The Swiss National Bank ended its seven year experiment with negative rates in September 2022, taking the base rate upwards to counter the country’s highest rate of inflation since the 2008 financial crisis. As the base rate rose, so too did swap rates, opening opportunities for fixed income products not seen for almost a decade.
“As rates moved into positive territory throughout the curve, it created more demand for bonds,” says Dominique Kunz, head of Swiss debt capital markets solutions at Credit Suisse. “Our underwritten volumes have increased by 15%. This increase was driven by both more demand and increased arbitrage opportunities for international issuers.”
Swiss franc swap rates have skyrocketed over the past year. For instance, five year swaps climbed almost 230bp from a year low of minus 22bp in January to a high of 205bp in late September. Although the rate had tightened some 60bp by mid-November, it was still trading at close to a decade high.
“Issuance volumes closely correlate to interest rates,” Kunz says. “We expect to reach Sfr63bn-Sfr65bn ($66.1bn-$68.2bn) in 2022 — the last time we saw a similar volume was 2014.”
The five year mid-swap rate averaged 33bp throughout 2014 as borrowers went on to raise Sfr67bn, according to data from Credit Suisse. In 2022, it has averaged 98bp, up from minus 38bp in 2021, when only Sfr55bn was issued.
The Swiss franc new issue market is set to end 2022 offering investors returns not seen for eight years. The average yield on Swiss franc paper rose from 0.43% in January to 2.08% in October, according to analysis of Dealogic data.
“The recent elevated spreads and higher rates have resulted in absolute yields that are amazing,” says Andreas Tocchio, head of Swiss franc debt syndicate at UBS in Zurich.
“It has been years since the Swiss franc capital market was able to offer such attractive yields,” says Patrick Endress, Basler Kantonalbank’s head of Swiss franc debt syndicate. “The significantly higher yields have certainly helped to generate demand from investors for good quality bonds.”
These alluring yields have driven corporate volumes upwards by 40% in 2022. By mid-November, Swiss franc dealers had pushed Sfr18.44bn of corporate paper through the market, compared with Sfr10.83bn throughout the whole of 2021, according to data from Dealogic.
“Corporate bonds at short to medium maturities are finding good demand with attractive yields,” Endress says.
Two names, Roche and Nestlé, are responsible for more than a third, Sfr6.23bn, of this supply. The former sold the largest Swiss franc deal for more 13 years in February 2022, raising Sfr3bn. Roche offered a positive yield on three of its four tranches, stretching from five to 15 years. Four months later, Nestlé’s triple-tranche trade returned more than 2% on its two longer notes, with its four year leg offering 1.6%.
“You need competitive pricing across the curve to deliver size,” Tocchio says. “There are only a handful of names in Swiss francs that can do this. We haven’t seen them in the past, as we could not achieve the needed levels across maturities.”
However, despite the pair proving that there is the potential to print size in Swissies, Kunz does not expect as many of these sorts of deals in 2023 as they “are kind of a one-off”. Roche, for instance, tapped the market in February to fund the repurchase of its shares from Novartis.
Furthermore, these “Sfr750m-Sfr1bn volumes are pretty much limited to double-A names, as the rating is linked to repo eligibility,” Tocchio says. Roche is rated Aa3/AA/AA and Nestlé Aa3/AA-.
ABB is the only lower rated name to have come close to this sort of size in 2022, with the single-A company raising Sfr700m across two tranches in March. Gazprom’s Sfr750m 1.45% March 2023 trade, printed in February 2018, was the last deal of this size from a company that did not hold a high grade or upper medium grade rating. The Russian corporate held a triple-B rating when this deal was issued.
“In the international segment, the number of potential candidates is not large,” Tocchio says. “There aren’t a lot of AA-rated companies available. In addition, the large US names aren’t repo eligible.”
Over the past decade, US blue chip corporates such as Apple, AT&T, Coca-Cola, Eli Lilly and Verizon have issued Matterhorn deals — offshore Swissie deals of more than Sfr1bn. But there has been nothing since 2017. US business Verizon was set to follow Roche in February, and bankers were hopeful the telecoms company would get Matterhorn issuance back on track. However, the sale was put on ice after Russia invaded Ukraine.
Dealers are confident that they could welcome these sizeable deals back to the Swiss market in 2023 as conditions settle and central banks outside Switzerland lighten their balance sheets, encouraging foreign companies to diversify their funding at an attractive price.
“The planned shift to quantitative tightening by the ECB could lead to a widening in euro spreads,” Kunz says. “But as there was no equivalent central bank action in Swiss francs, the Swiss market looks more attractive for certain issuers.
“The ECB buys roughly 30% of investment grade corporate issuance in euros and if that bid goes away then investors will demand higher spreads to replace it,” Kunz continues. “Swiss francs aren’t a substitute for the ECB bid, but they can offer an attractive source of diversification.”
Financial borrowers showed what this could look like in 2022 when a string of banks tapped the market for covered bonds, many with one eye on refinancing their maturing central bank liquidity.
But the opportunity to diversify does not extend to every corner of the market quite yet, with the highest quality and richest names unable to find a price that works for both issuer and investor. “Someone like the European Investment Bank would probably like to come back to Swiss francs, but the pricing doesn’t make sense,” Tocchio says.
For instance, the AAA rated supranational’s euro funding levels swap to minus 20bp-30bp in Swissies, Tocchio adds, “and that’s too expensive for investors. They want to buy names that are a little wider, like the Dutch or Scandie agencies.” GC
Swissies go green
Swiss franc environmental, social and governance (ESG) debt issuance leapt forward in 2022 as new asset classes made their way to the market.
Since the EIB sold the first Swiss green deal in 2014 the market has been slow to develop, compared with core currencies. Labelled deals “were initially seen more as a marketing tool,” says Matthias Ogg, Zürcher Kantonalbank’s head of special products, adding that “sustainability had been a key factor for Swiss issuers for many years.”
Meanwhile, Swiss investors had not felt the need to buy labelled debt, as they inherently follow ESG standards — even when investing on a passive basis, adds Andreas Tocchio, head of Swiss franc syndicate at UBS in Zurich. “If a company is not ESG compliant, it will get more and more difficult to issue in Swiss francs.”
However, companies are increasingly looking to publicly affirm their ESG credentials in the Swiss market by issuing labelled deals, including, in 2022, the first sustainability-linked bonds (SLB) and domestic social deals.
Volumes shot up in 2021, rising by Sfr1.6bn from Sfr2.9bn in 2020 to Sfr4.5bn, according to GlobalCapital analysis of Dealogic data. Supply grew again in 2022, with roughly one tenth of Swissie syndications carrying an ESG label. Swiss borrowers have placed just under Sfr5.7bn so far.
Roughly a third of 2022’s labelled supply was issued in the emergent sustainability-linked and social formats, with Sfr1.4bn and Sfr520m raised, respectively. But opinion is divided over how eager investors will be to continue snapping up these new formats.
Sustainability-linked bonds found a natural home in the corporate-orientated Swiss franc market in 2022 and Ogg expects this market to grow in Swissies.
“This is still a new product, and many investors that have lines for green labels don’t have mandates yet for SLBs,” he adds. “But as more issuers come, more investors will adapt. It was the same with green bonds.”
But the same cannot be said about the social bond market, which Ogg believes will become “more of a niche product in Switzerland”, with investors instead preferring the more familiar green label.
