Unravelling Hedge Fund Trade Derails Boom in Taiwan ConvertiblesAI Quick Read(Bloomberg) -- A lucrative hedge fund trade in Taiwanese convertible bonds has been derailed by regulatory changes, disrupting issuance in one of the hottest capital markets for the island’s tech sector.
About $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.
Fresh volatility in foreign-exchange markets has hampered the hedging structures typically embedded in such offerings, according to people familiar with the matter, who asked not to be identified discussing private information.
Offshore hedge funds, the primary buyers of these instruments, typically use offshore Taiwan dollar forwards to lock in exchange rates. This strategy has historically lowered the cost for Taiwanese convertibles, but the trade has unraveled this year.
The disruption marks a sudden shift for Taiwan’s bellwether tech sector. Those firms have increasingly turned to convertible bonds to fund the infrastructure requirements of the artificial intelligence boom. The 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.
Regulatory changes have triggered a plunge in hedging activity by Taiwanese insurers, and the withdrawal of these institutions upended 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 has 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, people familiar with the matter said. 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, the people said.
In some cases, firms decided to cancel their issuance plans and turned to other financing tools like loans, one of the people said.
New issuances this year include that of semiconductor firm Winbond Electronics Corp., which raised $750 million from convertible bonds due 2027, a notably short tenor compared to the typical five-year maturity of past Taiwanese deals.
AI server maker Wiwynn Corp. also tapped the market with a $2 billion, five-year convertible bond in March, adding put options after one year and three years to give investors additional downside protection. By comparison, a put option was only available after three years in Wiwynn’s previous issuance in 2024.
The shift in momentum contrasts with the past two years, when favorable market conditions allowed investors to hold Taiwanese convertibles at a lower cost while positioning for gains in the underlying equities. This setup drove a surge in issuance, with Taiwanese companies raising $4.3 billion from dollar-denominated bonds that can be converted into stock last year, a 21-year high, Bloomberg-compiled data show.
Challenges tied to currency interest rates have 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, he said.
“If issuers do not need cash urgently to finance growth, then they can, of course, choose to wait for a better environment where rates are lower and the fixed income parts of the convertibles are worth more to investors,” Nikolov said. This eventually enables issuers to offer higher conversion premiums, with existing shareholders facing less potential dilution, he said.
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