Swiss francs look to the summit of the Matterhorn
An upwards shift in rates spurred international borrowers back to the Swiss franc market in 2021, with local bankers left to wonder if it might see the return of the Sfr1bn bond in the next year.
After hitting its lowest level in over 30 years in 2020, international Swiss franc issuance rebounded in 2021, thanks to a rapid rise in rates that tempted new and returning borrowers back to this niche corner of the bond market.
Swiss rates mirrored their euro and dollar counterparts over the year, with the upward move acting as a “catalyst” for desks to bring more issuers to the market, says Denis Vucina, Deutsche Bank’s head of Swiss franc syndicate.
The 10 year Swiss swap rate rose almost 60bp over the first 10 months of 2021, from the depths of minus 32bp in January to a high of 30bp in early November. As a result, offshore issuers found plenty of opportunities to raise Sfr14.9bn by the end of October, according to Dealogic, up from Sfr12.9bn throughout the whole of 2020.
“The higher rates have made Swiss francs more competitive, allowing us to provide an attractive yield to investors and attractive funding opportunities to issuers on spread basis,” says Damien Aellen, co-head of Swiss franc syndicate at Credit Suisse.
Among the international borrowers to make use of these attractive conditions were a slew of new and returning names.
Highlights for Credit Suisse’s head of investment grade capital markets Switzerland, Benjamin Heck, included debut deals for CaixaBank, Macquarie Group, Scotia Chile, Digital Realty and HSBC Holding, which showed just how global the market’s approach was in 2021.
Although trades run by the big domestic banks dominated, foreign bank desks did claw back a share of the market. Deals arranged by offshore bank desks accounted for Sfr6.7bn apportioned of the total Sfr45.1bn issued by the end of October — more than double the Sfr3.3bn apportioned arranged by the same point the year before.
The three largest non-Swiss firms — Deutsche Bank, BNP Paribas, and Commerzbank — all grew their market shares in 2021, with Deutsche Bank hitting its highest apportioned level since 2014 thanks to growth in its corporate lending.
Corporate financing “is perhaps the hardest sector to get involved with as you need to offer suitable credit lines and loans for your clients,” says Vucina at Deutsche.
The German bank had arranged 5.4% apportioned of the overall market volume by the end of October, and 8.6% apportioned of corporate issuance, up from 7.7% in 2020.
Coming ‘round the mountain
No borrower has printed a Matterhorn bond — a foreign deal of Sfr1bn or more — since 2017, but with the rise in rates in 2021 allowing dealers to offer positive yields again, a return to size is possible for the year ahead.
“If rates stay where they are, I expect we will see a couple of Sfr1bn plus deals [in 2022], although maybe not in a single tranche,” says Vucina.
However, a move higher could allow dealers positive yields at the short and long end, allowing them to cover a broader group of investors, says Heck. “And now after six years of negative rates, private banking money is considering adding more bonds with yields further above zero.”
The market did come close to the Matterhorn mark on several occasions in 2021.
“We had some discussions with the jumbo borrowers this year, but the conditions were more favourable in dollars or euros,” says Andreas Tocchio, head of Swiss franc debt syndicate at UBS.
“If you visit these markets you can print up to $10bn, but in Swiss francs the maximum size is Sfr1bn to Sfr1.5bn — it’s a question of whether the deal is worth the effort.”
The largest offshore deal of 2021, a Sfr700m dual seven and 10 year tranche offering from Verizon in March, was itself part of a wider $31.2bn equivalent salvo that included deals in euros, Australian, Canadian and US dollars.
At the current rates level, corporates will be likely to supply the bulk of potential Matterhorn supply, says Vucina. “If rates go up another 50bp, we might see SSAs re-enter the market.”
Despite the fact that names like KommuneKredit and Nederlandse Waterschapsbank chose to end multi-year absences from the Swiss franc market in 2021, no foreign SSA borrower has sold a deal totalling more than Sfr350m since the start of the coronavirus pandemic.
Even then, the last SSA trade to encroach on Matterhorn territory arrived almost 10 years ago in the shape of a Sfr825m dual tranche deal from Poland.
However, the market might not have to wait long, with the rates sell off a “game changer,” says Aellen. “If things normalise and the market gets more competitive, we will be able to provide some arbitrage opportunities and hopefully see the pool of available issuers grow.” GC