Swiss Credit Handbook 2016 Fresh Off The Press
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Swiss Credit Handbook 2016 Fresh Off The Press

Benign credit environment not without risks as low rates enable higher indebtedness, acquisitions and a rising shareholder focus.

The Risk Pendulum Could Be About To Swing

Against the backdrop of mixed economic growth, Swiss corporates under our coverage have by and large been able to grow revenues thanks to higher volumes and better prices, and occasionally acquisitions, counterbalanced by the strong Swiss franc. With cost savings and efficiency programs, 50 percent of covered issuers improved margins in FY 2015, while the other half reported a drop. This drop in margins was more significant than the increases. It has mainly been supported by cost-saving initiatives rather than underlying growth, in our view, indicating that the risk pendulum might be about to swing the other way in the absence of profitable growth. Nevertheless, FY 2015 profit margins were still high historically, outperforming the 7-year average reading. Weaker margins were mainly reported by capital goods and building materials company ies and those suffering most from the strong Swiss franc.

Benign Credit Environment Not Without Risks

Operating cash flows remained relatively stable as working capital efficiencies balanced lower profitability for 50 percent of covered issuers in FY 2015. Capital expenditure across our coverage was slightly higher YoY when excluding outlier Glencore, which cut capex markedly following the drop in commodity prices.

At the same time, dividends rose or were maintained, and there was a substantial increase in share buybacks in our coverage, eating into available internal cash. To fund the gap, issuers often took advantage of the current very attractive refinancing conditions, central bank support for the fixed income asset classes and good access to capital markets within the investment grade universe. The generally very solid liquidity (cash on hand and unused credit lines) of companies under our coverage in FY 2015 cushions high cash outflows to some extent as seen in the Stable outlook for around 80 percent of covered issuers (90 percent excluding Swiss utilities). As we expect shareholder focus and acquisitive growth to continue, only three corporate credit ratings carry a Positive outlook.

Persisting Challenges For Utilities Drive Negative Rating Trend

Since the release of our last handbook in August 2015, there have been nine rating downgrades and one upgrade in line with our expectations. The utility sector again accounted for seven downgrades as the market challenges for electric utilities persist. Axpo was downgraded in December 2015 and Repower in April 2016, following weak FY 2015 results. This triggered rating actions for five partner plants in line with our rating methodology (KBG, KKW Gösgen-Däniken, Kraftwerke Hinterrhein, Kraftwerke Linth-Limmern, and Kraftwerke Sarganserland). We have maintained a Negative rating outlook for Axpo, implying further rating downside potential. Repower's rating outlook is Stable on account of a capital increase restoring Repower's credit metrics to levels on par with requirements for an investment grade rating. A potential upgrade would be triggered by the successful execution of Repower's strategy, the successful disposal of various assets, and the stabilization of the operating result.

Corporate Sector Ratings Largely Unchanged

There have been two corporate issuer rating downgrades since the last handbook. Sulzer's was due to a planned fully debt-financed acquisition, a special dividend and Sulzer's exposure to the oil & gas sector that is impacted by weaker commodity prices. Aryzta was downgraded to sub-investment grade due to continued acquisitive growth and substantially weaker credit metrics. The outlook remains Negative given the high shareholder focus, integration risks and operating challenges. We also revised a number of rating outlooks indicating potential rating actions. Clariant was moved from Stable to Negative given sustained weak cash flows and credit metrics. Flughafen Zurich was moved from Stable to Negative on account of planned re-leveraging and high shareholder payments. We changed the rating outlook for Valora from Negative to Stable given slightly improving credit metrics as the new strategy gains traction. Geberit's rating outlook was moved from Stable to Positive for the solid business profile and continued deleveraging.

High Credit Quality Of Public Sector Persists

With one upgrade and one downgrade the sector's credit quality remains high. We upgraded the rating of the Canton of Glarus backed by solid FY 2015 results, but downgraded the rating of the Canton of Basel-Landschaft given weak self-financing ratios and the balance sheet deficit due to the 2014 recapitalization of the pension fund. We changed the rating outlook for the Canton of Uri from Stable to Positive as the self-financing ratio has exceeded 100 percent for three consecutive years. The rating outlook for the Canton of Solothurn was moved from Stable to Negative after many years of negative self-financing ratios and a weaker balance sheet due to the recapitalization of the pension fund.