"The fact that many markets closed last year but the Swiss franc market remained open made many investors look more closely at the market as a reliable source of funding," says Guy Reid, managing director for frequent borrower coverage at UBS.
The Asian Development Bank and the World Bank were just two of the supranationals that returned to the Swiss market in 2009 after 10 years away, and both followed up with 20 year bonds in 2010.
And the increasing popularity of Swiss francs looks set to continue. Richard Teichmeister, the European Investment Banks head of funding for Europe (ex-euro) and Africa, says that although the currency still only accounts for a small proportion of EIBs issuance, in relative terms it is becoming more important.
"The Swiss franc is a safe-haven currency, so since the start of the crisis our issuance levels in the currency have increased," he says. "The ability to issue longer dated paper has also become increasingly important and the Swiss market is one where we have traditionally issued bonds with longer maturities than other markets."
Swiss franc bonds currently make up around 2% of the EIBs funding programme, and in 2009 it was the borrowers fourth largest currency, with new transactions totalling Eu1.6bn, up from Eu1.2bn the previous year.
The perfect fit
The Swiss investor base also fits particularly well with the funding needs of supras and agencies. Extremely low issuance by the Swiss government, combined with the need of the large institutional investor base including pension funds and insurance companies to invest in the long end of the curve, makes Swiss buyers a natural market for supranational and agency paper.
"The Swiss franc market is almost unique in its very strong preference for high quality names," says Otto Weyhausen-Brinkmann, senior funding manager at KfW. "Therefore our high rating together with our high name-recognition means we can issue at very attractive levels."
An example of the levels that can be achieved was provided by KfWs August 2020 bond, issued in January of this year, which priced at 17bp through mid-swaps. EIBs Sfr200m 2025 bond issued the same week, priced at 12bp through mid-swaps another illustration of the popularity of long dated tenors in the Swiss market.
Another attraction of Swiss francs for supranational and agency issuers looking to diversify their sources of funding is that they can maintain a market presence without having to issue large volumes, as bond sizes are typically between Sfr200m and Sfr300m. "It is a good alternative for issuers looking for some duration but that do not want to raise the Eu1bn or $1bn worth of paper that would be required in the euro or dollar markets," says UBSs Reid.
Smaller sizes, but there to stay
While 2009 proved a record year for Swiss franc issuance, especially from supranationals and agencies, due to other markets remaining closed, the same levels are not expected for 2010. In the first quarter of 2010 new issue volumes were down 35% compared with the same period last year.
"One of the reasons is that there are fewer arbitrage opportunities because of tight basis swaps," says Andre Schmid, head of syndicate at Credit Suisse in Zurich. "The absolute low rates environment and tight credit spreads also mean that, while the Swiss franc market is still pretty active, the average deal size is slightly smaller than last year."
Whether there is good arbitrage is particularly important in determining the level of Swiss franc issuance, so means borrowers are constantly on the look out for a window of opportunity.
"As KfWs Swiss franc issuance is swapped into euros the basis swap affects our ability to price at attractive levels," says Weyhausen-Brinkmann. "But we like to be in the market regularly and therefore monitor the basis swap closely. At the start of 2009, for example, we were very active, with eight transactions within the first two months, as the basis swap was attractive and there was low supply from the sovereign, so there was a lot of cash to be deployed," he says.
And with issuers such as KfW expected to maintain a regular presence in Swiss francs, an increasing number of banks are also turning their attention to the market.Barclays, for one, has recently announced that it is looking to start trading operations in Switzerland and is in the process of hiring Swiss franc currency traders. As issuers increasingly look to the Swiss market to diversify their sources of funding and term out their liabilities, more banks are likely to follow suit.