Formosa bonds have emerged as a significant instrument for global capital markets, with issuance particularly robust in the 2016-2019 timeframe.  Issuers such as AT&T, Verizon, Comcast and Intel are among the many companies that have tapped this unique source of debt capital.

Background:

Formosa bonds are named after the island of Taiwan, historically known as Formosa. These bonds are issued by foreign entities, typically non-Taiwanese issuers, in the Taiwanese market and are denominated in currencies other than the New Taiwan Dollar (TWD). They are often issued in US dollars but can also be denominated in other major currencies like the euro or the Japanese yen.

Advantages of Formosa Bonds:

1.  Funding Diversification: Formosa bonds offer issuers a chance to diversify their investor base by accessing a new market. This allows them to tap into Taiwanese institutional investors, predominantly Taiwan insurance companies, and expand their funding sources

2.  Allocations:   Formosa bonds often offer Taiwan life insurance companies substantive allocations of bonds.  As a relatively captive market under the aegis of a Tawian listing, participating investors are not competing for allocations against the large money managers.  As a result, in any given offering, local Taiwanese investors are able to source more significant allocations versus a broadly syndicate US debt financing

3.  Call Features: Formosa bonds provide issuers the flexibility to include call features in the structure of a financing.  Issuers often have the right(but not obligation) to redeem the securities at par after 3- or 5-years.  Such a feature is difficult to replicate in the broader USD market as international investors have strong preferences for non-redeemable securities (“bullets”).  Taiwan investors have demonstrated a willingness to embrace offerings with such a call feature, distinguishing this investor base from the broader USD institutional market.

4.  Access to Taiwanese Market: By issuing Formosa bonds, foreign entities can gain exposure to the Taiwanese market, which is known for its robust financial infrastructure and investor base.

Risks and Considerations:

1 . Foreign Exchange Risk: For issuers, there is a risk associated with the fluctuation of exchange rates between the currency in which the bond is denominated and the issuer’s home currency. This risk can impact the issuer’s overall financial position.

2.  Liquidity Risk: Formosa bonds may face liquidity challenges compared to bonds issued in more established markets. This can make it more difficult for investors to buy or sell these bonds at desired prices.

3.  Regulatory and Legal Considerations: Issuers and investors should be mindful of the regulatory and legal framework specific to Formosa bonds. Compliance with Taiwanese regulations and understanding the legal rights and reporting obligations associated with a Formosa bond offering is an important consideration for issuers.

Impact on Global Financial Landscape:

The fairly recent popularity of Formosa bonds has contributed to the diversification of funding sources for issuers and the expansion of investment opportunities for investors. These bonds have facilitated capital flows between Taiwan and other countries, strengthening financial ties and introducing new credits to the Taiwanese investor community.

Formosa bonds have emerged as a prominent financing tool, providing issuers with access to Taiwanese capital markets and offering investors attractive opportunities. While they come with their own considerations for issuers, the benefits of investor diversification as well as structural flexibility and currency options have made Formosa bonds an integral part of the global financial landscape.  While the surge in Formosa issuance has abated since 2020, Formosa bonds are likely to continue to play a significant role in the context of cross-border investments and capital flows.