Swissie 2.0 gains credit as Matterhorns loom
Once a staple of public sector borrower funding, the Swiss franc bond market has morphed into a smaller, credit-driven sector under the twin pressures of negative rates and evaporated arbitrage. Corporates are the stars of the Swissie 2.0 era, with emerging markets names and more junior debt providing further routes to the yield investors crave, reports Julian Lewis.
“Ten years ago it was a flow business. You would call BNG up, make a proposal, organise the swap and put the deal on the screen 15 minutes later,” recalls Benjamin Heck, head of Swiss franc bond syndicate at Credit Suisse in Zurich.
But no longer. “The issuer universe is almost 100% different if you look at international issuers. Except for a few outliers with Swiss franc needs, high grade names don’t work out,” says Andreas Tocchio, head of Swiss franc debt syndicate at UBS.
Now Google is the dream mandate of syndicate chiefs on Bahnhofstrasse and Rue du Rhone. “Corporates are the name of the game,” says Ronald Hinterkircher, co-head of capital markets at Raiffeisen. The 40-year market veteran’s checklist for a desirable transaction in the current environment comprises “a good corporate, not too highly rated, perhaps in the infrastructure space, in good size”.
“Anything with a corporate touch is very well received — the preference for corporates over financials is quite substantial,” agrees Heck.
Against the background of ultra-low rates, Switzerland’s small pool of domestic institutions has grown more receptive to credit products. Their appetite centres on investment grade corporates, especially single-As, though one of the stand-out transactions of recent times was a Sfr1.325bn Matterhorn (a deal of Sfr1bn or over) from Shell — then rated double-A by both Moody’s and S&P.
The Anglo-Dutch oil firm had been absent from the currency for almost a decade before the eight and 13 year dual-trancher, led by Credit Suisse and Deutsche Bank, in 2015. Untypically, the deal benefited from repo-eligibility with the Swiss National Bank — a rare feature these days, unlike in the pre-crisis era when some 85% of new issues in the currency were from qualifying double or triple-A names, mostly SSAs and financials.
The bulk of the new corporate flows have been to US blue-chip credits. Names able to source large volume from Swiss investors in recent years include Amgen (Sfr700m), Apple (Sfr1.25bn), AT&T (Sfr1.05bn), Coca-Cola (Sfr1.325bn), Danaher (Sfr750m), Eli Lilly (Sfr1bn), McDonald’s (Sfr400m) and Mondelez (Sfr675m/ Sfr400m/Sfr400m).
Heck cites Mondelez as a leading example of this trend. “They have been really active and have built a curve quickly. They are enjoying a good following from the Swiss institutional investor base.”
In less than 12 months the US food and beverage company raised almost Sfr1.5bn with its first three issues in the currency. These ranged across as many as seven maturities as the Baa1/BBB-rated credit met demand from two to 10 years.
Many of the US corporate transactions were debut deals. Thanks to a combination of requirement for the currency, favourable US tax treatment and notably tight re-offer spreads, the issuers were undeterred by the market’s lack of arbitrage into US dollars due to the negative basis swap. As this report went to press, Verizon underscored this sector’s continuing potential with an opportunistic Sfr1bn dual-tranche debut in the currency.
Non-US foreign names have surfaced too. Last year Baa1/BBB Teva Pharmaceutical scooped up Sfr1bn from a two, six and nine year offering via BNP Paribas, Credit Suisse and HSBC, for example.
BAT and Total have also issued substantial notes in recent years.
Domestic blue-chips have attracted even stronger support. In March, Roche ended a five year absence with a Sfr1.5bn triple-trancher. BNP Paribas, Deutsche Bank and UBS were lead managers for the A1/AA split-rated pharma titan, which drew some Sfr3bn of orders.
Tocchio at UBS cites the Matterhorn as his “dream deal” in the current environment. He cautions, however, that such deals are very rare. “All the stars must be aligned and the transaction has to make sense for the issuer.”
A similar must-have issue was Lindt & Sprungli’s earlier Sfr1bn. The unrated chocolate maker had been absent from the market for 15 years before the triple-tranche acquisition financing.
At the same time, retail buyers’ search for more substantial yields has also opened up a new sector for sub-investment grade corporates lately. Notable transactions include a Sfr300m five year for B1/B+ rated Gategroup at 3% via BNP Paribas, Credit Suisse and UBS in February, and Sfr175m with the same maturity and coupon for unrated MSC Cruises the previous November. CS was sole lead.
“The lack of supply has created a situation where investors are looking for diversification and are prepared to look at credits that were not suitable five years ago — even sub-investment grade names,” says Raiffeisen’s Hinterkircher.
Love for LatAm and Russia…
Another notable yield-driven development in recent years has been investors’ renewed receptiveness to emerging markets credits — particularly Latin American names. “Swiss investors are quite familiar with Latin America these days. There is a window for issuers in Switzerland,” says Tocchio at UBS.
This reached a striking peak in March when the Republic of Argentina returned to the market after an absence of nearly 20 years — and in the wake of swingeing haircuts imposed on Swiss bondholders following the country’s default in 2001.
Yet the sovereign racked up as much as Sfr400m via BNP Paribas, Credit Suisse and UBS. The B3/B- rated name’s October 2020 offering was priced at a yield of 3.275% — more than 380bp over swaps.
Argentina’s return was preceded by the state-owned oil firm YPF, in September 2016. The lowest-rated foreign offering in Swiss francs ever, the three year deal raised Sfr300m at 3.75% (nearly 440bp over swaps) — after initially targeting a size of Sfr100m-Sfr150m.
Stronger-rated LatAm credits were already a feature of the market. Chilean names have been particularly popular, with Banco Estado, Tanner Servicios Financieros and Banco Santander’s subsidiary in the Andean country all tapping Swiss investors.
In addition, the regional supranationals Central American Bank for Economic Integration and Corporacion Andina de Fomento have established themselves as regular issuers in the currency.
EM activity is not confined to LatAm — last year Russia’s Gazprom attracted Sfr1bn across a pair of offerings — a Sfr500m 2.5-year via Deutsche Bank, Gazprombank and UBS at 3.375% in March and the same volume of five year debt at 2.75% in November. VTB Capital joined the other lead managers on the later deal. The gas firm had issued two previous Swiss franc bonds before the international community imposed sanctions on Russian state-linked entities over Crimea in 2014.
… is lacking elsewhere
Even so, some areas of EM and higher yielding activity have evaporated lately. Indian and Middle Eastern credits saw periods of demand in recent years, with both Bharti Airtel and Bharat Petroleum debuting in the currency within a month back in 2014, for example. In 2015 First Gulf Bank re-opened the Middle Eastern sector after a two year hiatus.
But now both sectors have disappeared again. “With the drop in oil prices, Middle Eastern issuance has come to a complete stop,” notes Tocchio.
A return of Korean names could be on the cards, through recent tensions with North Korea may derail this.
A further market area achieving traction is more junior debt — all the way from the new senior non-preferred product to insurance perpetuals and corporate hybrids. Credit Suisse completed a retail-targeted additional tier one offering as recently as March.
This year has also seen new activity at the other end of the junior debt spectrum. Both Crédit Agricole and Société Générale have raised senior non-preferred debt in the currency, following the passing of enabling legislation in France in late 2016. A 20bp-30bp pick-up over outstanding senior unsecured paper enabled SG to increase Switzerland’s first issue of what one leading market player terms “the product of the future” (relative to traditional opco funding) by 50% to Sfr150m.
Even so, bankers are divided over the depth of the bail-in product’s appeal since it is too low-yielding for retail and institutional buyers have not participated in major size.