Swiss bonds: the tyranny of the minority
GlobalCapital understands the Swiss Exchange is considering changing the way a bond becomes eligible for the Swiss Bond Index. This will not only be a significant development, but a welcome one.
A bond is ineligible for the Swiss Bond Index if any of its ratings are sub-investment grade. This prevents several public and retail funds, and any passive investor following the index, from participating in some big international transactions, which in turn has made the Swiss market less competitive for crossover credits.
Gazprom, for example, is looking to enter the Swiss franc bond market for a fifth time next week.
The Baa3/BBB-/BB+ rated borrower’s bonds do not qualify for the index, as one of its ratings falls beneath investment grade level, which makes the price of selling notes more expensive for the borrower.
The categorisation system is a headache for domestic issuance too. Credit Suisse, Fedafin (an independent rating agency), UBS, Vontobel and ZKB all provide ratings for Swiss corporates, and if one classifies a bond a notch lower than the other four, the bond is placed in the lower bucket.
This gives each ratings desk an amount of power and responsibility that is too considerable.
Following recommendations from a run of high profile Swiss bankers, the Swiss Exchange is considering changing the criteria to a composite system, whereby the eligibility will be determined by the majority of the ratings.
The Swiss pace of life is slow, and this will likely not happen for a while. But if they are in search of an active bond market, with competitive pricing and greater participation, change could not come sooner.