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Swiss Credit Market 2020: COVID-19 – How immune are Swiss corporates?

Credit Suisse publishes its Swiss Credit Handbook 2020

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 2020, companies in the coverage universe are being challenged by the COVID-19 pandemic and the economic repercussions stemming therefrom. While most of the companies in the coverage universe are well positioned to navigate through the crisis, some management teams are required to make difficult decisions on the way they allocate resources efficiently among stakeholders to protect business operations.

Since the publication of the Swiss Credit Handbook in September 2019 there have been two positive and eight negative rating actions – the latter predominantly determined by COVID-19. Credit analysts of Credit Suisse upgraded Zug Estates’ and Lonza’s credit rating by one notch and downgraded MCH’s credit rating by two notches. Furthermore, they assigned Negative outlooks to the ratings of ABB, Bobst, Bell, Flughafen Zurich, Genève Aéroport, HIAG, and Valora. While some issuers are facing challenging times in the wake of the pandemic, the overall credit quality of Swiss corporate issuers remains very solid, supported by healthy balance sheets across companies.

A deep slump in economic output expected to be followed by a strong rebound
At the end of last year, Credit Suisse economists expected the global economy to remain resilient with subdued economic growth in 2020 while a market downturn or a financial crisis seemed unlikely. However, with the outbreak of the COVID-19 pandemic and government-imposed restrictions to combat the virus around the world, economists have revised their growth forecasts. Uncertainty prevails as to whether the recovery of key economic indicators will be shaped like a V, a W, a U, or even an L is limited, which is also reflected in the broad dispersion in GDP forecasts for 2020.

While Switzerland remains an economically stable country with top credit quality and a strong currency, the pandemic has taken its toll on the economy. Credit Suisse’s economists anticipate a deep and synchronized slump in the Swiss economy in 2020, with GDP falling by 4.0% before rebounding next year by 3.5%. To prevent the situation from turning worse, the Swiss government and the Swiss National Bank (SNB) had to support the Swiss economy with significant fiscal and monetary measures. Sectors such as industrials and airports have been hit severely by the pandemic, while more defensive sectors such as food and pharmaceuticals have shown their resilience. The pace of the recovery in different sectors and segments is likely to differ, with many facing financial repercussions of the pandemic beyond 2021.

Prudent stakeholder management key in a challenging environment
Limited visibility on the full impact of COVID-19 on the economy - and how it might recover - has made it difficult for management teams to assess the financial impact on full year results. Thus, many Swiss companies have withdrawn their full-year 2020 guidance over the last few months. While around 40% of all companies in the coverage universe have released a statement related to the impact of COVID-19, the share is significantly higher when considering cyclical sectors such as materials, capital goods, and airports only. In contrast, many companies in less impacted sectors have not materially adjusted or even confirmed their initial guidance.

The current challenging environment requires companies' management teams to make difficult decisions on the way they allocate resources among different stakeholders in order to protect the business operations while minimizing conflicts of interest. Credit Suisse's analysts have seen a wide range of measures implemented by companies to safeguard liquidity and business operations. While a large share of companies announced cost saving measures such as cutting personnel costs, adjusting capacities, or reducing discretionary spending, some have also revised capital expenditures, reduced dividend payments, or paused share buyback programs. Industrial companies such as Georg Fischer, Bobst and Bucher have introduced short time work for instance, while Flughafen Zurich has also adjusted its capital expenditure plans and waived the 2019 dividend. Sulzer announced that it would adjust its capacities by one third in energy-related businesses while also cutting capital expenditures. Adecco said that it would pause its EUR 600 m share buyback program. However, companies that have adjusted shareholder remuneration are typically those that have suffered severely from the pandemic.

There has also been a number of companies raising debt via bank loans or the capital market in order to ensure sufficient liquidity and to safeguard business operations. As such, Genève Aéroport and Flughafen Zurich both tapped the capital market in April, the latter also fully drawing its bank credit lines. While airports had little choice but to raise additional debt, other companies such as OC Oerlikon have drawn on existing credit lines to retain financial flexibility at limited costs. SGS and Geberit have raised debt via the capital market earlier this year avoiding potentially higher rates at a later stage. Corporate bond issuance spiked in the month of April, shortly after the crisis unfolded in March.

One corporate issuer added
Since the last edition of the Handbook, Credit Suisse analysts have added one corporate issuer to the coverage universe. Intershop is a Swiss real estate company that purchases attractive real estate properties in Switzerland, (re)developing and managing these sites before selling them again. Credit Suisse’s analysts assigned a Mid BBB rating to Intershop, supported by the company’s business strength and track record in capitalizing on investment opportunities as well as high operating margins and relatively low leverage.

About the Swiss Credit Handbook 2020
The Swiss Credit Handbook 2020 contains 69 issuers (58 companies, 11 partner plants), most of which 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. As in the previous year’s edition, cantons and cities were not included, as they will be covered in a separate publication 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 2020 is available upon request.