Swiss francs ready to celebrate normality
As central banks retreat from public markets, spreads are widening in dollars and euros, and cross-currency basis swaps are improving for international borrowers, Swiss bankers believe the good times might be returning to a market once known the world over for diversification and arbitrage.
Spread widening is more welcome in Swiss francs than most funding currencies.
Well rated foreign issuers, especially financial institutions and public sector borrowers, were effectively shut out of the Swiss bond market for the last three years, as they would have had to pay enormous spreads to compensate Swiss investors for the negative base interest rate.
But as dollar and euro markets widen, Swiss bankers expect arbitrage windows to creak open.
This has happened with foreign financials, which raised around Sfr9bn ($9.05bn) of Swiss franc bonds in the last year. Canadian banks, long absent from the Swiss currency, returned in June and July, as the dollar market widened and cross-currency basis swaps improved for foreign borrowers.
Bank of Montreal (Aa2/A+/AA-), Canadian Imperial Bank of Commerce (Aa2/A+/AA-) and Royal Bank of Canada (Aa2/AA-/AA) sold five year Swiss franc bonds for an overall size of Sfr1.23bn. “Canadian borrowers had what we wanted — short dated maturities from single-A plus borrowers, that offer a little spread,” says one Swiss investor, who does not want to be named.
A similar sentiment applied to Korean borrowers. The market saw a staggering 10 borrowers from that country raise Swiss franc debt — the Export-Import Bank of Korea, GS Caltex, Hyundai Capital Services, KEB Hana Bank, Korea Development Bank, Korea Gas Corp, Korea Land and Housing, Korean National Oil Corp, Korea Railroad Corp and K-Water. Their combined issuance was around Sfr2.4bn — only Sfr1bn less than the Sfr3.3bn raised by US borrowers in the whole of 2017, when they were the biggest source of foreign deals. This was largely due to an improving Swissie-dollar basis swap.
It worked particularly well for US financials in 2018, and bankers hope that it might bear out volume for US corporates next year.
Goldman Sachs sold Sfr325m of seven year Swiss franc bonds in May, its largest amount of Swiss franc bonds in a single issue. The leads offered 15bp-20bp of new issue premium over Goldman’s existing Swissie curve but it was still attractive as the cross-currency basis had moved in its favour.
“Three months before June, it would have cost 42bp for a foreign issuer such as Goldman Sachs to swap a 10 year Swiss franc bond into dollars, and by the time Goldman was out it was at 32bp,” says one Swiss franc bond banker. By the end of the year the cost fell to around 20bp-25bp.
This move may have greater effects for the year ahead, and attract US blue chips back to the market, after they were largely absent in 2018.
“US borrowers repatratiated a lot of cash because of the tax change in the US, so not much funding was expected,” says Dominique Kunz, head of Swiss franc DCM at Credit Suisse in Zurich. “The conditions are now promising in Swiss francs for US corporates to make a return.”
Short term pain, long term gain
Foreign Swissie volumes for 2018 (up to November 23) were Sfr15.2bn versus Sfr13.7bn for 2017. With conditions so ripe, one may be forgiven for thinking a mere Sfr1.5bn increase in international supply, year on year, is a little scanty.
Expectations of a rates rise stifled bond issuance last year, as investors became more cautious, keen to avoid parting with their cash before a pricing readjustment.
This meant a trickier market to navigate.
Some trades took more effort, on occasion requiring three or four arrangers to haul deals over the line.
“You need to listen to investors and get as much feedback as you can,” says Damien Aellen, director of Swiss franc syndicate at Credit Suisse. “People are more picky now and that may be here to stay.”
One Swiss investor says: “Once the pricing readjusts and stabilises, you’ll see investors become much more active in the bond market, and hopefully return to the glory days.”
In the meantime, Swiss franc syndicate desks, in conjunction with the Swiss exchange (SIX), selected issuers and investors, launched a digital platform in November called Deal Pool. The initiative hopes to breed efficiency and simplify process for new bonds.
“SIX Deal Pool introduces an efficient workflow by creating a central and electronic hub for managing and distributing new issue information,” said SIX in a registration document sent to investors in early November.
One Swiss bond banker is more abrupt: “Consider it like the Swiss Ipreo, but not so complicated.”