Evolution of Taiwan Corporate Bond Market - Ideas from Taiwan for Development of Other Regional Bond Markets Albert S.T. Ding Executive Vice President, Fixed Income KGI Securities Corp.
Content I. Taiwan Bond Market Overview II. Evolution of Taiwan Corporate Bond Market 2
Fixed Income Investment Facilities in Taiwan tenors within Government Bonds 30yrs Government bonds 30yrs Government bonds Municipal bonds Municipal bonds • Taiwan Bond Corporate Bonds 10yrs Market Corporate bonds (public sector) 10yrs Corporate bonds (public sector) Overview Corporate bonds (private sector) Corporate bonds (private sector) Convertible bonds (asset swaps) • Evolution of Convertible bonds (asset swaps) Preferred shares (fixed income type) Corporate Bond Preferred shares (fixed income type) Market Bank Debentures 10yrs Senior bank debenture 10yrs Senior bank debenture Subordinated bank debenture Subordinated bank debenture Supranational NTD 10yrs Supranational NTD Bonds 10yrs Supranational NTD Bonds Bonds 8yrs 1 Securitization 8yrs 1 ABS, MBS, CLO ABS, MBS, CLO Products 1. Estimated 3
Outstanding Volume of Straight Bond Market Unit: NTD Billion 3000 • Taiwan Bond 2500 2639 Market Overview 2000 • Evolution of Corporate Bond 1480 1500 Market 861 1000 1179 707 92 500 97 3 0 92 556 19951996199719981999 2000 2001 2002 20032004.2 113 Gov't Bonds Corporate Bonds 149 Date: 2004/2 Bank Debentures Source: KGI Securities Supranational Bonds 4
Percentage Breakdown of Straight Bond Market • Taiwan Bond Market Supranational Bonds Overview Bank Debentures 3.31% 12.01% • Evolution of Corporate Bond Market Corporate Bonds 26.15% Gov't Bonds 58.54% Date: 2004/2 Source: Statistics from GreTai Securities Market , SFC, and CBC 5
Monthly Turnover Rate of Bond Instruments 225.60% 250% • Taiwan Bond 200% Market Overview 150% • Evolution of Corporate Bond Market 100% 50% 38.86% 13.48% 0% Monthly Turnover Rate Government Corporate Bond Bond Supranational NTD Bond Period: Year 2003 Source: KGI Securities 6
Average Monthly Turnover of Government Bonds (Repo trading only) 400% 380% • Taiwan Bond Market 350% Overview 305% 303% 296% 294% 300% 267% • Evolution of 248% 250% Corporate Bond 199% Market 200% 150% 100% 50% 0% 1997 1998 1999 2000 2001 2002 2003 2004 Period: 1997- 2004 Source: KGI Securities 7
2004 Government Bond Dealer Composition Government Bond Dealer is licensed to participate � government bond primary auction. • Taiwan Bond Market Overview Securities House, 31 • Evolution of Corporate Bond Market Trust & Investment Corporation, 2 Bank, 25 Bill Finance, 13 Foreign Bank, Insurance 2 Company, 4 Period: 2004 Source: KGI Securities 8
Composition of government bond primary market bid ratio 100% 1.85 1.3 1.68 3.25 4.57 4.49 5.68 5.49 10.27 10.25 17.51 16.47 19.1 19.87 24.02 22.24 • Taiwan Bond 28.82 80% 30.45 28.36 Market 44.31 38.28 40.36 Overview 29.03 54.29 60% 46.11 45.26 27.99 • Evolution of 41.45 39.71 55.67 27.58 Corporate Bond 40% Market 64.98 53.46 51.47 51.2 49.37 41.01 20% 40.22 37.24 35.57 34.48 33.63 32.77 24.19 0% 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Bank Securities House Bill Finance Trust and Investment Corporation Insurance Period: 1992-2004 Source: KGI Securities 9
Repo is the mechanism to broaden the market participation � A sizable repo market will encourage securities house and investment bank to join the bond market due to the lower funding cost (compared with • Taiwan Bond funding by bank loan). Market Overview • Evolution of � OTC setting up a simplified standard repo contract Corporate Bond Market creates an easy and efficient trading platform, which enables securities house and investment bank applying repo as their funding tool. � The advantage of tax exemption lures individuals to enter the repo contracts in a swarm. 10
Summary In addition to government bonds, corporate bonds, and � bank debentures, Taiwan has a nine year history of supranational NTD bond issuance and an one year history • Taiwan Bond of securitization products. Market Overview Government bonds as a percentage of total outstanding � • Evolution of bonds has decreased from 83% ten years ago to 58% as Corporate Bond at the end of 2003. 42% of of total bonds outstanding now Market comprise of corporate bonds, bank debentures, and supranational bonds. Huge volume of repo transactions coupled with full � participation of securities houses and bill finance companies have resulted in high turnover rate for government bonds. 11
