Taiwan mulls shielding insurers from callable corporate bonds

(Bloomberg) — Taiwan’s financial market regulator is considering policies to protect local insurance companies from difficulties with investment planning as bond issuers exercise options to pay off debt early.

Foreign issuers that sold callable notes in Taiwan have rushed to repay the securities before maturity to lock in lower financing costs. Life insurers face risks if issuers pay off bonds before maturity, Chiung-Hwa Shih, deputy director general at the insurance bureau of the Financial Supervisory Commission, said in a phone interview Wednesday. The regulator has yet to make any decision on a new policy, and is in talks with life insurers concerning the risks, according to Shih.

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About $6.7 billion of foreign-currency notes sold by international borrowers in Taiwan were repaid this year ahead of maturity, including those sold by Verizon Communications, Goldman Sachs Group, Morgan Stanley and Citigroup. That’s up from $2.1 billion for all of 2015. The trend is fueling debate about securities that can be redeemed early, with some brokerages saying the ability to sell debt with shorter-term call dates helps attract issuers to Taiwan. Some life insurance firms have focused more on potential losses.

Debate spreads

About 80 percent of longer-tenor international bonds sold by foreign issuers in Taiwan are callable notes, according to Sunny Hsu, vice president at Shin Kong Life Insurance Co. If issuers repay the securities before the original maturity, investors will lose future coupons and the repayment may not be reinvested at as high an interest rate as when the note was initially purchased. Longer non-callable securities may help eliminate such risks.

“There should be a policy limiting issuers from buying back notes within three to five years,” said Hsu. “This could lower the period mismatch between the insurance policy payout and bond payment income.”