Taiwan’s once-robust market for US dollar-denominated convertible bonds has lost momentum after changes to currency hedging dynamics undermined a widely used hedge fund trade, according to a report by Bloomberg.
Roughly $2.7bn of planned issuance over the past six months has been delayed, with multiple deals requiring extensions, reflecting a sharp slowdown in activity.
At the core of the disruption is a breakdown in the currency hedging framework typically used by offshore investors. Hedge funds – the dominant buyers of these instruments – have historically relied on offshore Taiwan dollar forward contracts to manage FX exposure and enhance returns. However, increased volatility in currency markets, combined with regulatory changes, has made these hedges significantly more expensive and less accessible.
A key factor has been the retreat of Taiwanese insurers from the derivatives market, which has reduced liquidity and driven up hedging costs. As a result, the economics that previously supported strong demand for these securities have deteriorated.
The shift is particularly significant for Taiwan’s technology sector, where companies have increasingly used convertible bonds to fund expansion linked to the artificial intelligence boom. The structure has been attractive due to its flexibility relative to traditional lending, helping fuel a surge in issuance in recent years, often arranged by global banks such as Citigroup Inc, JPMorgan Chase & Co, and UBS Group AG.
With market conditions now less favourable, issuers are reassessing their options. Some companies have postponed transactions, while others are adjusting deal terms to attract investors. Proposed changes include shorter maturities and reduced conversion premiums, allowing bondholders to convert into equity at levels closer to current share prices.
In certain cases, companies have abandoned convertible issuance altogether in favour of alternative funding sources such as bank loans.
Recent deals illustrate the changing landscape. Winbond Electronics Corp completed a $750m convertible bond with a relatively short maturity, while Wiwynn Corp issued a $2bn bond featuring enhanced investor protections, including earlier put options.
The current slowdown marks a reversal from the past two years, when favourable funding conditions and efficient hedging strategies drove issuance to multi-decade highs.
Despite the near-term challenges, market participants expect convertible bonds to remain a relevant financing tool, particularly for companies investing in AI infrastructure. However, issuers may wait for improved rate and currency conditions before returning to the market in size, especially if they are not under immediate pressure to raise capital.
