MunHyp drives Swiss yields to new lows
Swiss investors who have been kicking their heels for the last month or so have been kept busy this week by Munchener Hypothekenbank (MunHyp), comfortably the most frequent international borrower in the Swiss franc market this year.
On Monday, MunHyp enlivened a quiet market when it made a modest Sfr50m reopening of its June 2028 mortgage Pfandbrief, led by Credit Suisse.
It was not the size of the reopening that was striking, but its eye-watering price, which was in keeping with the borrower’s strategy of keeping its new issues small and tight. With a 0.5% coupon and a spread to mid-swaps of 2bp, the MunHyp trade offered a yield to maturity of minus 0.521%.
“I think this made the MunHyp reopening the tightest covered bond in the history of the Swiss franc market on a yield basis,” said Alexander Schnurrer of Credit Suisse in Zurich. “I can’t remember any other borrower issuing for a maturity of almost nine years at a yield below minus 0.5%.”
“Timing was key, given that the market is completely dry and pipelines are empty,” added Schnurrer. “MunHyp is very well-regarded by Swiss investors who have a strong focus on quality. Most investors take PSHypo as their benchmark for covered bonds, and since MunHyp is always priced through PSHypo in the new issue market, smaller sizes are anticipated.”
Demand for the MunHyp reopening was led by asset managers, which accounted for 73.4% of distribution, followed by banks (23.6%) and pension funds (3%).
MunHyp followed up on this transaction with a series of investor meetings in Zurich and Luzern on Thursday and Friday.
It’s important that MunHyp keeps its Swiss investor base up to speed. After all, both as a lender and a borrower, Switzerland is virtually a second home to the Munich-based mortgage bank.
The bank won’t disclose precisely how much of its €32bn loan portfolio is in Switzerland, where MunHyp has a distribution agreement with PostFinance. But as 83% of its portfolio is in residential mortgage lending, it is safe to assume that Switzerland accounts for the lion’s share of MunHyp’s non-German lending, which makes up 21.2% of the total.
This explains why the Swiss franc market has been such a key source of funding for MunHyp over recent years. “How we cover our Swiss franc business has always been an important issue for us,” said Martin Schmid, funding manager at MunHyp. “Up until a few years ago, the favourable cross-currency swap made it attractive for us to issue in euros and swap into Swiss francs. Over recent years, it has been much more efficient to borrow directly in Swiss francs. In addition to the cost benefit, it is also helpful from a ratings perspective to maintain a one-for-one funding strategy in Swiss francs.”
This calendar year alone, says Schmid, MunHyp has issued close to Sfr1.5bn, roughly half of which has been in public issuance across a range of maturities, with the balance in private placements. This equates to about 30% of the bank’s total issuance of some €4.5bn in 2019, which includes the $600m three year Pfandbrief it issued in July.
Schmid said that given the size of its Swiss franc loan portfolio, there is ample room for more issuance in the second half of this year. Schnurrer at Credit Suisse added that local investors have “absolutely no limit issues” with the MunHyp credit, which continues to be regarded as a welcome source of diversification away from domestic issuers. To put their size into perspective, Schnurrer said that PSHypo has some Sfr70bn of covered bonds outstanding, dwarfing MunHyp’s total.
Don’t be surprised if MunHyp joins the list of borrowers exploring opportunities in the Swiss franc green bond market later this year. MunHyp has already acted as a pioneer in the market for sustainable Pfandbriefe in euros, and Schmid said that his team will monitor the Swiss market for similar opportunities. “Although we face some limitations on the asset side, it would be possible to issue a green covered bond in Swiss francs, so we are keeping an eye on this market,” he said.
Elsewhere in Swiss francs, the only other issue of the week was an Sfr250m 15 year trade from Basler Kantonalbank (AA+). With a yield to maturity of minus 0.058%, this was another reminder that even in longer-dated maturities, Swiss investors will be lucky to find high-quality credits offering positive yields.