It should have been a tough year. For the whole of 2010 Swiss franc swap spreads could scarcely have been tighter, shutting sovereigns and SSAs out of the market for much of the year. But the same low swap spreads have led to a flourishing of deals lower down the credit spectrum, with new jurisdictions and new deal structures offering tempting coupons for retail investors.
While retail funds hunted outright yield at the short end of the market, rates buyers were forced to look long for worthwhile spreads. Covered bond issuers, cantons and utilities snapped up funding with tenors of 15 years or longer.
With Swiss franc rates so low, absolute issuance volume hit Sfr83.01bn well below 2009s Sfr102.89bn, but one of the highest totals of the decade in nominal terms, and second highest in dollar terms.
For domestic issuers 2009 and 2010 were bumper years with volumes of Sfr40.76bn and Sfr35.52bn respectively. Domestic deals made up a greater proportion, 43%, of issuance than in any other year since 2000.
The market bonanza of the last two years has attracted more resources from banks, with Barclays Capital setting up a Swiss franc syndicate desk with Martin Meili as its head, and Deutsche Bank re-opening its Zurich syndicate, hiring Denis Vucina from BNP Paribas as its chief. Credit Suisse and Royal Bank of Scotland brought in new talent from outside the Swiss franc syndicate world to fill syndicate seats Benjamin Heck switched out of DCM to syndicate and Clemens Dorkup went to Zurich from RBSs London desk.
The trust test will come in 2011, particularly for BarCap, which is building up a Swiss franc franchise from scratch. However, commitments from the international banks suggest other positive developments for the market.
In many respects 2010 was a standout year. Perhaps the most striking feature was the array of new names and emerging market issuers in the market. There was the first Brazilian borrower since 1995, the first Korean company, the first Chilean bank, the first Qatari bank, the second ever corporate hybrid, and the first rated hybrid and the first Indian issuer is in the pipeline. There were also debut deals from Lloyds TSB and HSBC Bank and bold, defiant trades from Spains Ico, Bank of Ireland and Allied Irish.
"It was one of the years with the greatest number of debut transactions," says Vucina at Deutsche Bank. "There was a shift out of struggling countries in the eurozone and a diversification to emerging market countries. People are redrawing their allocations, so the emerging market momentum should continue."
The Swiss market for higher yielding names is traditionally underpinned by private bank demand, with the usual Sfr5,000 denomination and long settlement period. Private banks buy bonds from the bookrunners and sell them on through branch networks. The cost of distribution and sale for retail investors means that issues have to have a high nominal yield to make it through the system.
High coupons or eye-catching yields typically help retail-targeted issues go well, irrespective of the re-offer spread at which bonds are issued. Last year, however, asset managers and other institutional accounts started to make up more of a bid for high yielding names.
The hybrids are coming
"With low yields, all investor classes are desperately looking for a pick-up," says Patrick Raeber, head of syndicate at RBS in Zurich. "In 2011, Swiss investors will become more selective about the emerging market names they buy, because they will have much more choice."
Emerging market names offer Swiss investors one route to yield, moving down the capital structure offers another.
Zurich and Helvetia, insurance companies, and Aryzta, a bakery company, all issued hybrid debt in the Swiss market last year. Hero, a confectionary manufacturer, opened the Swiss hybrid market in 2009 and tapped its deal in March. Swiss franc bankers have eagerly anticipated the next issue to follow Hero.
With four hybrids in the market, syndicate bankers are starting to build a better picture of what works and what doesnt and becoming more precise on price.
Hero and Aryzta issued unrated hybrids with 500bp step-ups at the call date, explicitly aiming to receive equity accounting treatment with debt tax treatment. Helvetia and Zurich issued their hybrids to match the Finma Swiss Solvency Test rules for insurers, structuring the deals to receive upper capital treatment. These deals have no step-up, but offer inflation protection by switching to a floating rate spread after the call date.
Outside Switzerland, corporates havent issued enough Swiss francs for bankers, or for investors. While Swiss corporates can lock in exceptionally cheap funding, foreign issuers must use cross-currency swaps, meaning rates that are less internationally competitive. A string of successful issues came through including deals from BMW, MacDonalds, SPI Australia, Deutsche Telekom but investors are keen to see more corporates come to the market.
"Swiss retail investors like to buy something tangible," says Raeber. "They can eat a McDonalds, drive a BMW or call with Deutsche Telekom. This is more important than ratings for the Swiss retail market."
While these deals were successful, there were few blockbusters in 2010 only a handful of deals over Sfr500m, and nothing over Sfr1bn. By contrast, in 2009, some of the elite Swiss companies printed Sfr1bn plus trades. For example, Roche did a Sfr4bn deal.
According to Raeber, Sfr1bn trades are still possible, despite a decline in the average size of issues during 2010. However, to get big sizes done, names are still essential, as demonstrated by debut deals from Lloyds TSB and Glencore last year, which attracted impressive Sfr800m and Sfr600m volumes.
Bankers expect small deals and low corporate supply to continue into 2011, as the leading corporates are already sitting on plenty of cash, and need something to spend it on.
"Corporates dont need much cash," says Vucina. "Swiss corporates can lock in cheap funding, but foreign corporates cannot. To the extent that the bond market is driven by M&A activities, 2010 was not a good year for corporate financing, because activity was very low."
High grade hurdles
In the rates market, conditions were hard in Swiss francs. Fears about SSA stability encouraged Swiss money back into Swiss francs (with attendant currency appreciation), swap rates stayed low, and the cross-currency basis squashed arbitrage opportunities for most of the year.
In the spring of 2010 KfW and EIB could price deals more than 10bp through mid-swaps, as the basis swap arbitrage worked. However, since then the agencies have struggled to issue at cost-effective levels in Swiss francs. Some borrowers, notably BNG, tapped the long end of the market later in the year, but acted opportunistically, responding to lead orders and reverse enquiry.
For frequent issuers with established Swiss franc curves, the low rates brought further challenges. Liquidity, never the strong point of the Swiss franc market, was hampered further by larger number of old bonds with coupons way above market levels. These bonds would be quoted at big premiums to par perhaps 106 or 108 but few buyers are willing to come at such levels, so they scarcely trade.
This means issuers struggle to come to market in line with their curves, because the curves were based on quotes, rather than liquid trading.
Raeber believes that 2011 could be the year for covered bonds, particularly from the familiar jurisdictions of Germany, France, the Netherlands and Scandinavian countries. Foreign covered bonds fulfil a similar role to agency debt a product with foreign exposure and a triple-A rating but even the best pay a spread well over Libor. Crédit Agricole, HSBC (France), ABN Amro and ING all showed the way in the autumn.The Swiss market looks in good shape for 2011. Bankers have no shortage of ideas to elaborate on, and are coping with the low rates environment turning to other products and longer maturities to keep investors interested. Banks, be they established native or new entrant, are determined to take a piece of the Swiss franc bond market pie.