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What does not kill Swiss franc bonds makes them stronger

The Swiss franc bond market has been able to withstand — just — the destructive forces of negative rates and yields and is looking forward to a new year in which green structures are set to blossom. Philip Moore reports

The Swiss franc market reaffirmed its credentials as a resilient funding source for borrowers from a well-diversified range of geographies and sectors in 2019.

Domestic issuance volume slipped by 10% in the first 10 months of 2019, according to numbers compiled by Credit Suisse. But international supply had expanded by 24% to Sfr19.3bn by the end of October, with German, French and US borrowers accounting for about a third of the total. 

The bulk of this issuance was driven by attractive arbitrage opportunities. “The main source of support for the primary market was the cross-currency basis into dollars and euros, which has remained at a level that is bearable for international borrowers,” says Benjamin Heck, head of Swiss franc syndicate at Credit Suisse in Zurich. 

This encouraged long-term absentees to return to the sector, especially in the first half. Heck says a highlight in February was BMW’s first new issue in Swissies for eight years and its largest since January 2008. With over 130 tickets in the book, both the Sfr335m 5.5 year and the Sfr265m 8.5 year tranches were priced at the tight end of revised initial price thoughts.

Among other highly-regarded US names, Bank of America returned in May after a 10 year absence with a Sfr375m seven year non-call six trade, the largest offering from a US bank in four years. Citigroup took Sfr625m in two trades in 2019, the second of which was its first callable in Swissies. And in May, New York Life printed the largest single-tranche trade of the year in the international market with a Sfr650m 8.5 year.

Elsewhere, Nationwide defied Brexit uncertainty to price its first Swissie covered bond in June, with a three-tranche Sfr500m issue that was the largest Swiss franc covered bond since 2012. Another impressive trade came from Deutsche Bahn, which equalled its largest Swiss franc issue to date with a two-tranche Sfr500m 10 and 15 year trade in June. 

Adaptable investors

The vibrancy of the market was buoyed by investors’ adaptability. “Investors have come to terms with negative rates, and have become more focused on relative value,” says Heck. “Even when rates were collapsing in the middle of the year, we never faced the threat of a buyers’ strike in the primary market.”

Andreas Tocchio, head of Swiss franc syndicate at UBS in Zurich, agrees. “What was new in 2019 was that we did not just have negative rates,” he says. “Increasingly, in the primary market for emerging market and corporate names we saw negative new issue yields, which in previous years had been confined to public sector and Pfandbrief issues.”

Tocchio adds that a notable trend among investors in 2019 was a preparedness to look at fixed income not through the prism of absolute yields, but performance potential. He says that a visible landmark in this respect was the four-tranche Sfr525m trade from Baloise in September, which was the first time a corporate borrower had priced all tranches of a new issue with 0% coupons and negative or zero yields.

For investors unable or unwilling to stomach negative yields, alternatives were offered — notably at the long end of the curve. “Most investors recognised by July or August that rates were going to stay low for much longer than they had expected earlier in the year,” says Daniel Zubler, head of syndicate at ZKB in Zurich. “They adjusted by going longer or further down the ratings spectrum.”

As an example, Zubler points to the success of Swissgrid’s 30 year in September, which raised Sfr125m at 5bp.

The low-yield environment also enhanced investors’ responsiveness to emerging market supply. “Borrowers from Latin America were regarded slightly cautiously until fairly recently,” says Ronald Hinterkircher, co-head of capital markets at Raiffeisen Switzerland in Zurich. “In 2019 a number of institutions were prepared to adapt their very strict rules to fulfil investment needs driven by redemptions.”

Zurich-based bankers are cautious about making forecasts for 2020. “With Brexit and trade wars likely to be less of an issue in 2020, we will probably see economic fundamentals and corporate earnings have more of an influence on fixed income,” says Zubler. “As those fundamentals don’t look promising, I expect rates to stay low but stable.”

From a structural perspective, syndicate heads point to two themes to watch in 2020. The first is the further development of the green bond market in Swiss francs. This gained encouraging impetus in 2019, notably by the Canton of Geneva, which in October launched a three-tranche Sfr660m issue which was the largest green bond ever printed in Swissies. 

A second area that may attract increased attention in 2020 is denominations in new issues for FIG borrowers. Tocchio says that an important feature of UBS’s first AT1 Swiss franc trade in October was the choice of the Sfr200,000 denomination for the Sfr275m non-call six transaction in a market where the standard denomination has traditionally been Sfr5,000. 

“The Sfr200,000 denomination has become established in the market for senior non-preferred debt, but UBS was the first to use it in a sizeable AT1 deal,” he says.   GC