SSAs switch back on as eurozone crisis returns

SSA euro funders may have been deterred from printing Swiss francs by the difficult cross-currency swap and cheaper funding alternatives. But given the volatility in government bond markets, public sector borrowers should reconsider the strategic importance of one of the most stable capital markets. Tessa Wilkie reports.

  • 06 Jun 2012
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While a punitive cross-currency basis swap — as well as more attractive funding opportunities elsewhere — has caused many public sector borrowers to eschew Swiss franc markets this year, anyone prepared to brave it has been welcomed with open arms by investors falling all over themselves to get their hands on paper from borrowers in an increasingly rare sector in the market.

Poland and Slovakia were two such SSA borrowers prepared to summon up the courage to take the plunge.

The Republic of Poland had the Swiss franc world all aflutter in April when it stormed the market with a May 2018 dual tranche deal through Credit Suisse and Deutsche Bank. The note surprised with its sheer size. At Sfr825m ($873.5m) it was the largest bond from international borrowers since 2009, according to one of the leads.

The floating rate portion, an August 2015 piece that marked the borrower’s first use of FRNs in Swiss francs, came a sharp 23bp through where its fixed rate May 2015s were trading.

The Slovak Republic also enjoyed great success, surprising the market with its Sfr325m size. The issuer sold its debut Swiss franc print in March — a 2.125% April 2018 note sold through Royal Bank of Scotland and UBS. The sovereign printed at 165bp over mid-swaps, which was through its 2017 bonds at the time.

"Slovakia’s debut shows that a newcomer can print after a short roadshow, and the 10 year maturity shows that investors are getting more and more open," says Patrick Raeber, head of Swiss franc syndicate at Royal Bank of Scotland in Zurich. "All the sovereigns from central and eastern Europe looked very closely at Poland’s and Slovakia’s deals. It might be possible to expect some more activity from that region."

Highly rated issuers such as Oesterreichische Kontrollbank (OKB), for example, have also had a good year. OKB has been able to take advantage of Swiss franc buyers migrating further up the credit curve as the eurozone sovereign debt crisis has intensified.

In April it printed a Sfr400m dual tranche note split into six and 11 year tenors. The issuer printed the 11 year tranche through its outstanding bonds at 58bp over mid-swaps — at the time its 2022s were at 60bp
over and its 2024s at 62bp over.

Worth the cost?

But many international borrowers have stayed away because of costs. "The basis swap from Swiss francs into other currencies is currently very expensive and there is the additional challenge of one-way CSAs which reduce arbitrage even further," says Guy Reid, head of frequent borrower coverage at UBS in London. "The costs haven’t been good enough for many issuers to be able to do deals in the currency."

On top of those issues, Swiss franc swaps are at such low levels that issuers have to pay up to get Swiss investors’ attention, and many have not done so for the simple reason that they can get more attractive funding levels elsewhere.

"The arbitrage does work at the short end but it’s tricky to get investors’ attention given the extreme low yield environment," says Raeber. "Five year swaps give a yield of 0.35%, so combined with the kind of levels a top rated international SSA would pay, that would give a yield of 0.45%, which is too low to attract broad demand. The retail bid doesn’t work at all at the moment. The kind of yields you could get won’t even cover transaction costs for the private accounts."

And many SSAs in core Europe no longer represent the kind of highly stable credit that Swiss franc investors want to hold — this is something that the likes of Poland have been able to capitalise on very strongly.

"Many Swiss investors like to buy long-dated paper and they want top quality names with stable spreads," says Reid. "SSA issuers offered both these qualities but in the recent past there has been much more spread volatility. Swiss investors have therefore looked at other names, such as eastern European sovereigns — although they are lower rated they are offering much greater spread stability than a number of European names."

One way in which issuers could help themselves would be to agree to two-way CSAs. One-way CSAs can mean crippling costs for banks, particularly in a market such as Swiss francs, which leans so heavily on long dated issuance.

"The Swiss franc market tends to be long dated and that is where the CSA-related costs are quite painful," says Reid. "Unless basis swaps improve substantially or there is movement on one way CSAs, it will remain hard for many top-rated borrowers to print at cost-effective levels compared with other currencies."

However, with the eurozone once again highly volatile, can borrowers afford to get fussy about pricing when they may need to simply hoover up as much funding as they can in case conditions are about to get a whole lot worse?

One thing that the Swiss franc market offers the reluctant borrower that few others can is consistency. The market has not experienced the windows of opportunity mentality that benchmark currencies have in the past two years.

On top of that, maintaining a presence in Swiss francs offers issuers access to cash in other currencies.

