Competition heats up in thriving Swiss market
The Swiss franc bond market weathered the collapse of one of its two biggest players in 2023 to enjoy its busiest year since 2014. Investors welcomed foreign issuers from all quarters with open arms and, as Sophie Astles writes, those visitors may be here to stay
The latter half of 2022 saw the renaissance of international Swiss franc bond issuance; but if that was the warm-up, 2023 was the headline act. Rates kept rising, offering investors positive yields, while spreads stayed tight, making the market attractive to issuers.
Damien Aellen, head of Swiss syndicate at BNP Paribas in Zurich, describes 2023 as the year of rates stabilisation. “We really saw a revival in the bond market, in terms of volumes but also in terms of number of issuers coming back,” he says.
Deal face value, Sfr (m), January 1 to November 16, 2023
Total number of issuers
January 1 to November 16, 2023
The end of central bank bond buying in Europe also helped improve the appeal of the Swiss bond market. “[That] made it hard for the Swiss market to be competitive,” says Rosario Clemente, head of DCM Switzerland at Deutsche Bank. “Spreads are not distorted elsewhere, so it is a much more level playing field [now].”
Andreas Tocchio, head of Swiss franc debt syndicate at UBS in Zurich, says that his firm had expected a good year for issuance from the outset and particularly the return of international borrowers, which benefited from swapping their bond proceeds into other currencies.
This gave them an advantage over domestic issuers, which kept proceeds in francs and therefore had to take the cost of higher rates.
International issuance for 2023 until mid-November was Sfr24bn. It had been just Sfr16.3bn for the same period in 2022.
Total volumes by non-Swiss issuers
Deal face value, Sfr (m), January 1 — November 17, 2023
Corporates catch up
Foreign corporate borrowers more than doubled their issuance in 2023, compared with the year before, driving the increased volumes.
Many were keen to diversify their funding sources after the Covid-19 pandemic and Russia’s invasion of Ukraine, Aellen notes, at a time when the Swiss market offered arbitrage funding compared with euros. “Currency and the pricing made sense,” he says.
The Swiss market has the advantage too of offering “a lot of flexibility with regards to size,” says Clemente.
Some issuers returned for second helpings after a “good experience” on their first trade, he adds. For example, Toyota ended a 14 year absence from the Swiss market in June with a Sfr500m bond that offered it an estimated 20bp of arbitrage over an equivalent deal in euros. It returned in October to raise a further Sfr450m, making it responsible for almost a fifth of foreign corporate issuance in 2023.
SSAs ride the wave
Although taking a smaller share of the market, the return of supranationals and agencies to the Swiss market was symbolic of its revival.
Low interest rates had made it difficult for SSAs to come to the market for the past eight years. They “needed a spread of 25bp-30bp through Saron, but they couldn’t get the yield [for investors] on that,” Aellen explains.
However, as rates went up, the Swiss market offered appealing funding levels. In June, the European Investment Bank capped off the return of SSA supply when it ended an almost decade-long absence to price a Sfr200m deal.
The Asian Infrastructure Investment Bank made its Swiss debut in June. In the same month the Nordic Investment Bank did its first deal since 2009. BNG ended a nine-year absence in March.
“We were pleased to be back,” says Jens Hellerup, head of funding and investor relations at NIB. “[The market offered] good diversification for our funding programme.”
Clemente expects that “SSA clients will continue to play a much more active role” in the market in 2024, as long as cross-currency basis swaps remain stable, offering funding arbitrage compared with core currencies.
“We would issue there again if it works,” Hellerup says, “but there is a limit to what we will pay for diversification. It needs to work from an economic point of view too.”
SSA issuance is “very much window-driven,” Tocchio says, adding that the “window can close quickly if the basis fades.
“[It’s a] tricky thing to forecast, but we wouldn’t expect to see the same window for the same length of time in 2024,” he says.
Swiss franc environmental, social and governance (ESG) labelled debt issuance took a step forward in 2023. Volumes increased by Sfr1.8bn compared with 2022, with a diverse range of issuers launching deals.
Nordea printed its first Swiss green bond in May. Petra Mellor, head of bank debt at the lender, says that there was “strong demand for green in Swissies”, adding that Nordea “wouldn’t use their relatively scarce green assets if they didn’t think it added value”. She believes the pricing benefit was 5bp, as well as bringing in new investors.
Of ESG labels, green deals interest investors the most, but social bonds are “more of a nice to have”, Tocchio says. “It is always the case that in a green format, you get additional demand and that’s how you can boost volumes without [offering investors] a price benefit on a larger deal,” he adds. “On a small deal, you can get a pricing benefit.”
Resting on rates
Provided interest rates achieve stability, 2024 is expected to be just as good as 2023 in the Swiss market. “I don’t see volumes collapsing,” Tocchio says.
He foresees more focus on FIG issuers “and we could even see a more focused fixed income asset allocation from investors, given that the field is driven by the Swiss pension fund system”.
However, geopolitics remain a concern, with all bankers surveyed by GlobalCapital identifying it as the biggest threat to the market for the coming year, particularly as tensions in the Middle East remain high.
But it is not the only worry. “Inflation globally remains a concern. It is decreasing but it is not yet completely under control,” Aellen says. “Whether we will have a soft or hard landing remains to be seen.”
Most bankers surveyed by GlobalCapital do not expect a decrease in volumes in the coming year. The majority anticipate similar levels of issuance to 2023, and those who think that there will be an increase believe that this will be a modest one — of 20% or less.
Issuance is expected to be driven predominantly by financial institutions from both within and outside of Switzerland.
Where bookrunners struggled to reach consensus was on their expectations for spreads. None expect a dramatic change in pricing, but some are expecting spreads to widen, while others see them tightening. A small majority expect spreads will remain stable.
Towards the end of 2023, the high volumes of issuance led to cash constraints among investors, resulting in issuers having to pay higher new issue premiums to draw investors to their trades. While some bankers believe that these higher premiums will persist into 2024, most think that they will return to a level similar to most of 2023 — or even fall as the year goes on.
The main priority for issuers in the coming year will be finding the right issuance window. Competition is expected to remain hot in the Swiss bond market, so timing a deal to navigate competing supply could be a challenge.
Despite a strong year, the Swiss market has not yet seen the return of Matterhorn deals — a deal of more than Sfr1bn by a foreign issuer. Such transactions would be welcomed by the market, but few expect them to make a comeback in 2024.
A number of factors need to come together for these deals to make sense for borrowers. In the first instance, issuers need to have the requisite funding needs – often triggered by an event such as M&A. Timing is also key to ensuring that the cross-currency basis favours the Swiss franc as a funding source.