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Corporates thrive as safe haven status boosts appeal

05 Jun 2012

Offering some precious relief from the Eurozone debt crisis, the biggest Swiss corporates have had little difficulty in attracting international investor interest for their funding diversification trades. But as the domestic market matures, the need for the second tier of credits to look away from home may diminish, as Oliver West writes.

Mark Twain once famously described Switzerland as "simply a large, lumpy, solid rock with a thin skin of grass stretched over it". But for its size, the country is home to a remarkably large number of global companies unafraid of making a splash in the international capital markets.

Pharmaceutical group Hoffmann-La Roche did just that in March, selling a €1bn bond, due June 2018, paying just 18bp over mid-swaps through bookrunners BNP Paribas, Santander and UniCredit.

Although Roche, rated A1/AA-/AA-, is one of the most highly-rated corporates in Europe and will always receive a strong reception, the company’s jurisdiction is at least part of
its attraction.

"That was some of the lowest pricing we’ve seen in Europe this year, and is clearly a reflection on the superb reputation of this borrower in the capital markets," said Matthias Minor head of corporate DCM, Switzerland, Germany and Austria, at Royal Bank of Scotland. "The branding of Swiss corporates makes a big difference."

Roche, Glencore, Nestle, Novartis — these are corporate giants of the kind investors snap up. But it is not only because of their size and industry that they are popular.

"Let’s put it this way, if any of those companies were based in Portugal but all else was equal, their borrowing costs would be significantly higher," says Christoph Seibel, head of corporate DCM at UBS.

Safe haven

Indeed, in a turbulent Europe, with corporate debt often seen as a safer bet that bank or sovereign debt, Swiss companies are the perfect buy in a region of declining opportunities for investors wishing to avoid exposure to the euro.

"Put simply, international investors love Swiss companies," says Roland Plan, country head for Switzerland at Royal Bank of Scotland. "Switzerland is politically stable, AAA-rated, and not in the euro, while the corporates are cash rich and have strong management teams. These credits are the best of the best, a safe haven trade — it’s a no-brainer."

One of the reasons given for Roche’s success was the rarity of the deal. But the amount of deals that have taken place during the beginning of 2012 suggests that non-domestic investors looking for Swiss corporate debt may be satiated.

So far in 2012 (up to May 14), issuance by Swiss corporates in currencies other than Swiss francs stands at €7.82bn — 73% of all the bonds these companies have issued. The same period in 2011 produced only €863m of issuance in non-domestic currencies — just 35% of the total.

Much of this increase is takeover-driven, as despite a subdued M&A market, Swiss corporates have been busy stocking up on overseas businesses. Food group Nestlé paid $11.85bn for Pfizer’s baby food group, while engineering group ABB (albeit half Swedish) acquired US electrical equipment manufacturer Thomas & Betts, for example. ABB attracted $14.5bn of orders for its three-tranche $2.5bn Yankee issue to finance the acquisition.

"If you look at the funding benefit a Swiss corporate would enjoy over an Italian or Spanish corporate for example, it can make debt financed M&A very attractive," says Barry Donlon, head of corporate syndicate at UBS. "This should make for a very expansionary picture in the Swiss corporate markets."

ABB is, says Donlon, the "poster child" for Swiss companies using the international markets: an acquisitive growing company, with great name recognition in dollars and with bonds trading in euros, dollars and Swiss francs.

"ABB is an example of using the strength of the company’s geography to build a business, and funding that in a more efficient manner,"
adds Donlon.

RBS’s Plan highlights how ABB foresaw that it would make further acquisitions in the US, and subsequently registered with the SEC to upgrade itself into a real Yankee issuer and achieve better pricing.

"When these big Swiss businesses do US acquisitions, their rating, size, the nature of their business, and being domiciled in Switzerland make them the perfect type of issuer for the US dollar market," says Plan.

Global firms, global markets

In general, international capital markets have become even more important for Swiss companies as, according to Minor, "the financial crisis has shown a lot of corporates the need to establish more than one funding source".

While funding diversification is not a Switzerland-specific theme, the international nature of the largest Swiss companies — even those with historically Swiss roots like Novartis and Nestlé — make it a particularly relevant point.