Milestone Events in the Evolution of the Taiwan Corporate Bond Mkt 1993 : First Unsecured Corporate Bond Issuance 1993 - 1994 : Birth of Bond Funds 1994 : First Bull-Bear Floating Rate Note Issuance 1995 : First Supranational NTD Bond Issuance 1997 : Asian Financial Crisis • Taiwan Bond 1998 : Taiwan Local Financial Crisis Market Overview First Corporate Bond Default • Evolution of Introduction of Local Credit Rating Agency Corporate Bond 2001 : Elimination of Securities Transaction Tax Market New Issuance Amounts for Corporate Bond Unit: NTD Billion 3 0 0 2 5 0 5 6 2 0 0 7 2 1 5 0 3 8 5 3 1 0 0 1 5 9 1 8 8 7 6 7 5 1 5 3 1 2 6 1 1 3 5 0 2 7 1 6 5 5 4 6 3 5 2 5 1 8 0 1 9 9 6 1 9 9 7 1 9 9 8 1 9 9 9 2 0 0 0 2 0 0 1 2 0 0 2 2 0 0 3 2 0 0 4 .3 Period: 1996 – 2004/3 N o G u a ra n te e B a n k G u a ra n te e d Source: KGI Securities 12
The Taiwan Debt Market Corporate bond issuance has gradually become a more � important and viable source of funding. Outstanding Ratio Market Share (%) • Taiwan Bond 100 2.1 2.4 3.6 3.9 4.4 5.1 6.5 7.2 7.1 Market Overview 90 • Evolution of 80 Corporate Bond 70 Market 60 50 97.9 97.6 96.4 96.1 95.6 94.9 93.5 92.8 92.9 40 30 20 10 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 Period: 1996 – 2004/2 Bank Loans Bonds Source: CBC 13
The Taiwan Bond Primary Market by Coupon Rate Type Structured Coupons have become the norm of Taiwan � corporate bond, bank debenture, and supranational market. Market New Issuance Amounts Unit: NTD Billion • Taiwan Bond 500 Market Overview 450 • Evolution of 400 Corporate Bond 350 186 Market 0 300 267 250 200 300 150 255 100 132 64 50 30 0 2001 2002 2003 2004.3 Fix Structured Period: 2001 – 2004/3 Source: KGI Securities 14
Taiwan Corporate Bond Issuance by Credit Rating � The Taiwan bond market favors large enterprises. � Companies with poor credit or no credit rating at all have difficulty in issuing public bond due to regulatory constraints and more importantly, lack of investor acceptance for low grade bonds. • Taiwan Bond Unit: NTD Billion New Issuance Amounts / Ratio for Corporate Bond Market Overview 300 • Evolution of 250 Corporate Bond 56 Market 27% 200 72 2 1% 4 150 76 68 32% 64 72 7 100 10 45 73 15% 15 40 8 26 5 50 20 22 25% 65 52 50 10 36 15 0 1999 2000 2001 2002 2003 2002/2003 Average(%) twAAA twAA- ~ twAA+ twA- ~ twA+ twBBB- ~ twBBB+ non-rating bank guaranteed Period: 1999 - 2003 Source: KGI Securities 15
Comparison of Bond Underwriters in Taiwan v.s. Other Regions Securities houses are the major players in the Taiwan � corporate bond market. Market Share (%) Market Shares of Top 10 Bond Underwriters • Taiwan Bond 100 Market Overview 90 • Evolution of 80 20.8 Corporate Bond 70 Market 60 50 82.2 40 69 34.7 30 20 10 13.9 7.1 0 Asia (Japan excluded) Thailand Taiwan Securities Houses Banks and Universal Banks Period: 2003 Source: Bloomberg, KGI Securities 16
Summary Benefits of having securities firms dominate a corporate bond primary market: • Taiwan Bond Market Overview Focus on non-bank investors � - real capital market activity • Evolution of Corporate Bond Market Provide variety of trading types and better liquidity � Better transparency in pricing � 17
Summary Some factors behind the competitiveness of Taiwanese securities firms in the corporate bond primary market: • Taiwan Bond Market Overview Strong repo liquidity provides adequate and reliable � financing. • Evolution of Corporate Bond Market � Bond funds have become the major partners for securities firms, as they rely on securities firms for distribution channel. Bond funds are also the key investors of corporate bond primary market issues. � Over the past decade, securities firms have enjoyed superior derivative capabilities and investment banking culture than local commercial banks. 18
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