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Swiss issuers remain solid in a difficult environment
Credit Suisse Study: Swiss Credit Handbook 2013The "Swiss Credit Handbook 2013" 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.
As a result of economic challenges, in particular with regard to Europe, the issuers under Credit Suisse's coverage have focused mainly on cost savings and efficiency measures. When comparing the 6-year average EBITDA margin to the estimated EBITDA margin for this year, a picture of relatively stable margins for most of these companies emerges. The few positive and negative exceptions are a result of restructuring, repositioning or acquisitions. With regard to the balance sheet, it transpires that Swiss corporates remained relatively solid over recent years, with net leverage being stable to slightly improving. This reflects cautious financial policies driven by the challenging economic environment, particularly in Europe.
Hence, companies continue to hold large cash piles, with many market participants waiting to invest. In the short term, companies' somewhat suppressed capacity utilization will most likely hold back larger investments, but a few positive signs emerged recently, with good economic data in North America and indications that the economic trend in Europe is bottoming out. This could bring more confidence to the market over the next 12 months. Within the corporates coverage universe, the Swiss Institutional Credit Research team has made less than a handful of rating changes since the last handbook. This was in line with the bulk of rating outlooks being stable. Flughafen Zürich's rating was revised up following its strong operational performance, cash flow generation capacity and reduced indebtedness. Swiss Life successfully restructured its business under the new set-up and the company is likely to maintain a strong market position with restored capitalization, which also resulted in an upgrade to the next higher rating category. In contrast, Credit Suisse analysts lowered Meyer Burger to a Mid B rating following the weak performance due to the prevailing very difficult solar market situation and the high cash burn rate over recent quarters.
Swiss utilities under pressure while the public sector remains resilient
Swiss utilities remained in the spotlight as their credit quality remains under pressure due to testing electricity market conditions, combined with large investment programs that have squeezed cash generation substantially in recent years. As such, BKW's, Repower's and Alpiq's credit ratings have been adjusted down, which triggered downgrades for several partner plants, as their rating is derived from that of their shareholders. The public sector, in contrast, experienced another good year, although the impending challenges that were already highlighted last year have begun to affect the accounts, as fewer cantons were able to improve their financial situation. Nonetheless, credit quality is expected to remain sound despite the future challenges indicated by cantons in the current round of budget and medium-term financial plans. The only upgrade versus last year is for the Canton of Geneva, which again presented strong financials, a sound balance sheet and a good reading in the Credit Suisse locational quality index.
Outlook on credit quality
Most companies that are covered by Credit Suisse analysts indicate that it is difficult to give firm, reliable guidance on their business development, given low growth expectations in mature markets, particularly in Western Europe. At the same time, while growth in emerging markets remains sound, general cost inflation is proving somewhat of a challenge to profitability. Credit Suisse analysts assume that the global economy will continue to gain traction over the next 12 months, and this should allow most issuers to achieve credit metrics in line with their respective credit ratings. Their creditworthiness is further supported by the fact that most of the companies enjoy good market positions, combined with financial leeway which, in most cases, is still sound under their current ratings. Many companies are sitting on sizeable cash piles that offer the financial flexibility to pursue potential expansion steps. As 85% of all issuers carry a Stable outlook, Credit Suisse analysts therefore expect credit ratings to remain widely stable over the next 12 months. There are currently eight issuers with a negative outlook, half of which are in the utility sector. Utilities will remain exposed to a very demanding environment, given persistently low power prices in Europe, combined with high capex programs. Five out of the six positive outlooks are in the public sector, which is still underpinned by strong operating accounts and prudent financial policies.
Credit spreads are very tight
The generally positive financial market sentiment has seen credit spreads tighten further, also supported by the continued high level of governmental intervention in the bond markets. Subdued new issuance activity, particularly in the CHF foreign market, had a technical effect on bond valuations as well. The imbalance between supply and demand has increased again this year, and credit spreads of corporate bonds across all rating categories have tightened further. The record low credit spreads make it difficult to find attractive bond yields at this stage. Credit Suisse analysts prefer to invest in lower-rated corporate bonds. In a relatively dry market, there are some lower rated investment-grade and some sub-investment-grade issuers that could offer attractive yields. Some corporates also recently issued corporate hybrid bonds that offer interesting yields. Subordinated paper from insurance companies and banks could also offer some outperformance potential. However, investors need to closely monitor the various special features, such as interest deferral, subordination and potential loss absorption or conversion features of these perpetual bonds, and Credit Suisse analysts reiterated its view that not every lower rated credit offers attractive yields, and that every single issuer needs a sustainable and appropriate credit assessment.
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 past 12 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 authors have included all entities under coverage (49 companies, 17 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.