"As reliance on bank lending is reduced, companies are looking more and more to the capital markets," says RBS’ Minor. "But we’ve seen that even those markets can close, so several corporates look at a second or third leg of bond financing to finance themselves."

One example is cement firm Holcim’s Australian dollar issue in March, which served the purpose of diversifying financing activities, as well as raising money where it was needed, says Minor. And Holcim has indeed also reduced its reliance on the banks, favouring more capital market issuance.

At the end of 2007, Sfr8.091bn-equivalent of Holcim’s financial liabilities were bank loans, with Sfr7.936bn in bonds and private placements. By the end of 2011, Holcim’s loans totalled just Sfr4.528bn, while it had Sfr9.713bn of bonds.

Another factor bankers point to as a recent driver for greater international bond issuance is the desire to avoid cross-currency swaps wherever possible.

"In an environment where counterparty risk limits banking lines and there is deleveraging in the banking sector, borrowing in the currency that you ultimately need is definitely a very sensible strategy," says UBS’ Seibel.

"First you have a cost in the cross-currency swap to convert into the currency you actually need, and second you are then creating or increasing an exposure to a financial institution that you might not want."

Therefore, companies are increasingly making a special effort to have matched funding programmes. Indeed, Holcim has undertaken something of a world tour of debt issuance, with outstanding bonds in Swiss francs, euros, US dollars, sterling, Australian dollars, Thai baht, Canadian dollars, Costa Rican colons, Argentine pesos, Indian rupees and Moroccan dirham.

"With the regulatory framework changing on the banking side, this has become more important," says Matthias Signorell, managing director in the Swiss DCM team at Credit Suisse in Zurich. "Cross-currency swap transactions, in particular, tend to have a long tenor and can be costly for a bank’s balance sheet in terms of risk
weighted assets.

"This cost is now significantly higher than in the past, particularly where no credit support annex (CSA) is in place. That can drive companies to decide it’s easier to fund in the currency required directly."

Not for everyone

While the likes of ABB, Roche and Nestlé are formidable big names, not every Swiss credit is a global star, and not every company has the ability to tap international markets. Nor, as the Swiss franc market matures, do they need to.

"In some ways, as the Swiss franc market has become more accepting of lower rated credits, there is less and less that the international markets offer Swiss borrowers that domestic markets cannot," says Donlon of UBS.

It is longer dated paper in particular where the Swiss market struggles, but not all borrowers see the worth in paying up for longer maturities when the domestic market is so competitive in terms of price.

"International markets do offer longer tenors, more liquidity and more size, but I really think the starting point for all discussions with clients has to be to uncover the objective of the bond issue," says Fred Zorzi, global co-head of syndicate at
BNP Paribas.

Usually a combination is required, with the Swiss markets offering cheaper funding but not in the same scale. Indeed, crossover credit Clariant (Ba1/BBB-), the paints and speciality chemicals group, pays a coupon of just 3.25% for its Sfr285m 2019 Swiss franc bonds, which it tapped in March. This compares favourably to the 5.625% coupon on its €500m five year euro bonds issued in January.

Credit Suisse’s Signorell points out that the smaller Swiss companies that are not well known or do not have a rating face some challenges in the international markets. For these borrowers, the best solution is a Swiss franc bond that they can swap if they need other currencies.

There is another side of the coin, believes Signorell. "For sub-investment grade credits, it is harder to get access to funding in Swiss francs despite the market now taking crossover credits."

Indeed, high yield companies like Barry Callebaut and Orange Switzerland have successfully gone to the international markets to get transactions done in past year. And even below the blue chips, corporates appear to revel in being Swiss.

Clariant’s €500m deal attracted a €5.25bn book, which bankers put down to its jurisdiction. Meanwhile, private equity-owned high yield name Orange Switzerland was so popular among CLO investors that it removed its entire term loan ‘B’ in favour of a floating rate note during syndication — forcing the euro lenders to give up the loan-style maintenance covenants they hold so dear.

So though Mark Twain may have found nothing memorable about the country, those companies based in Switzerland will be thankful that the country has managed to avoid the negative headlines that so many of its European neighbours have suffered from in recent years.

"Switzerland has a very stable political environment, which today in my view is worth a lot," says Zorzi at BNP Paribas. "If you want to stay invested in credit and you are worried about the euro, Swiss companies are the perfect asset for flight-to-quality."
05 Jun 2012