The Swiss franc market pushed back boundaries in 2012, as another year of low interest rates drove investors into the arms of debut names, foreign issuers and lower rated credits.
As far as investors are concerned, the stars of 2012 were corporate issuers. Swiss retail investors hungrily sought out any corporate debt domestic or international that provided even a sniff of yield.
Happily for them, the corporate funding backdrop was one of disintermediation, as reduced balance sheet and lending capacity particularly at the Swiss banks encouraged corporates to tap the bond markets. There was a flurry of debuts from Swiss domestic names.
The year was one of increased issuance from Swiss domestic corporates, with disintermediation coming as a response to the reduced balance sheets and lending capacity of Swiss banks. The result was a series of debuts, including industrial group Oerlikons Sfr300m four year note in June. Oerlikons deal was able to achieve a 20%-30% oversubscription while pricing at the tight end of guidance, overcoming investor nervousness stemming from a period of financial difficulties for the company during 2008-2009.
"One of the bigger stories of last year was the increase in issuance from mid-cap domestic corporates," says Michal Novak, portfolio manager, fixed income at Swiss & Global Asset Management. "The regulatory changes are creating disintermediation in the domestic market, which I expect will continue over the course of this year. These issuances are making up some of the shortfall in foreign issuance created by the hostile cross-currency environment."
But investor interest has not been limited to domestic companies. If any issuer capitalised on the thirst for yield that has gripped Swiss investors it was Italian car manufacturer Fiat. Fiat came to market in Swiss francs twice over the course of the year, bringing a Sfr425m September 2015 trade in February and a Sfr400m November 2016 in November.
Both deals thrived by offering investors very high spreads over mid-swaps 480bp for the three year and 508bp for the four year and were deemed huge successes by bankers, particularly given that Fiat was exploring unfamiliar territory for investors with what were only the second and third foreign sub-investment grade corporate deals in Swiss francs.
Investors increasing tolerance of risk that would be have been unthinkable just a few years ago was a big theme of 2012, and periphery Eurozone issuers were not limited to Fiat, particularly towards the end of the year.
Spains Telefónica and Portugals EDP both approached the Swiss investor base in November. Importantly, more than half of Telefónicas Sfr150m 10 year bond its debut in Swiss francs went to insurance companies, showing that it was not just high net-worth individuals and private bank accounts that were willing to dip their toes into more exotic waters in search of higher yielding deals.
From adventurous to needy
The Swiss investor base had been adventurous in 2011 in its embrace of new issuers, but in 2012 that same trend was driven more by necessity. Swiss investors, particularly institutional investors, were hard hit by the low yield environment in the currency. For investors restricted to investment grade credits, meeting their obligations to clients is becoming difficult.
"The low yield environment is particularly damaging for institutional investors who have strict limits on the quality of paper they can buy," says Novak at Swiss & Global. "They have targets to meet and its becoming a struggle."
There are only a few domestic sources of investment grade paper. Over the course of 2012, for example, the only such issuance was from the Swiss government, the various Cantonal governments, Switzerlands two Pfandbrief issuing entities, Zürcher Kantonalbank and pharmaceutical company Roche.
Roche brought a Sfr1.5bn triple tranche transaction in February, its first dip into Swiss francs in three years.
This pool is even smaller given that all Pfandbriefe boil down to the same exposure to the Swiss housing market, and that ZKB and the canton of Zurich are effectively the same credit.
Not only is the pool small, it is low yielding in the extreme. Cantonal issues, short maturity Swiss govvies and Pfandbriefe all offered negative yields at certain points throughout the year.
The rush of fresh blood to the Swiss market is not just a way for Swiss investors to diversify the paper they hold: it is increasingly instrumental to them being able to generate any yield for their clients.
"It may be the case that Swiss investors start looking towards other currencies and emerging markets as a way to balance this out," says Novak. "The other option would be changing the allocation mix to favour larger holdings in equities or real estate."
