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Loans Slump as Highest Costs Since 2008 Send Taiwanese to Bonds

Lending in Taiwan slumped to the lowest level in more than a year last quarter as banks’ cost of U.S. dollar funds soared to the highest since 2008, driving companies to the bond market for capital.

Syndicated loans in the Asia-Pacific region’s seventh-biggest economy dropped 28 percent to $7.7 billion in the three months to Dec. 31 from the third quarter, the least since the June-to-October 2010 period, according to data compiled by Bloomberg. Dollar-denominated bond yields in Taiwan averaged 5.9 percent in the second half of 2011 versus 5.1 percent in the first six months as dollar loan margins tripled to 76 basis points over the same period.

Bank lending costs surged as concern Europe’s debt crisis will escalate widened the gap between the three-month Taifex rate, a benchmark interbank rate in Taiwan, and the dollar London interbank offered rate to as much as 159 basis points, or 1.59 percentage points, last quarter, from 24 basis points in February, the most since September 2008 when the collapse of Lehman Brothers Inc. froze credit markets. Domestic company bond sales in Taiwan rose 33 percent to the equivalent of $10.8 billion last year from 2010, led by Taiwan Power Co. and Taiwan Semiconductor Manufacturing Co., the world’s largest contract chipmaker.

“Given high U.S. dollar funding costs, many Taiwanese banks have actually reduced their dollar lending unless a borrower is willing to pay a price premium,” Diana Szeto, a senior vice president of syndicated finance at DBS Bank Ltd., the second-biggest non-domestic loan arranger in 2011, said. “With the Eurozone debt crisis looming in the background, the outlook for 2012 remains uncertain and possibly bleak.”

Loan Margins

U.S. dollar loan margins in Taiwan averaged 76 basis points in the second half compared with 25 basis points in the first six months, according to data on 63 loans tracked by Bloomberg. Average dollar borrowing costs in Asia outside of Japan and Taiwan rose to 126 basis points from 121 over the same period, data on 211 loans show.

“We’re conservative about 2012 because of the tightening measures in China and because there’s still uncertainty over the debt crisis in Europe,” Emma Yu, a vice president in the syndicated loans department of Mega International Commercial Bank Co., a unit of Mega Financial Holding Co., said in a phone interview from Taipei. “We’re more focused on margins and are selective about who our customers are. While we want to grow our business, we want profitability to grow proportionately.”

Mega Financial was the second-biggest arranger of loans last year with a 10.6 percent market share. Taiwan Cooperative Bank ranked first with 11.9 percent of the business, and Land Bank of Taiwan was No. 3 with 9.3 percent.

Libor versus Taifex

Taiwanese banks’ cost for U.S. dollar funds is based on Taifex rather than Libor. Like Libor, Taifex is quoted daily based on rates provided by major Taiwanese banks. Libor, a benchmark for financial products worldwide, is set daily by the British Bankers’ Association based on data from banks reflecting how much it would cost them to borrow from each other for various periods of time.

To compensate lenders for the gap between Taifex and Libor, some recent syndicated loans include a price floor, according to DBS’s Szeto. “Going forward, we expect to see more dollar loans incorporating such features whereby borrowers are obliged to pay any excess over a pre-agreed level with lenders,” she said in an interview yesterday.

Loans Slump

Syndicated loan volumes in Taiwan for the full year fell 28 percent to $38.8 billion from $53.9 billion in 2010. Dollar bonds in Taiwan lost 0.4 percent last year versus a 5.8 percent negative return in China, according to JPMorgan Chase & Co. indexes.

“We’re expecting our loans to fall about 5 percent in 2012, as loans to property developers slow,” Yang Li-Wen, an official at Land Bank of Taiwan, said in a phone interview from Taipei. “Developers will launch fewer housing projects in the second half as both presidential candidates are vowing to curb home prices.”

Land Bank of Taiwan’s syndicated loan business shrunk as much as 4 percent last year from 2010, which was a record year for the bank, Yang said.

Taiwan’s President, Ma Ying-jeou, is seeking re-election on Jan. 14 amid slowing growth, a stock market slump, near-record home prices and stagnant wages. Both Ma and opposition Democratic Progressive Party chairwoman Tsai Ing-wen have said they would introduce a capital gains tax on transactions of properties to curb speculative buying.

The central bank left interest rates unchanged at 1.875 percent for a second straight quarter last month to support domestic spending as Europe’s sovereign crisis hurts exports and threatens jobs.

Local-Currency Liquidity

Syndicated loans will be supported in 2012 by refinancing needs and liquidity in the local-currency market, according to Benjamin Ng, the head of Asia syndicate and acquisition finance for Citigroup Inc. Citigroup was the top-ranked non-Taiwanese bank for loans last year.

“It also still makes sense for companies to raise money from the Taiwanese banks to inject into China because the dollar liquidity in China is tight, and funding costs and local rates are high,” Ng said in a phone interview yesterday from Hong Kong.

The People’s Bank of China’s benchmark lending rate for three- to five-year loans is 6.9 percent, rising to 7.05 percent for borrowing of more than five years.

China will be an important part of Mega International’s loans business in 2012, according to Yu. Mega received approval in November to open a branch in Suzhou, a city in the southeast of Jiangsu province in eastern China.

“We expect to be making loans to Taiwanese companies that are expanding in the service sectors in China,” Yu said. The service industry, including restaurants and law firms, is “taking off” following the June 2010 signing of a trade agreement.

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