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Cheap Euro Financing Poses Major Headache for Taiwan’s Funds

Miaojung Lin and Tasos Vossos

(Bloomberg) -- Enticingly low borrowing costs in euros might be great for companies looking to refinance debt. But they’re about to become a major headache half-way across the globe from Europe: in Taiwan.

Taiwanese insurance companies binged on more than $180 billion of Formosa bonds -- notes listed in Taiwan but denominated mainly in dollars since regulators exempted them from restrictions on foreign investments. The securities helped the funds get yields unavailable in the local market.

But as a wave of these bonds approach the dates when the issuers can call them, the risk is that the Taiwanese investors will be handed back their cash and forced to hunt for alternative securities. That’s because of attractive rates for borrowers in Europe.

“Formosa is set for a redemption wave,” said Ruslan Bikbov, a rates strategist at Citigroup Inc. “If rates stay where they are or go lower, as we expect, then calls are pretty much automatic.”

One recent example was Verizon Communications Inc. The New York-based telecoms giant last month called a $2.06 billion bond -- one of the largest issued in the Formosa market. The security due in 2046 had a coupon of 4.2%. Verizon then sold debt in euros and British pounds at cheaper cost, even if swapped back into dollars, according to data compiled by Bloomberg.

Companies including AT&T Inc, Comcast Corp., Apple Inc. and Pfizer Inc. are facing similar decisions. Some $8 billion of Formosa bonds have callable dates by year-end. Another $22.4 billion reach their next call date in the first quarter of 2020.

“Some Formosa bonds we bought were already called this year, and we expect the trend will last until at least 1Q next year,” said Hung-Sheng Chen, chief financial officer at Taipei-based Mercuries Life Insurance Co.

Mercuries Life will look at options including Taiwanese dollar-denominated exchange-traded funds that track foreign assets, Chen said.

Some issuers may decide not to call their Formosa bonds, to maintain their relationship with Taiwanese investors. But this if history is any guide, that’s unlikely to stem the tide. Borrowers redeemed almost $11 billion of Formosa bonds back in 2016, when U.S. dollar rates plummeted.

“Will we have more bonds called? The answer is yes,” said Rick Chan, a portfolio manager at Pacific Investment Management Co. LLC, which oversees $1.84 trillion. “If I am one of those corporates who issued one of these bonds, my job is to do what is most economical for my company, which is to call these bonds.”

(Adds name of issuer in sixth paragraph.)

To contact the reporters on this story: Miaojung Lin in Taipei at mlin179@bloomberg.net;Tasos Vossos in London at tvossos@bloomberg.net

To contact the editors responsible for this story: Vivianne Rodrigues at vrodrigues3@bloomberg.net, Christopher Anstey, Hannah Benjamin

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