Hint mode is switched on Switch off

Formosa bond

Category — Bond Types
By Vladislava Sabanova, Latin America Group of Cbonds
Updated June 25, 2024

What is a Formosa Bond?

A Formosa Bond, also known as a Formosa Note, is a type of bond issued in Taiwan international bond market, specifically on the Taipei Exchange. These bonds are typically denominated in a currency other than Taiwan dollars (TWD) and are issued by foreign companies or international bond issuers to raise capital. The name "Formosa" is an alternative name for the island of Taiwan and was selected to represent the region’s unique characteristics. Formosa Bonds have played a significant role in Taiwan’s financial market’s globalization efforts.

Example: Central American Bank for Economic Integration, 5.229% 29nov2032, USD

Formosa bond

 

Characteristics of Formosa bonds

These foreign currency bonds possess several distinct characteristics, making them a unique financial instrument in the international bond market.

  1. Credit Rating Requirement. Formosa Bonds must meet a stringent credit rating standard, typically requiring a minimum rating of BBB or higher. This requirement ensures that issuers maintain a certain level of creditworthiness, providing a degree of security for domestic and international investors.

  2. Trading Platform. Formosa debt sales take place on designated platforms. When trading among securities firms within Taiwan, the GreTai Securities Market’s Electronic Bond Trading System is the preferred channel. This electronic system streamlines the trading process, enhancing efficiency and transparency.

  3. Taipei Exchange Listing. Formosa Bonds can be listed on the Taipei Exchange, providing them with a platform for exposure to domestic investors.

  4. Overseas Exchange Listing. Formosa Bonds may also be listed on overseas exchanges, broadening their reach to international investors. In such cases, trading can occur between dealers through the over-the-counter (OTC) market. This flexibility allows for greater accessibility and liquidity, further attracting foreign investors.

 

Advantages and Challenges of Formosa Bonds for Investors

Advantages

  1. Attractive Interest Rates. Formosa Bonds often offer competitive interest rates compared to bonds denominated in other currencies. This can be particularly appealing to yield-seeking investors.

  2. Currency Diversification. Formosa Bonds are typically denominated in currencies other than TWD, allowing investors to diversify their currency exposure, which can be valuable in managing foreign exchange risk.

  3. Access to Taiwan’s Market. Formosa Bonds provides international investors with a gateway to Taiwan’s domestic market, which can benefit those looking to expand their investment horizons.

  4. Liquidity. Trading in Formosa Bonds is facilitated through various channels, including electronic systems and over-the-counter markets, providing liquidity and ease of buying and selling.

Challenges

  1. Limited Issuers. The pool of Formosa Bond issuers may be limited compared to other bond markets. Investors might have fewer options when it comes to choosing bonds that match their risk tolerance and investment objectives.

  2. Market Knowledge. Understanding the nuances of the Taiwanese bond market and the specific terms and conditions of Formosa Bonds can be challenging for international investors.

  3. Currency Exchange Rates. Exchange rate movements, particularly between the Taiwan dollar (TWD) and other major currencies, can influence the returns on Formosa Bonds for foreign investors. Currency depreciation can erode returns for foreign investors.

FAQ

  • Who issues Formosa bonds?

    Subsidiaries of foreign companies can issue Formosa Bonds. These subsidiaries can be either entities that are already operating in Taiwan or ones that are specifically established for the purpose of issuing these bonds.

    To qualify as Formosa Bond issuers, borrowers must meet stringent credit rating standards. They are required to have credit ratings of BBB or higher. This requirement ensures that issuers maintain a certain level of creditworthiness, providing a degree of security for investors.

    Formosa Bonds are listed and traded on the Taipei Exchange, which provides a platform for exposure to domestic investors in Taiwan.

  • How can foreign issuers access the Taiwanese Formosa bond market?

    1. Credit Rating. One of the key prerequisites for foreign issuers is to have a credit rating of BBB or higher from a recognized credit rating agency. This rating demonstrates the issuer’s creditworthiness and helps attract investors.

    2. Establish a Local Subsidiary. Foreign issuers can access the Formosa Bond market by establishing a local subsidiary in Taiwan. This subsidiary can be a special purpose vehicle (SPV) created solely to issue Formosa Bonds.

    3. Registration with Regulatory Authorities. The newly established local subsidiary must register with the relevant regulatory authorities in Taiwan, including the Financial Supervisory Commission (FSC). Compliance with Taiwanese regulations is essential to ensure transparency and investor protection.

    4. Listing on the Taipei Exchange. Foreign issuers need to list their Formosa Bonds on the Taipei Exchange to access domestic investors in Taiwan. The exchange has specific listing requirements that issuers must meet.

    5. Legal Documentation. Issuers need to prepare legal documentation, including the bond prospectus, offering circular, and any other required disclosure documents, in compliance with Taiwanese regulations.

  • Are Formosa bonds tradable on secondary markets?

    Yes, Formosa Bonds are tradable on secondary markets, including the over-the-counter (OTC) market. The tradability of Formosa Bonds on secondary markets offers flexibility to investors and liquidity to the bonds.

  • What is the role of the currency swap market in Formosa bonds?

    The currency swap market plays a crucial role in Formosa Bonds by providing a mechanism for investors to hedge their currency risk. Investors who purchase Formosa Bonds denominated in foreign currencies can use currency swaps to convert the bond’s interest and principal payments into their preferred currency, reducing the impact of exchange rate fluctuations on their returns. This hedging capability enhances the attractiveness of Formosa Bonds to a wider range of investors and contributes to their overall appeal in the international bond market.

Try in 7-days Trial access

Free for company representative

  • Get full online access to the database
  • Use our powerful bond screener
  • Track bond prices from 400+ sources
  • Smart Portfolio Monitoring
  • Evaluate advanced analytical tools
Sign up

Why Cbonds?

  • 24 Years of Market Leadership
  • Trusted by clients across 90 countries for decades of reliable service
  • Used by Financial Professionals & Fintech central banks, asset managers, fintech innovators
  • Convenient platform for private investors for informed investment decisions
Terms from the same category

Upgrade to Premium features

Cbonds consolidates global bond, stock, ETF and indices data into a single platform — so you can analyze faster, make informed investment decisions and outperform the market

Get access
Welcome to Cbonds

  • Full access to the largest bond database

    Bond parameters,
    prospectuses

  • Seamless
    Data export

    Analyze the data in the most efficient way

  • Bond pricing

    Current & historical quotes from 400+ stock exchanges & OTC market

  • Smart risk assessment

    Credit ratings, financial reports

Get access
Registration is required to get access.