Appetite for maturities and risk reaches new heights
The Swiss franc bond market had a fabulous 2006. Not only was it prepared to take on 30 year maturities for the first time, but also riskier credits rated single-A or even, selectively, triple-B. Even the most elusive borrowers returned to the market for highly successful transactions. Philip Moore reports.
Records are there to be broken, and when France's triple-A rated Compagnie de Financement Foncier (CFF) laid down a marker at the long end of the Swiss franc curve, in January last year, the record would last for no more than a few months.
CFF's Sfr150m 25 year issue, led by Credit Suisse and priced at 9.5bp through mid-swaps, was the first 25 year transaction in the market from an international non-sovereign guaranteed borrower. It was also the longest deal of its kind ever to have been swapped.
CFF's modestly sized 25 year deal built on a trend that developed during 2005: institutional accounts had moved down the maturity curve for asset-liability management purposes in spite of rising rates.
In June, France's railway infrastructure manager, Réseau Ferré de France (RFF), responded to that demand by pushing further out along the curve, with the market's first 26 year transaction, a Sfr200m 2032 deal sole-led by Credit Suisse. The following week, Credit Suisse rounded off its three card-trick at the very long end of the market with a Sfr225m 30 year issue for the European Investment Bank.
"As the first ever 30 year from an international issuer and the longest ever to be swapped into another currency the EIB's benchmark was a clear highlight of the year," says Jean de Skowronski, head of Swiss debt capital markets at Credit Suisse in Zurich. "One of our ambitions for several years has been to develop the longer end of the Swiss franc market."
Continued structural demand for long dated paper in Swiss francs in 2006 coincided with a concentration on shorter maturities among more risk-averse investors focusing on the flattening yield curve and rising volatility.
Although that prompted a decline in issuance in medium term maturities (in the seven to 12 year bracket), solid demand at either extreme of the yield curve fuelled record-breaking volumes in the primary market. "We saw everything from two year floaters to 30 year fixed rate bonds last year," says Dennis Vucina, head of fixed income syndicate at BNP Paribas in Zurich.
That is just as well, given the heavy redemptions in the Swiss franc market in 2006, which amounted to a little over Sfr39bn last year, according to data published by Credit Suisse. Some 35% of that redemption was compressed into January and February, explaining the unprecedented flurry of issuance with which the year began, with more than Sfr6.5bn hitting the market in the first week of the year alone.
That early burst of issuance included the only sovereign transaction of 2006, a Sfr1bn 12 year deal for Italy led by Credit Suisse and UBS, which was increased from an intended Sfr750m.
Although the start of the year was exceptional in terms of volume, by mid-November total international issuance had reached Sfr63bn, compared with Sfr58.4bn in the whole of 2005 and Sfr35.2bn in 2004.
Appetite for risk grows
While the extension of maturities was one notable characteristic of primary market activity in 2006, other features of the Swiss franc market included an increase in risk appetite of investors, the appearance of highly elusive or first-time borrowers, and new structures.
"In this environment of very low interest rates investors in the Swiss franc market were more prepared to look at the lower end of the credit curve," says Ronald Hinterkircher, head of Swiss syndicate at UBS in Zurich. A compelling example of that process came in March, when Holcim, the Swiss cement company, launched a two-tranche Sfr550m domestic and international transaction via Credit Suisse, HVB and UBS, making it the first BBB+ borrower in the market since 1997. Both tranches were priced below guidance at 34bp over mid-swaps and both were well oversubscribed.
Food company Nestlé's first appearance in the market since 1996 was a highlight. The demand generated in August by its Sfr450m seven year issue via Credit Suisse, priced at 22bp through mid-swaps, took everybody by surprise. "We were expecting to bring a deal of Sfr150m, but within half an hour or so we had built a book of Sfr400m," says de Skowronski.
New borrowers have included names in the banking sector such as HSBC which offered the dual attraction of diversification and yield pick-up. HSBC's deal in June was split between a Sfr350 10 year bond at 30bp over swaps and a Sfr300m five year issue at 15bp over, led by Credit Suisse and UBS.
That deal has since been re-opened twice, with Sfr1.15bn now outstanding, and was a good example of the growing popularity of multi-tranche deals in Swiss francs. "We were very committed to two-tranche transactions which allow issuers to raise a sizeable amount of funding by targeting different pockets of demand across the curve," says Martin Scheck, head of fixed income for Switzerland at UBS in Zurich.
Another notable newcomer from the financial sector which used tranches was the UK's Bradford & Bingley. Having issued the first UK covered bond in Swiss francs in April with a two-tranche Sfr500m deal via BNP Paribas and HVB, it returned to the market in September with a Sfr1bn benchmark led by BNP Paribas in four tranches of four, seven, 12 and 25 years.
Although the deal caused some controversy in the market, with some saying it amounted to an illiquid private placement, BNP Paribas was delighted by the transaction. "It was an outstanding deal which achieved amazing funding levels for Bradford & Bingley of 5bp-6bp inside where it would have priced in the sterling covered bond market," says Vucina.