August 9, 2019 / 8:48 AM / a month ago

Taiwan capex lending takes hit

* Loans: Government woos companies back home with cheap financing

By Evelynn Lin

HONG KONG, Aug 9 (LPC) - A government drive to lure overseas-based Taiwanese companies back home with favourable loans is threatening to hurt its project financing and syndicated loans market as the island braces for a boom in capital expenditure.

The Ministry of Economic Affairs has already approved nearly a hundred applications with investment valued at over NT$500bn (US$16bn) from Taiwanese firms returning home. These companies are planning to borrow up to NT$400bn from domestic banks through the government-mandated programme launched in January.

The incentives are aimed at Taiwanese companies, especially those with operations in China amid its trade war with the US.

They include easier access to bilateral bank loans bearing interest rates no higher than 50bp over the two-year post office savings rate, which is currently at 1.095%, and a tenor no longer than 10 years.

While it is not mandatory for Taiwanese banks to provide such loans, not many are likely to pass up the opportunities even if it means earning lower returns than what such capex financings would offer in the PF and syndicated loans market.

“Local companies are turning to the bilateral loans to fund their capital expenditure plans and top-tier borrowers with strong bargaining power can even get the pricing below 1%,” said a syndicated loan banker at a top-tier domestic bank in Taipei.

Typically NT dollar syndicated loans carry interest-rate floor mechanisms that protect lenders from downsides. The lowest pre-tax interest rate floor is set at 1.7%. Syndicated capex financings offer higher margins and pay a premium of 40bp–50bp over similar plain-vanilla loans, proving popular with domestic lenders because of the higher returns.

In January, Winbond Electronics, a maker of integrated circuits and related components, closed Taiwan’s largest capex loan this year. The NT$42bn seven-year term facility saw participation from 19 banks and offered interest margins tied to its after-tax net profit margins ranging from 95bp to 115bp over Taibor. The loan’s pre-tax interest rate floor was set at 1.8%.

CAPEX WAVE

With most of the borrowings for the new capex expected to come through bilateral loans under the incentive programme, domestic lenders are trying to come up with alternatives that could boost their returns.

“We are looking to find a way out to structure deals that combine the incentives into syndicated loans as the National Development Fund has promised to subsidise 0.1% of bank commissions for those borrowing more than NT$10bn under the plan,” a second loan banker said.

Any volume that filters through to the syndicated loan market will add to the US$4.26bn in capex loans already raised in the first half of 2019. In comparison, 2018 transacted only US$1.35bn in capex financings.

Given the rising friction between the US and China, and in light of the new incentives from the government, companies returning home to set up new operations include bellwethers such as Yageo, the world’s largest manufacturer of chip resistors, and Pegatron, the world’s second-largest electronics original equipment manufacturer.

Yageo plans to invest NT$16.5bn to expand its manufacturing facilities in Taiwan, while Pegatron is establishing a research and development facility in Taipei and expanding existing production lines in Taoyuan.

“The government wants to turn the threat of the US-China trade war into an opportunity to encourage its companies to relocate in Taiwan,” said a third Taipei-based loan banker.

In the second quarter of this year, Taiwan’s economy grew by a stronger-than-expected 2.4% year on year, thanks in part to orders shifting to Taiwan from China and the start of the peak season for the technology sector. The plan to return home would further help boost the island’s economic development and manufacturing upgrades during the second half are expected to translate into more than 43,900 new jobs in Taiwan.

Another government drive to install offshore wind farms has already kicked off and is generating multi-billion dollar loans as well as jobs. Loans for up to NT$235bn combined are currently in the market for wind farm developers, including Danish fund manager Copenhagen Infrastructure Partners and German wind energy developer Wpd.

Reporting By Evelynn Lin; Editing by Prakash Chakravarti and Chris Mangham

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