The three-month TAIFX, Taiwan's interbank U.S. dollar lending rate, touched a record high of 328bp last December and hovered above 280bp until recently, more than double the 128bp seen in November 2016.
TAIFX has climbed as increasing numbers of offshore borrowers have come to Taiwan in recent years, absorbing huge amounts of U.S. dollars.
For Taiwanese lenders, the jump in funding costs is prompting a rise in loan pricing on U.S. dollar-denominated deals in order to meet target return levels.
“Taiwan’s U.S. dollar liquidity gets tight at year-end traditionally as banks hoard cash to meet regulatory requirements. We would like to push the pricing higher due to the higher costs, but we face a tough task as borrowers can turn to rival lenders, which will exploit the opportunity by offering lower pricing,” said a senior syndicated loan banker at a Taiwanese bank in Taipei.
US dollar loans in Taiwan come with a risk-sharing mechanism when the difference between TAIFX and Libor exceeds an agreed threshold – generally set at 30bp–40bp – and the borrower pays the excess interest rate beyond that difference.
“While the increased costs are passed on to the local borrowers to some degree, those top-tier clients still have very strong bargaining power on interest rates and fees, and take advantage of the abundant liquidity to bring sizeable deals,” the banker said.
The volume of US dollar loans in Taiwan jumped 62% in the first three months of 2019 to US$3.4bn, from US$2.1bn a year earlier, according to LPC data.
Among the biggest deals, Taiwanese conglomerate Formosa Plastics Group raised three facilities totalling US$2bn. They were a US$750m loan, a U.S.$750m loan for special-purpose vehicle Formosa Ha Tinh (Cayman) and a US$500m facility for Formosa Ha Tinh Steel.
The three transactions offer an interest margin of 110bp over Libor. The borrower will pay any excess interest rate beyond a 35bp difference between TAIFX and Libor.
For loans to overseas borrowers, Taiwanese banks bear the risks entirely. US dollar loans extended by Taiwanese banks have become more expensive than those from their foreign counterparts since the rise in TAIFX. For pure offshore deals from other countries, Taiwanese banks are usually not the leads and thus cannot raise pricing, which affects their profitability.
However, they are not deterred from providing retail liquidity to overseas borrowers.
“We are more cautious on overseas deals since our funding costs are rising. But we see the surge in the interbank rate as a short-term phenomenon and we expect the pace of the rise to slow after quarter-end,” said a second banker at an offshore banking unit in Taipei.
“We still have strong appetite in state-owned entities from South-East Asia as our credit department is more concerned about the risky credits in emerging markets.”
For example, state-owned Indian Oil Corp sealed a US$1.7bn five-year loan in February with 17 banks participating, including 11 Taiwanese banks accounting for US$310m. The financing offered a top-level all-in pricing of 114bp based on an interest margin of 100bp over Libor.
In March, Bank Rakyat Indonesia’s US$700m multi-tranche financing also pulled in 13 Taiwanese lenders with total commitments of US$288.5m, despite the tight top-level all-in of 60bp, 91bp and 103bp based on interest margins of 40bp, 74bp and 84bp over Libor.
(Reporting By Evelynn Lin; Editing by Chris Mangham and Vincent Baby)
By Evelynn Lin