Swiss SMEs maintain rock-solid capital structures

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The FINANCIAL — The Swiss Credit Handbook 2018 contains 98 issuers (55 companies, 11 partner plants, 26 cantons, and six cities), 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. Compared to the 2017 edition of the handbook, the coverage on six partner plants was discontinued and four corporate issuers were added. 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.

Overall, ratings in the coverage have remained fairly stable since the last handbook was published in September 2017, reflecting the still relatively benign credit environment. Indeed, Credit Suisse analysts upgraded three issuers and downgraded none. Nevertheless, they retain negative outlooks on four issuers versus only one positive rating outlook. Credit quality in the public sector remains strong overall as can be seen in the high average rating.

Significant rise in global debt….

Global debt has continued to rise not least due to the prolonged period of low interest rates. Many companies have rethought their capital structures, yielding to persistent shareholder pressure to use debt for generous shareholder payments or mergers & acquisitions. Rated corporate debt rose by 9% to USD 19 tn in 2017 according to Standard & Poor’s (S&P). Among corporates, 37% were classified as highly indebted in 2017, up 5 percentage points since 2007. In itself, this is not yet alarming as profitability generally improved, leaving debt servicing capacity largely intact. The low-interest rate environment fosters this – the flip side is that a rise in rates bears considerable risks to debt service capacity.

Rating distribution is already beginning to reflect the burden of higher debt. While only 25% of the total value of bonds issued by the companies in the S&P 500 index were rated BBB in 2007, this share had doubled to 50% by mid-2018. With low rates, the stake that issuers set by a high rating appears to be diminishing as there is little pricing advantage. In the coverage by the Swiss Institutional Credit Research team, Novartis and Nestlé have lowered their commitment to a high rating.

…but Swiss SMEs are resisting the siren call of cheap debt

At first sight, it would appear that Swiss companies in the coverage of the Swiss Institutional Credit Research team are following a similar path. Gross debt across the corporate coverage has risen by 15.7% over the past five years to CHF 171 bn, and net debt has risen even further, by 21% (to CHF 115 bn). As EBITDA has also grown, the aggregate reported net debt/EBITDA remained low at 1.05x (up 0.35x). Credit Suisse analysts observe, however, that most of the additional debt was raised by the five largest companies in the coverage (ABB, LafargeHolcim, Nestlé, Novartis, and Roche). Higher debt focus sectors include Real Estate and Hospital/Public. The risk is partially dimmed by higher property portfolio values and the implied cantonal support.

While credit metrics for larger caps in the coverage tend to be stronger than those of SMEs, the latter withstood the call of the debt siren. This supports the well-known reputation of Swiss SMEs for maintaining rock-solid capital structures. Thus, investors in bonds issued by Swiss companies have less to worry about than in other developed markets, underpinned by the very low default rate in the Swiss capital market.

New issuers remain in the focus

Since the last edition of the handbook, Credit Suisse analysts have added three first-time issuers and re-initiated coverage on Schindler, which returned to the market with the issuance of two bonds (CHF 100 mn and CHF 400 mn) in early May 2018. Aéroport International de Genève issued its inaugural CHF 175 mn bond in October 2017. Its Low A rating is boosted by two notches through its cantonal ownership. In December 2017, AMAG Leasing AG issued two bonds (CHF 300 mn and CHF 170 mn) with the issuer rating set at Mid BBB. In May 2018, MCH Group tapped the capital market with a bond of CHF 100 mn. The issuer has a Low BBB rating with a Negative outlook, however, following the sudden and unexpected exit of Swatch Group from the Baselworld fair.

Overall new bond issuance is recovering after several lean years

Issuance in the aggregate CHF segment stabilized at CHF 51.6 bn, with the domestic segment retaining a 70% share in overall issuance in 2017. Most of the growth in issuance stemmed from financials (excluding cantonal banks), offsetting the decline in domestic Pfandbriefe (25% of issuance). The growth trend persisted in the first half of 2018, strongly driven by corporates and financials. Issuance volumes in the foreign bond segment rebounded after years of decline as there is a rekindled interest in international issuers. This was mainly supported by the gradual decline in hedging costs for foreign issuers, as measured by the cross-currency basis swaps. The share of international issuance rose to around 40% of CHF issuance in H1 2018.

The Swiss Institutional Credit Research team believes that the growth trend in the foreign segment will persist as more foreign issuers are likely to consider a CHF bond issue if interest rates further increase in other regions. The domestic market is expected to benefit from issuance for refinancing and new issuers seeking diversification of funding structures. Such first-time issuers are likely to be smaller issuers or hospitals, as new development and renovation projects entail material financing needs.


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