Emerging market issuers made their big push into the Swiss market during 2011, and the trend has shown no signs of letting up. Over the course of 2012 Russian and Korean issuers were particularly prominent in the Swiss market, with issuers like the Korean Development Bank and Russias Gazprombank able to offer Swiss investors an enticing combination of coupon and creditworthiness.
"Investors are starting to recognise that emerging market growth and credit ratings are on an upward trajectory," says Kunz. "While we remain in a low yield environment, investors will look kindly on these trades."
Another source of yield for investors was, surprisingly, covered bonds specifically those issued by Australasian banks.
Australia and New Zealand Banking Group in 2012 became the first ever antipodean issuer to bring a covered bond in Swiss francs, with a Sfr725m dual tranche transaction launched on January 16.
Bookrunners on the trade emphasised that the Swiss market was the perfect arena for Australian issuers to put their new covered bond law to the test, largely on the back of the dearth of AAA issuance in Swiss francs.
ANZs market opener was followed by covered bond issuances from the rest of Australias big four banks: Commercial Bank of Australia, National Australia Bank and Westpac.
"The covered bonds from Australian banks were very welcome," says Novak. "You dont need to worry about creditworthiness too much and they actually carry some yield."
Indeed the warm welcome from investors was enough to make repeat shoppers out of a few issuers, most notably Australias Macquarie Bank and South African lender African Bank. Both banks made their debuts in Swiss francs in the summer and followed up with second issuances in November.
In a similar vein, there is little indication that the Swiss taste for Korean and Russian debt is likely to diminish, and it may well have had the effect of whetting investors thirst for emerging market credit.
"Russian and Korean issuers are an accepted part of the Swiss franc market now, they issued around Sfr4bn of issuance between them last year," says Manuel Gadient, head of Swiss franc syndicate and DCM at UBS. "Theyll continue to be a big part, and other EM countries are likely to be able to achieve the same status over time."
Expanding at home
The alternative to bringing in new international issuers is to bolster the number of domestic investment grade issuers, particularly if the new domestic players can offer investors a yield pick-up compared to their more traditional counterparts.
This thinking was a big part of what made ABS deals from Swiss issuers so successful in the early part of 2012. Swiss ABS issuance had been non-existent since the crisis began, and was minimal even before that.
GE Moneys Sfr200m security backed by Swiss car leases was brought to market in March and piqued investor interest by offering an opportunity to buy a AAA rated domestic issue at attractive prices: GE Moneys three year paper came at a spread of 57bp over mid-swaps, at a time when three year notes from Pfandbriefbank were pricing at 10bp over mid-swaps.
The auto lease deal was followed up in June by a deal from Swisscard, a joint venture between Credit Suisse and American Express, backed by Swiss credit card loans. Credit Suisse was able to sell Sfr351m of AAA rated three year notes at 80bp over mid-swaps, with smaller, lower rated tranches selling at a higher spread.
While no further ABS deals emerged in Swiss francs, Credit Suisses Kunz is adamant that the investor demand is there to support further issuance.
"The Swisscard and Auto lease trades demonstrate the role that ABS could play in the Swiss market," says Kunz. "They give an alternative to mortgage exposure through Pfandbriefe. Instead investors can get AAA-rated exposure to the Swiss consumer sector. Investors keep asking us when more of the same will be coming."
If 2012 was a golden year for corporates and emerging market credits, it was something of a wasteland for sovereigns, supranationals and agencies. An unfavourable cross-currency swap to euros and dollars meant that highly rated issuers were simply unable to achieve the level of arbitrage that they demand from the currency.
And with most SSAs having no funding needs in Swiss francs, there was no need for them to look to the market.Excluding issuance from emerging market sovereigns notably Poland, Slovakia and Lithuania SSA issuance was just Sfr3.8bn, down from a height of around Sfr29.8bn in 2009. And of that Sfr3.8bn, around Sfr2.45bn came from just two issuers: Austrias Oesterreichische Kontrollbank and the EIB.