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Swiss Credit Market 2019: Swiss corporates streamline their portfolios
The annual Credit Suisse Swiss Credit Handbook examines the creditworthiness of the largest Swiss bond issuers and main participants in the Swiss franc capital market. In 2019, companies in the coverage universe remain healthy and fit overall. But in an environment of increasing macroeconomic uncertainty, slowing economic growth, and changing consumer behaviors, management teams have started to streamline their portfolios, often in the form of disposing of non-core businesses or transforming the business to higher-yielding or better positioned areas.
The rating landscape has remained fairly stable since the publication of the Swiss Credit Handbook in September 2018, reflecting the still favorable credit environment. Nonetheless, there were no upgrades of issuers, while the Credit Research analysts of Credit Suisse have downgraded three issuers since the last publication of the handbook. MCH was downgraded in two steps in December 2018 and March 2019, Implenia and Nestlé (currently restricted) in February this year. In general, the overall credit quality of Swiss corporate issuers remains very solid, also supported by high cash levels across companies.
Uncertainties continue to shape the global and Swiss economies
After a very favorable global macro environment in 2018, the current economic situation is marked by more uncertainty. The trade conflict between the US and China, the uncertainty around Brexit, the German economy showing signs of weakness and the new chapter in the Italian government crisis have brought uncertainty and volatility to the markets.
The trade war continues to intensify and this uncertainty has a negative impact on global industrial production, which can severely affect financial markets and global monetary policy decisions. The Credit Research analysts expect the Fed and the ECB to further ease monetary policy in order to support their economies. Given that the SNB’s course of action will be heavily influenced by the ECB’s decision, further intervention by the SNB does not seem unlikely. GDP growth rates for 2019 are expected to be lower compared to 2018 across major economies.
Back to the core – companies streamline their portfolios
In this environment of macroeconomic uncertainty, slowing economic growth, persistently low levels of capacity usage, changing consumer behavior, and rapid developments in technology, management teams are seeking measures to protect and improve profitability and shareholder value. Many companies in the coverage have chosen the route to identify and concentrate on the most profitable and value-creating parts of their businesses. This has led to a discernible drive to transform businesses and reshape portfolios, often in the form of disposing of non-core businesses or transforming the business to higher-yielding or better-positioned areas.
Migros, for instance, announced its intention to sell several subsidiaries (Globus, Interio) to sharpen the strategic focus and concentrate resources on strengthening its core business and expanding its online business. Novartis has transformed itself from a diversified healthcare company to a streamlined and focused pure Pharma company, which has required a number of transactions in recent years, culminating in the disposal of its remaining 36.5% stake in the Consumer Healthcare Joint Venture to GSK. At end-2018 ABB announced it would sell its power grid business to Hitachi in order to focus on digital industries and automation. In a smaller transaction, Emmi sold its delivery company Emmi Frisch-Service AG to Transgourmet, a subsidiary of the Coop group. Bell Food has sold its sausage business to the Zur-Mühlen-Group and intends to reallocate resources to reinforce and further expand its market position in other segments. Lonza has transformed itself into a healthcare company by selling its non-core Water Care business and separating its Specialty Ingredients business in order to focus on the higher-margin and high-growth core healthcare business.
Two corporate issuers added
Since the last edition of the handbook, Credit Suisse analysts have added two corporate issuers to the coverage universe. Coverage on Spital Männedorf Ltd. was initiated in January 2019 after the hospital issued a CHF 50 million bond. Based on the above-average business profile and the average financial profile, Credit Suisse’s analysts assigned a High BBB rating to the issuer. Kühne + Nagel also started with a High BBB rating in the coverage after the CHF 200 mn bond issuance in mid-June 2019. Its top market positions in the Seafreight, Airfreight, Contract Logistic and Overland businesses, solid and growing revenue streams, as well as its high potential for operating leverage, a solid balance sheet, and strong capitalization support the rating.
Total Swiss Franc bond issuance picked up again in 2018 by 5.4% to CHF 58.9 bn. This increase was mainly driven by rising CHF issuance of cantonal banks and corporates, while the financial- and public segments were less active in the CHF bond market compared to 2017. The domestic segment dominated the CHF bond market with 70% of total CHF issuance. In the domestic segment, rising CHF issuance by cantonal banks and Swiss corporates was largely offset by a decline in volumes for financials and the public segment. Looking at the first half of 2019, Swiss corporates were less active in the bond market, tapping it with issues of only CHF 3.3 bn. Having already refinanced debt over the last two years at low interest rates and with often high cash levels, demand has been subdued to date. Macroeconomic uncertainty is adding to the sluggish sentiment.
About the Swiss Credit Handbook 2019
The Swiss Credit Handbook 2019 contains 68 issuers (57 companies, 11 partner plants), most of whom are not covered by the international credit rating agencies. The Swiss Institutional Credit Research team of Credit Suisse assesses each issuer’s credit profile and outlook, and assigns the resulting credit rating. In this year’s edition, cantons and cities were not included, as they will be covered later this year. The Swiss Credit Handbook is aimed at all investors and financial market participants seeking detailed information about current developments and the creditworthiness of Swiss capital market borrowers.
The Swiss Credit Handbook is available upon request.