Swiss Enjoy Best Funding Advantage for Six MonthsPatrick Winters and Katie Linsell
Swiss companies are recovering their competitiveness with the euro region as the central bank succeeds in capping the franc and they enjoy the biggest advantage for six months in credit markets.
Investors demand almost a full percentage point less in average yield to own franc-denominated corporate bonds rather than euro securities, approaching the biggest discount since February, according to Bloomberg bond indexes. The gap, which shrank to 0.56 percentage point in May, is widening as franc bond yields at 1.1 percent drop faster than those of euro notes.
Favorable credit markets are helping Swiss companies from Georg Fischer AG to Lonza Group AG absorb the cost of Europe’s highest paid workforce and compete with cheaper neighbors almost two years after the central bank capped the franc’s appreciation to try to shield the nation from recession. Corporate earnings, which plunged as currency gains pared income from exports, increased an average 47 percent in the first half of 2013 from the same period last year, according to data compiled by Bloomberg on the nation’s 30 biggest listed companies.
“The current market environment is principally favorable towards debt instruments in Swiss francs,” said Toralf Haag, chief financial officer of Lonza, a Swiss drug-additive maker. “The cap on the franc-euro is certainly a help and allows at least for solid planning.”
The yield on Swiss franc bonds fell 0.18 percentage point since reaching a one-year high on June 24, to 1.07 percent, compared with a 0.13 percentage-point decrease on euro bonds in the same period to 2 percent, Bloomberg index data show. The gap between the rates is moving back to its average, with the spread during the past three years at 1.5 percentage points, the data show.
The Swiss National Bank capped the franc at 1.20 per euro in September 2011 to protect exporters after investors pushed the currency toward parity with its 17-nation counterpart as they sought the safest assets during Europe’s sovereign-debt crisis. Switzerland’s average monthly wage was Europe’s highest at $7,765.5 in 2011, according to data compiled by the United Nations.
“The Swiss franc market looks very attractive for domestic issuers and companies with operations in Switzerland that don’t need to use currency swaps,” said Andreas Tocchio, a syndicate officer for Swiss franc corporate bonds at UBS Investment Bank in Zurich.
Georg Fischer, a Swiss maker of metal castings for Audi AG and BMW AG cars, sold 300 million francs ($323 million) of bonds due in 2018 and 2022 this month, according to data compiled by Bloomberg. The five-year notes were priced with a coupon of 1.5 percent, a record low for the company, while the nine-year bonds had a coupon of 2.5 percent, the data show.
Georg Fischer cut overtime, vacation days and the number of part-time employees at the European plants of its automotive division last year, company spokesman Beat Roemer said at the time.
“The terms are really quite low,” Roland Abt, chief financial officer of Georg Fischer, said in a telephone interview after the sale. “We wanted to take advantage of that.”
Lonza Group eliminated 400 jobs out of 2,890 at its complex in Visp, Switzerland last year, the deepest job cuts in its 115-year history. The Basel-based company sold 300 million francs of bonds at a record low coupon of 1.75 percent in March, which it used to help refinance debt from its $1.35 billion takeover of U.S. water-additives maker Arch Chemicals in 2011, Lonza Chief Financial Officer Toralf Haag said in an e-mailed response to questions.
“The appreciation of the Swiss franc since 2010 has hurt some Swiss companies,” said Zoso Davies, a credit strategist at Barclays Plc in London. “Lower yields on Swiss corporate bonds can help to offset that pain.”
The yield on benchmark 10-year German government bonds climbed 76 basis points since April 30 to 1.98 percent on Aug. 23, the highest since March 2012, amid concern the Federal Reserve will slow stimulus. The rate on 10-year Swiss government bonds rose 61 basis points to 1.18 percent on Aug. 23, according to Bloomberg data.
The Fed will probably begin to reduce its monthly purchases of Treasuries at its meeting next month as the economy improves, according to 65 percent of economists in an Aug. 9-13 Bloomberg News survey. Investors are watching economic data to see if it warrants the withdrawal of stimulus that will trigger a rise in borrowing costs. Still, orders for durable goods in the U.S. dropped by the most in almost a year in July and purchases of new homes dropped.
Government bonds are driving the difference between yields of Swiss company debt and their European counterparts, Euan McNeil, co-manager of the Kames Investment Grade Global Bond Fund, based in Edinburgh, said by e-mail.
“A combination of stronger global data, combined with a growing belief that the Federal Reserve will taper its quantitative easing program have acted to shift bund yields higher,” he said. “The inevitable consequence is that companies who borrow in euros have seen a similar increase in their borrowing costs.”
Swiss companies from Bell AG, a sausage distributor, to Credit Suisse AG, the country’s second-biggest bank, sold 23.2 billion francs of bonds this year, compared with 24.9 billion francs in the same period of 2012, according to Bloomberg data. That’s compared with an average of 15.6 billion francs of issuance in the same period for the five previous years.
“Domestic companies have increased their activity in the capital markets knowing there’s appetite,” said Denis Vucina, head of the Swiss franc bond syndicate at Deutsche Bank AG in Zurich. “For the rest of the year, we expect to see two or three Swiss domestic corporates tapping the market per month.”