"Issuers like to have name recognition with Swiss investors not only to sell Swiss franc denominated product," says UBS’ Reid. "A lot of Swiss institutional investors manage portfolios in other currencies which are also large buyers of SSA product. There is substantial private bank and retail demand for a number of currencies as well. Secondary market demand from these investors can have a strong positive impact on spread performance."

One issuer that has found a presence in Swiss francs useful is Finland’s Municipality Finance. It sold its debut sterling benchmark earlier this year and more than 30% of the book went to Swiss buyers, according to head of funding Joakim Holmström. "Swiss francs are our fourth biggest funding currency," he says.

MuniFin, perhaps more than anyone, has tasted the market’s resilience. "We sold a deal in 2008 just a few days after the bankruptcy of Lehman Brothers, when nearly every capital market had shut," says Holmström.

While central and eastern European borrowers have enjoyed unprecedented success in the market this year, it will be tougher for others to follow. One area from which investors could find traction is Asia, but many issuers in that region trade very tightly.

"For other parts of the world, such as Latin America and southeast Asia, it would be very challenging for issuers to print in Swiss francs because they trade so tightly in dollars," says Raeber at RBS.

Ultimately the vagaries of cross-currency basis swaps will determine whether issuance in this market is attractive for the bulk of SSA borrowers, and as Switzerland looks more and more like a safe haven, the basis swap moves against international borrowers.

But in a year where spread volatility is almost a given for even top SSA names, perhaps borrowers should be asking themselves: what’s a few basis points?

 Scandi back despite Eksportfinans debacle  

Finland’s Municipality Finance returned to the Swiss franc market on May 11 — its first time back since the demise of Eksportfinans — raising a Sfr150m 15 year note. The deal was the issuer’s first in 14 months.

MuniFin is one of the few Nordic borrowers to tap Swiss francs since the Norwegian government shocked bond markets in November by suddenly withdrawing Eksportfinans’s monopoly on export financing and thereby causing its immediate and brutal downgrading to below investment grade by rating agencies. Unsurprisingly, the spreads of other Nordic borrowers gapped out as investors feared the worst.

However, after a brief period of panic, investors soon realised that Eksportfinans was a one-off and quickly returned to regarding the Nordic region as a safe haven — allowing borrowers such as MuniFin to tap the Swiss franc market for competitively priced debt. Indeed, its May transaction was printed in line with its outstanding trades in the currency, at 12bp over mid-swaps.

Kommuninvest is another issuer to have printed post-Eksport — it got a Sfr150m 10 year away in February at what was then deemed an extremely tight spread of 15bp.

But despite dealing with extreme spread volatility at the end of last year, Nordic borrowers have been able to reap the benefits of an investor flight away from the eurozone in recent months.

"Nordic borrowers are now fully understood and recognised by investors," says Ulrik Ross, global head of public sector DCM at HSBC in London. "Investors are much less focused on the issues of indirect and direct guarantees, they are much more concerned with the soundness of an issuer’s balance sheet, the capital base, and they look at whether if something went wrong then how and if they would get their money back. On top of this investors are more focused than ever on the larger questions surrounding the eurozone and European Union. The Nordic borrowers have benefited from this."

MuniFin did not encounter any excessive questioning from investors in the wake of the Eksporfinans debacle when marketing its deal.

"We never had any questions about Eksportfinans from Swiss investors this time around," says Joakim Holmström, head of funding at MuniFin in Helsinki. "It was occasionally a topic for discussion, but knowledge of the difference between Eksportfinans and us is clearly there in Switzerland, unlike sometimes in more distant places like Asia. That understanding is shown by the fact that all the Scandi issuers that have come this year have printed very tightly."

Bankers agree that Swiss investors’ understanding of Nordic borrowers is well enough advanced for them to know the difference between the various agencies, their ownership and guarantee structures.

"In the short term Eksportfinans was a big psychological issue," says Patrick Raeber, head of Swiss franc syndicate at Royal Bank of Scotland in Zurich. "Before November last year investors tended to buy the top rated issuers without doing too much credit work. In the wake of Eksportfinans, investors have done a lot of work on issuers’ guarantee structures and have generally been more cautious. However, that work has now been done and Nordic issuers haven’t had to pay any kind of premium this year because of investors associating them with Eksport."

In fact, what is hampering Nordic issuers’ plans to print in the market is the punitive cost of selling Swiss francs. MuniFin is strategically committed to Swiss franc funding, and it had to pay up over its euro private placement levels — it declined to disclose the amount, but it was more than a few basis points, according to Holmström.

However, one thing working in their favour is rarity value and an investor preference for credits that are removed from the European sovereign debt storm.

"Scandinavian borrowers have really benefited from an investor flight away from core Europe because of the eurozone crisis," says Holmström. "Last year we came with an identical maturity to KfW and we actually printed tighter than KfW."
  • 06 Jun 2012

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