,
according to Deutsche Bank's Mr. Stephen.
"There's no other way [Taiwanese investors] can achieve their
yield target by investing in regular bonds," said Lorna Greene,
director of debt syndicate and origination at National Australia
Bank in Hong Kong. "They would rather choose names they feel
comfortable with. But rather than taking credit risk, they opt for
the risk of the call option."
Having greater flexibility to move cash around could come into
play if the Trump administration makes good on its plan for a
one-off lowering of the tax rate on overseas earnings, as it tries
to entice multinational firms to bring more of the roughly $2.5
trillion of cash they hold overseas back home.
U.S. drugmaker Pfizer, which issued a $1.065 billion 30-year
Formosa bond with a 4.2% coupon late last month, said it hadn't
made a U.S. tax provision on about $86 billion of unremitted
earnings from international subsidiaries, as of Dec. 31, 2016.
The company said it considered President Donald Trump's
proposals and Taiwan's new rules, among other factors, when
deciding to issue in the Formosa market for the first time,
according to a company spokesperson.
Write to Rachel Rosenthal at Rachel.Rosenthal@wsj.com
(END) Dow Jones Newswires
March 13, 2017 07:40 ET (11:40 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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