Busy New Issuer Activity in the Swiss Franc Capital Market

The Swiss Credit Handbook 2017 contains 100 issuers (51 companies, 17 partner plants, 26 cantons, and six cities), many 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. The Swiss Credit Handbook is thus aimed at all investors and financial market participants seeking detailed information about current developments and the creditworthiness of Swiss capital market borrowers.

Since the last handbook in August 2016, there have been 18 rating downgrades and four upgrades. Most of the downgrades were in the utilities and related partner plants segment. However, the Credit Suisse analysts believe that rating pressure in the utilities sector has gradually bottomed out, supported by stabilizing electricity prices. Credit quality in the public sector remains strong overall as can be seen in the high average rating. The rejection of the Corporate Tax Reform Bill III suggests that fiscal competition among cantons remains unchanged at this stage.

Busy Issuance Activity of First-time Issuers

Overall new bond issuance in the CHF domestic segment in 2016 amounted to CHF 36.7 bn which is slightly less than the CHF 39.5 bn issued in 2015. Most of the decline can be explained by lower issuance activity of cantonal banks and the public sector, while issuance of corporates increased slightly to around CHF 8.2 bn. The rise in issuance activity among Swiss corporates has continued thus far in 2017.

While a number of companies fell out of the study's coverage universe, the Credit Suisse analysts added four 2017 first-time issuers and one new issuer that tapped the market at the end of 2016. In January 2017, the real estate company Zug Estates issued a CHF 100 mn bond. This was followed by a CHF 100 mn bond from Kantonsspital Aarau and a CHF 300 mn bond from Partners Group in May 2017. Following the split of the Galenica Group into Vifor Pharma and Galenica, the latter issued two bonds of CHF 180 mn and CHF 200 mn in May 2017. The authors of the Handbook have also initiated coverage on Investis, which issued a CHF 100 mn bond in November 2016 and a CHF 140 mn follow-up in February 2017.

The Swiss Institutional Credit Research team expects the brisk new issuance trend to continue. More first-time issuers may tap the bond market in the coming quarters, especially smaller issuers with a lower revenue base, or hospitals as new development and renovation projects entail material financing needs. Some companies, who predominantly relied on bank debt for their funding in the past, are now increasingly seeking to raise their flexibility and diversify their funding structures. The trend to tap the bond market is not necessarily detrimental for banks as they can lower their outstanding loans and as such reduce their risk-weighted assets and capital costs.

Towards a Recovery in Companies' Top Line

Margins in 2016 increased on average versus 2015, especially in the more cyclical industries, while the situation in the food and retail sectors was more mixed amid unchanged structural changes. While overall margins are above the five-year average, the Credit Suisse analysts see further upside potential in the near term, particularly in cyclical industries that benefit from high operating leverage and rising order books. Having struggled in recent years with declining order intakes due to low global capital spending and the strong Swiss franc, and therefore having focused on reducing capacity or shifting it abroad to support operating efficiency, indicators now point towards a recovery in companies' top line as well.

Risk of Higher Shareholder Remuneration Remains Unchanged

The Credit Suisse analysts believe that it is too early to call for a general recovery across companies in their capital goods coverage. At first sight, the high operating leverage would definitely benefit cash flow generation and credit metrics, but the Credit Suisse analysts have also seen an increase in shareholder-friendly policies in the sector, which could potentially counter this positive development.

Higher dividends and share buybacks remain a concern in other sectors as well, particularly given the presence of shareholder activists whose objectives are typically not aligned to those of bondholders. In 2016, share buybacks among the companies in the coverage of the Swiss Credit Handbook amounted to CHF 1.7 bn, a hefty decline versus 2015 as Nestlé and Novartis were not as active. However, the level is expected to increase again materially in 2017, even excluding the new buyback programs by these two companies.

The Swiss Credit Handbook is available upon request.