Regulatory changes in Taiwan (June 2014) made the Formosa bond qualify as a domestic investment for Taiwanese institutional investors, even though the denomination of the bond is in a foreign currency. This provided an attractive and alternative source of funding for TFS who raised $750m via its inaugural offering in August 2015.

Photo of Cindy Wang, Toyota Financial Services and Meg Coates.

The challenge

TMCC treasury is responsible for supporting asset growth and refinancing maturing debt. As its balance sheet continues to grow, TMCC needs to maintain flexibility but also provide ample liquidity to support business needs. The large size of its managed assets requires TMCC to be a frequent borrower in the global capital markets.

In the summer of 2015, the investment grade issuance market in the US was under severe stress due to harsh global financial market conditions and a flight to quality move by investors. TMCC had to develop alternative funding sources to be able to fulfil its liquidity needs and turned to a brand new market, the Formosa bond market in Taiwan.

The solution

Regulatory changes in Taiwan in June 2014 meant that TMCC’s planned Formosa bond would qualify as a domestic investment for Taiwanese institutional investors, even though the bond was denominated in a foreign currency.

The primary investors of Formosa bonds are Taiwanese life insurance companies who have long-dated liabilities and a hurdle rate around 4%. The Formosa bond market represented a new and attractive funding opportunity for TMCC to diversify its investor base and presented a cost-effective alternative to longer-duration benchmark funding.

During late August 2015, in the midst of extreme volatility and a risk market selloff in the US and Europe, the Formosa bond market proved to be a valuable source of differentiated funding for TMCC. After months of detailed preparation involving legal trade documentation, valuations, accounting, and systems, TMCC readied itself to be able to take advantage of the Formosa bond market and strike while the iron was hot.

“Winning an Adam Smith Award is a great achievement for TMCC Treasury. We strive to be innovative and are committed to maintaining the flexibility and diversity of our best-in-class funding programmes. We are honoured to gain recognition for our efforts from such a prestigious publication as Treasury Today. This award is incredibly encouraging and motivates us to continue to deliver a better service to our investors and partners.”

On Wednesday 26th August 2015, TMCC priced $750m of 30-year non-call five-year fixed-rate senior notes at 4.25% in the Formosa bond market. The notes have a 30-year final maturity and are not callable for the first five years. After year five, the notes are callable annually.

Beyond the value of liquidity, the deal is notable because, at the time, 4.25% represented the lowest Formosa bond coupon ever for a benchmark callable offering, and was the lowest from any US issuer and from any non-bank issuer regardless of structure. The $750m size also marked the largest non-bank financial Formosa bond ever and the third largest Formosa bond in 2015.

“In summary, we were able to fulfil our liquidity needs with this inaugural Formosa issuance at a time when other markets were not available even at elevated risk premiums,” says Stephanie Wang, Manager, Debt and Derivatives, at Toyota Financial Services. “Given investors’ strong demand for scarce, high-quality paper, TMCC expects to be able to return to this market in the future.”

Best practice and innovation

TMCC’s first Formosa bond highlights the innovation and strength of its structured notes programme as a corporate issuer. The successful execution shows how treasury utilised their dedicated back office and how they expanded their capabilities to both enhance the flexibility of TMCC’s funding programme and allow TMCC to be proactive in diversifying its funding sources.

TMCC has a best in class, streamlined treasury organisational structure with a dedicated back office that includes operations, solutions and processes, accounting and legal teams. TMCC also has robust treasury systems to support its funding platforms. Additionally, post-financial crisis, TMCC spent considerable resources on building a strong quantitative valuations team to fulfil its mandate to be able to value all of its debt and derivatives transactions internally.

“Our inaugural Formosa bond shows our ability to price significant size at attractive pricing (in-line with benchmark US dollar funding costs) on a day when the US investment grade bond market experienced its sixth straight day of zero new issue supply,” Wang concludes. “Ultimately, the TMCC Formosa priced during a period when the traditional US investment grade market was shut for a record 13 business days—the longest drought in over 20 years.”

Key benefits

• A successful transaction that fulfilled the company’s liquidity needs and was conducted amid very challenging market conditions.
• Diversification into a new market.
• Developing new investor relationships.
• The lowest Formosa bond coupon ever for a benchmark callable offering.
• Enhanced the flexibility of TMCC’s funding programme.