The Formosa bond market exploded in 2014 following Taiwan's Financial Supervisory Commission's (FSC) decision to reclassify these instruments as onshore investments under local insurance law. Prior to May 2014, onshore insurers' holdings of Formosa bonds - lightly structured corporate bonds issued in Taiwan but denominated in currencies other than the new Taiwanese dollar (yuan) - were placed in the foreign investments bucket, capped at 45% of total allocations.
When the cap was lifted, the race was on to supply a newly liberated market with fresh issuance - a race Societe Generale won with a $250 million, 20-year fixed-rate and a $355 million, 20-year, zero-coupon transaction issued on July 8, 2014 and July 10, 2014, respectively.
"The reason why we were the first one to issue in Taiwan under the new framework is our close monitoring of the regulatory environment and close dialogue with the insurance companies," says William Huang, head of Greater China sales, global markets at Societe Generale. "We were engaged in discussions with the local underwriters for more than a year on reclassifying Formosa bonds. Then there are our internal capabilities. We have a team of in-house legal experts, so we were able to launch the internal approval process in a timely manner and get everyone on the floor to understand all the requirements of issuing a Formosa bond."
With the Central Bank of Taiwan base rate stuck at around 1.88% for several years, and long-tenor investors such as insurance companies crying out for yield, there was a natural market for the instruments among local players. Formosa bonds offer fatter coupons to reflect both the credit risk of the underlying and the higher yield of the currencies in which they are denominated. Societe Generale's July 8 transaction, for example, provided investors a return of 4.1% per year.
The bank was quick to capitalise on these early successes, printing seven further deals in US dollar, Australian dollar, and renminbi. It also took the lead in co-opting foreign and local banks to help develop the market further. On September 11, 2014 Societe Generale partnered with Lloyds Bank for its maiden Formosa bond as swap counterparty - the first issued by third-party bank in Taiwan. The French bank was also the first one to offer a floating - rather than fixed - rate in its Australian dollar issuance. Partnerships with Cathay United Bank, Changhwa Bank, Credit Industriel et Commercial, E.Sun, and First Commercial Bank quickly followed.
Societe Generale's decision to create a dedicated Formosa bond team went a long way towards securing these early successes. A dedicated pricer and legal counsel enabled it to execute more swiftly than its competitors, while the bank's close relationship with a range of third-party issuers put it at an advantage over its competitors in identifying potential partners.
One head of foreign investments at a Taiwanese life insurer says: "In the beginning period of the building up of portfolios, Societe Generale was the most active. We appreciated their efficiency and their issuance of both zero-coupon and fixed coupon structures."
The French bank may have been the first to market but a flood of issuers have entered the Formosa bond space since last June, resulting in fierce competition. In 2014, total issuance hit 20.8 billion yuan ($3.4 billion) - growing by 96% year-on-year. The trend has continued in 2015, with year-to-date issuance of renminbi bonds now at 13.3 billion yuan, according to the Taipei Exchange.
"Last year, the door had just opened and the market was supply driven. This year, it is very different. It is demand-driven and buyers are cherry-picking the issuance available. So we explore the demand and then approach local issuers that are attractive to the market," says Huang.
Tinkering with payout structures and underlyings is another means by which Societe Generale has been able to stay distinctive. The French bank has actively promoted the virtues of adding asset-backed securities and lower-rated corporates to the roster of eligible underlyings to the FSC. There is also talk of Formosa bonds becoming permissible investments for retail clients - and the bank has already acted as backstop for a bond underpinning one life insurer's new investment-linked policy.
There is plenty of scope, then, for Societe Generale to maintain its position in the Formosa bond market ahead. Huang knows that a close relationship with the regulator will be key to the bank's continuing success. "We are seeing a positive trend with gradual deregulation in Taiwan [but also] more risk management requirements before they accelerate the deregulation," he says.