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    1301   TW0001301000

FORMOSA PLASTICS CORPORATION

(1301)
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Taiwan banks raise loan pricing

04/26/2019 | 05:54am EDT

Hong Kong (LPC) - Taiwanese banks, well-known for their ample U.S. dollar liquidity and tolerance of tightly priced loans, have started to push for higher pricing as their U.S. dollar funding costs have increased.

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.

PRICING DYNAMICS

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


© Reuters 2019
Stocks mentioned in the article
ChangeLast1st jan.
EURO / US DOLLAR (EUR/USD) -0.53% 1.2108 Delayed Quote.-0.34%
FORMOSA PLASTICS CORPORATION -1.90% 103.5 End-of-day quote.7.37%
INDIAN OIL CORPORATION LIMITED -0.73% 115.1 Delayed Quote.26.55%
MSCI TAIWAN (STRD) 0.59% 710.15 Real-time Quote.17.49%
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Financials
Sales 2021 235 B 8 508 M 8 508 M
Net income 2021 47 888 M 1 732 M 1 732 M
Net Debt 2021 55 742 M 2 017 M 2 017 M
P/E ratio 2021 14,1x
Yield 2021 5,29%
Capitalization 659 B 23 784 M 23 836 M
EV / Sales 2021 3,04x
EV / Sales 2022 3,07x
Nbr of Employees -
Free-Float 66,5%
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Mean consensus BUY
Number of Analysts 12
Average target price 121,82 TWD
Last Close Price 103,50 TWD
Spread / Highest target 25,6%
Spread / Average Target 17,7%
Spread / Lowest Target 2,42%
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Managers and Directors
NameTitle
Chien Nan Lin Chairman & General Manager
Chen Hsiao Lei Chief Financial Officer
Chi-Lin Wei Independent Executive Director
Ching Chi Wu Independent Director
Yen-Shiang Shih Independent Director
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