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Swiss issuers remain overall solid – utilities experience difficulties

Credit Suisse Study: Swiss Credit Handbook 2012

The "Swiss Credit Handbook 2012" published today comprises the credit profiles of the most important Swiss issuers and participants in the Swiss franc capital market. The Handbook compiles assessments of the entities covered by Credit Suisse analysts – such as Swiss corporates, utilities, cantons and cities, thereby encompassing a wide range of borrowers that are not covered by the large international credit rating agencies. The handbook also examines the prospects for selected issuer industries.

Earnings of Swiss corporates in the 2011 financial year were generally solid. With some exceptions, the issuers under Credit Suisse's coverage have been able to increase or maintain their profitability margins in spite of the economic challenges, as they have focused on capacity adjustments, efficiency improvements and overall strict cost control. The good profitability also had a positive impact on cash generation. The trend in net debt was mixed. Higher indebtedness (particularly with capital goods companies and utilities) was primarily the result of ongoing high capital expenditure combined with merger and acquisition activity, currency headwinds and continued shareholder focus. The credit metrics of most companies remained in line with their current rating categories, as reflected in the mostly “Stable” rating outlooks and very limited amount of downgrades across corporates. That said, some signs of re-emerging challenges have appeared in the past few months. In particular, the European debt crisis has resulted in a contraction of activities in several regions and several Swiss companies remain burdened by the strong Swiss franc.
One exception to the overall encouraging development is the Swiss utilities sector, which experienced two downgrades – which in turn led to an additional eight downgrades of related partner plants – in the last 12 months following the continued challenging market environment for Swiss electrical utilities.

Swiss public sector remains a safe haven
Swiss public entities experienced another solid year with regard to credit quality, reflecting the sector's resilience. However, the positive momentum has eased. Most of the cantons outperformed their 2011 budgets again last year, although at a lower level than in previous years. Many cantons have strong balance sheets with substantial financial flexibility reflected in nine cantons carrying a net cash position at end-December 2011. However, underfunded pension liabilities continue to pressure the financial profiles of many cantons and could result in future recapitalization needs. Currently, Swiss cantons have accumulated underfunded pension liabilities of CHF 28.0 bn. As a result of the continued stable environment, Swiss cantons only experienced one upgrade and two downgrades in the last 12 months. Despite the upcoming challenges, Credit Suisse analysts expect further, albeit limited, rating upside potential for four cantons with a “Positive” outlook if they are able to maintain their credit quality over the coming years despite the headwinds. Currently, there are no cantons with a “Negative” outlook.

Outlook on credit quality
The Credit Suisse Private Banking Global Research base-case scenario assumes that the global economic recovery will continue and that the creditworthiness of most Swiss issuers under the analysts’ coverage is supported by the issuers' generally good market positions, sound financial leeway under their current ratings, profitability supporting cost-saving measures and continued solid cash and near-cash positions. Since the key downside risk remains a potential decline in global growth, the analysts are also keeping a close eye on growth in emerging countries, as exposure to these regions will continue to be key for growth for many companies. Furthermore, headline risks (e.g. M&A activities) remain. Credit Suisse analysts project credit ratings under their coverage to remain relatively stable in the next twelve months and have a “Stable” fundamental view on all sectors but utilities. Consequently, as of end-August 2012, 71 of the 91 issuers covered in the Swiss Credit Handbook have a “Stable” rating outlook. Only four issuers carry a “Positive” outlook, which reflects the analysts’ view of limited upside potential in fundamental credit quality. At the same time, the analysts currently see a high likelihood for a number of downgrades, reflected in the “Negative” outlook for 15 issuers – predominantly utilities.

Credit spreads expected to remain volatile
The Credit Suisse analysts believe that the continued high demand for corporate bonds has already resulted in relatively tight credit spreads, particularly with regard to higher-rated issuers, which somewhat limits the upside potential. In addition, the uncertainty surrounding sovereign debt and the macroeconomic outlook is likely to manifest itself in persistent market volatility. They therefore expect Swiss franc credit spreads of corporate and financial bonds to show an overall sideways movement, after the tightening experienced since the beginning of 2012. As the mid- to long-term prospects remain neutral overall, Credit Suisse analysts recommend that investors remain overweight in selected investment-grade issuers in cyclical sectors and Swiss financials. In view of their ongoing higher credit spread volatility, they recommend to carefully select speculative grade issuers.

About the Swiss Credit Handbook
The Credit Suisse Swiss Credit Handbook has provided an overview of the credit quality of key Swiss issuers in the Swiss franc capital market for the last 11 years, thus contributing substantially to investment decision-making in the Swiss economy. The goal of the Swiss Credit Handbook is to shed light on the credit standings of Swiss issuers in the Swiss franc capital market. The study examines the creditworthiness of the largest Swiss bond issuers and main participants in the capital market through a structured assessment. As in last year’s edition, the analysts have included all entities under coverage (47 companies, 16 partner plants, 26 cantons and 2 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 is thus aimed at all investors and financial market participants seeking detailed information about the current development and creditworthiness of Swiss capital market borrowers.