Taiwan Convertible Market Faces Turbulence Following Hedge Fund Trade Derailment

Taiwan's Tech Sector Hit by Regulatory Changes in Convertible Bond Market

A lucrative hedge fund trade in Taiwanese convertible bonds has been disrupted by regulatory changes, causing a significant slowdown in issuance in one of the hottest capital markets for the island's tech sector. Approximately $2.7 billion in planned US dollar-denominated convertible bond sales filed over the past six months remain stalled and have had to file for extensions, according to Bloomberg calculations based on regulatory filings and historical issuance data.

The disruption marks a sudden shift for Taiwan's bellwether tech sector, which has increasingly turned to convertible bonds to fund the infrastructure requirements of the artificial intelligence boom. These instruments offer greater flexibility than traditional bank loans, fueling a wave of deals handled by global banks including Citigroup Inc., JPMorgan Chase & Co., and UBS Group AG.

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Foreign-exchange market volatility has hampered the hedging structures typically embedded in convertible bond offerings, according to people familiar with the matter. Offshore hedge funds, the primary buyers of these instruments, typically use offshore Taiwan dollar forwards to lock in exchange rates. However, this strategy has unraveled this year, causing a plunge in hedging activity by Taiwanese insurers and upending the currency's derivatives market.

As the cost for hedge funds to offset currency risk rises, some deals in the pipeline for equity-linked debt in the tech sector have effectively ground to a halt. Companies are in a wait-and-see mode in assessing deal plans, and those that are going ahead would need to consider sweeter terms to investors. Concessions being considered include shorter bond tenors and lower conversion premiums, which would let investors convert the bond into stock closer to current share prices.

Regulatory changes have also led issuers to introduce new features to compensate investors for lower bond values, according to Ivan Nikolov, head of convertible bonds at Switzerland's Fisch Asset Management AG. The new features come as Taiwanese companies are still expected to issue convertible bonds to fund their AI-related capital expenditures.