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Solid credit fundamentals for Swiss corporates and cantons

Credit Suisse Research Study: "Swiss Credit Handbook 2011"

The "Swiss Credit Handbook 2011" comprises the credit profiles of the most important Swiss issuers and participants in the Swiss franc capital market. This year, the Handbook compiles assessments of all entities under the coverage of Credit Suisse analysts, including corporates, partner plants, cantons and cities. The handbook also examines prospects for selected issuer industries and the latest trends and topics currently dominating the economic environment, such as FX headwinds and the uncertainty surrounding sovereign debt and the economic outlook.

The Credit Suisse Credit Handbook has provided an overview of the credit quality of key Swiss issuers in the Swiss franc capital market for the last ten years. The Handbook also includes analyses of Swiss issuers that are not covered by international rating agencies. The study further examines the latest trends and current topics that dominate the environment, and analyzes the prospects for selected issuer groups.

Corporates back on track but far from peaks
Overall economic conditions continued to improve in 2010 and H1 2011. The recovery was particularly supported by the strong recovery of more cyclical sectors, which benefited from the base effect after the substantial setbacks. From a fundamental credit point of view, earnings readings of the Swiss corporates under Credit Suisse analysts’ coverage were generally stronger than in 2009. Emerging markets stood out as the growth engine, while selected markets in Europe and North America continued to experience a rather slow recovery. As such, the credit metrics of Swiss corporates improved further from the lows seen in 2009, thanks to a combination of efficiency and cost-saving programs, as well as an increase in order intake and top-line growth in general. Profitability margins improved and cash flow measures remained relatively solid, resulting in stable-to-lower net debt, and hence stronger credit metrics. That said, the FX headwinds from the declining USD and EUR against the CHF are an increasingly serious issue. The analysts at Credit Suisse also highlight that uncertainty about the outcome of the European sovereign debt crisis continues to pressure not only the financial sector, but also the entire global economic environment.

Swiss public sector acts as a save haven
Swiss cantons had another good year, with solid financial performance in 2010, albeit at lower levels than in the previous years, which indicates future challenges. In addition, many cantons were able to post excess revenues again last year, thereby generally surpassing their budgets. 16 cantons presented self-financing ratios above 100%, indicating that they fully self-financed their net investments. Financial flexibility remained strong, as seen with eight cantons carrying a net cash position in 2010. This should help to address the upcoming challenges of decreasing earnings combined with higher net investments for the years ahead. The Credit Suisse analysts reiterate their view that these challenges are more of a lag effect of the recession than a structural challenge. That said, Swiss cantons also face the risk of not receiving dividend payments from the Swiss National Bank, which accounted for roughly 1%–3% of total income in the last few years.

Credit quality outlook
The Credit Suisse base-case scenario still assumes that the global economic recovery will continue within the next twelve months – although at a slower and potentially more volatile pace. This should allow most Swiss issuers under the analysts’ coverage to achieve credit metrics in line with their respective credit ratings. Most covered issuers have maintained their positioning within the existing rating category. That said, there are still headline risks, as seen with recent acquisitions, despite the fact that many companies enjoy good financial headroom under their current ratings. The analysts also highlight the FX headwinds, which put additional pressure on some companies that are already exposed to other challenges. However, globally active Swiss corporates often have a natural hedge on their currency exposure which limits the FX headwind to translation risk. The analysts of Credit Suisse expect credit ratings of Swiss issuers within their coverage to remain stable within the next twelve months. Consequently, as of end-August 2011, 82 of the 91 issuers covered in the Swiss Credit Handbook have a “Stable” rating outlook. The fact that currently only one issuer has a “Positive” outlook reflects that currently very limited upside in the fundamental credit quality is seen. The negative rating outlooks of eight issuers reflect that the credit rating of less than 10% of the entire coverage universe are exposed to a potential rating downgrade over the upcoming months at this stage.

Volatile sideways movement in credit spreads expected
After the substantial tightening of credit spreads in 2009, CHF credit spreads generally continued their overall sideways movement that started at the beginning of 2010. However, the recent market volatility caused a spread widening in the more cyclical sectors as well as for lower rated corporates as a result of the uncertainties in the market. Based on the current credit fundamentals, the Credit Suisse analysts remain cautiously positive over the medium term, also for lower-rated names. They see some tightening potential under the assumption that the market will continue to recover, albeit at a somewhat slower pace than anticipated at the beginning of the year, while volatility should remain high in the short run.

About the Swiss Credit Handbook
The goal of the Swiss Credit Handbook is to shed light on the credit profile of Swiss issuers in the CHF capital market. The study examines the creditworthiness of the largest Swiss bond issuers and the main participants in the capital market through a structured assessment. For the first time, the analysts included all entities under coverage (corporates, partner plants, cantons and cities), thereby encompassing a wide range of borrowers that are not covered by the international credit rating agencies. Using standardized rating methodologies, the analysts assess the credit profile and the outlook for each issuer and subsequently assign a credit rating to each one. The Swiss Credit Handbook further provides general facts and figures for the Swiss bond market, with a particular focus on the market for domestic bonds. The Swiss Credit Handbook thus targets all investors and financial market participants seeking detailed information about the current development and creditworthiness of Swiss capital market borrowers. This edition of the Swiss Credit Handbook features credit profiles for 47 companies, 16 partner plants, 26 cantons and 2 cities.