Tax rethink will completely change Swiss bond 'side dish', says departing veteran Ronald Hinterkircher
Ronald Hinterkircher, who is retiring from the Swiss franc bond market after a 40 year career, has told GlobalCapital that digitalisation and the possible removal of the withholding tax for foreign investors could change the market over the next few years. But with the European Central Bank propping up the euro bond market, arbitrage opportunities for international companies in Swiss francs are vanishingly slim.
Hinterkircher, ‘Roni’ to his friends and colleagues, has been at the coal face of the Swiss franc bond market for the last 40 years. He was head of UBS’s Swiss franc bond syndicate in the mid-2000s before he had his first stint away from banking in 2008, when he took up coaching youth team ice hockey in Zurich. But it took him just three years to resurface, being appointed co-head of capital markets at Raiffeisen Schweiz.
When Hinterkircher started at one of UBS's predecessors, Swiss Bank Corp, in the early 1980s, the market was decidedly different. Many more international companies sold Swiss franc bonds and the domestic segment was robust but proportionally smaller. Over the past few years that has changed as foreign borrowers have been enticed to fund in dollars and euros, where borrowing costs have been kept low through central bank involvement.
“With negative yields, foreign issuance has lost importance," said Hinterkircher. "10 or 15 years ago the market was split 50/50 or even 70/30 between international and domestic, but this changed over the last five or six years. Ninety percent of foreign issuance was arbitrage but with attractive markets in euros and dollars, why should international borrowers come to the Swiss market?”
Foreign visitors have printed Sfr12.6bn ($13.9bn) of the Sfr49.5bn worth of deals done this year to date, a far cry from the Sfr41.0bn printed over the same period in 2010, where non-domestic issuance dominated market proceedings, accounting for 54% of the overall volume.
This creeping domesticity, which prompted JP Morgan, RBS and other international banks to shut their Swiss franc bond desks, was of course helped along by the ECB’s purchasing programme, which made euro bonds much more attractive for the typical stable of potential Swiss franc foreign issuers. This has held up through the pandemic too, but Hinterkircher does not necessarily mind this. In fact, he believes that the pandemic and the heightened uncertainty surrounding it may make Swiss franc bonds more desirable as a safe haven.
“We were always a side dish, but we are very happy in this position,” said Hinterkircher. “There is some nice stuff going on, and we are not afraid that the market will decline further. If we survive this crisis, then we can survive everything. Given what’s happening, the Swiss franc's safe haven status gives some issuers a justification to issue.”
Beyond central banks pulling back from bond purchasing programmes, there is only thing Hinterkircher feels may spur the international wing of the market again.
In Switzerland, politicians and bankers have been discussing scrapping a 35% withholding tax for international investors. Even a reduction in this tax may prompt a renaissance in the bond market, as additional appetite from new investors may drive down margins. “There have been discussions about cutting the withholding tax for a decade now, but I think now there is a real demand for it and the wind is changing dramatically. There is an in-depth dialogue between politics and finance to attract more international investors here, and I think the withholding tax could change in the next two years. If that happens, we’d see a completely different playground.”
Hinterkircher thinks digitalisation is set to change the Swiss franc bond market. The Swiss market is already making headway, with several competing platforms launching in recent months. Earlier this year, Hinterkircher’s own Raiffeisen Bank launched platform subsidiary Valyo, a digital capital marketplace that links investors and issuers directly.
“The market has digitalised over the last few years, but not at the pace of others," he said. "We are a retention market. To get a mandate you must be willing to underwrite, and this is something not yet offered by the various platforms. These platforms work as a marketplace for investors to put out offers and issuers requirements, but they cannot be steered like a normal trade.”
For now, the focus for digitalisation is on the corporate and financial sectors: Valyo launched with deals for Raiffeisen and Swisscom, while competing digital marketplace Loanboox worked with energy company Axpo.
Much like firms in other markets that have seen digital upstarts eat into their business, the relationship between banks and platforms started fractiously but will likely end up more harmoniously. “Digitalisation has a long way to go in Swiss francs.” said Hinterkircher. “Why would any corporate issuer decide to work with a platform and disregard a decades-long bank relationship? At the moment the only way to get a corporate mandate is to lend to them. The tech layout its brilliant, but they need to adjust their processes to be successful. They need to shift a little closer to the traditional market.
“I expect we will move to a mix, using traditional new issue processes in combination with electronic platforms. At end of day what we offer is risk transfer, an awareness of the latest documentation features and the ability to hard underwrite a deal.”
With Zurich’s cases of coronavirus climbing, banks in Switzerland have recommended at least a portion of employees should work from home. So Hinterkricher's last day, which is on Friday, may involve less of a fanfare than it would have had in normal circumstances. “We’re back on split operations and wearing masks, which is a funny thing to experience in the last 10 days of a banking career.
“I leave the market with a pretty good future. There’s a young generation coming up that want to be in this market, and I’m quite positive that if there’s the same niche demand internationally then there’s a good future ahead.”
Hinterkircher’s real passion is ice hockey. With his son a professional player, as he bids farewell to capital markets he plans to spend as much time as close to the ice as possible.