Crisis? What crisis? Swiss corporate finance has prospered through the pandemic.
Switzerland is reasserting its reputation as a stable and resilient economy in times of turbulence. While markets elsewhere are concerned about overleveraged companies and ballooning public debt, credit and capital markets in Switzerland appear to be quietly ticking along with the reliability of a proverbial Swiss watch.
It is not for nothing that the country and its currency are considered among the safest of havens. After the Alpine republic and its internationally oriented companies weathered the 2008 global financial crisis, the Swiss National Bank (SNB) tackled the relentless appreciation of the Swiss franc by massively intervening in the currency market, opening Switzerland to accusations of currency manipulation.
But it worked. The SNB’s efforts stemmed the franc’s rise, protecting Swiss companies’ competitiveness and creating favorable funding conditions in the country. Corporate bond spreads hardly budged throughout the financial crisis, a stark contrast to the adverse environment CFOs faced in the eurozone and the US.
When the Covid-19 pandemic hit last year, the funding environment for Swiss companies once again remained stable.
Two fundamental factors explain the resilience of Swiss corporate finance: One is the relatively low leverage of many Swiss companies. Even among exchange-listed Swiss companies, family ownership dominates, preserving a corporate culture with limited appetite for risk.
“Executives act as if they run their own private companies and prefer to focus on operations, not finance,” says Rolf Bachmann, a senior investment banker in Switzerland. “Strong balance sheets afford Swiss treasurers more breathing space in tough times like today.”
The second important factor boosting resilience is the country’s traditional “house-bank” system. Typically, Swiss banks have known their clients’ business and management team for years and stand ready to lend when the economic environment becomes uncertain. Add Swiss banks’ robust ability to provide stable funding options for companies, and the country would appear to be in a strong position to recover from the Covid-19 related economic crisis. According to S&P Global, the Swiss banking sector is less exposed to economic and industry risks than any other banking system globally, although still vulnerable to disruption from big tech and challenger banks.
While company finances have weathered the downturn well to date, pressure is mounting in some vulnerable sectors, such as fashion, retail, automotive supplies and hospitality. Generous federal loan support and a suspension of insolvency rules have kept bankruptcies and nonperforming loans at levels below the pre-crisis years. The central government assumed the default risk and the SNB provided banks with liquidity through a new refinancing facility at close to the central bank’s policy rate of -75 basis points.
Once that support is withdrawn, the specter of delayed bankruptcies will rise. Additionally, the flip side of the time-honored house-bank system is that Switzerland has a relatively small debt capital market relative to the high level of sophistication of the Swiss economy and financial sector. Thomas Rühl, head of sector analysis at the Swiss Bankers Association (SBA), calls this a “lost opportunity.”
For many years before the pandemic, corporate treasuries were not tapping the domestic capital market like they could. Last year, however, saw record issuance of corporate bonds in Swiss francs, spread across all sectors and with strong activity from both domestic and foreign companies. This was due to spiking liquidity needs when the pandemic wiped out much economic activity.
Higher issuance was also driven by corporates’ desire to reassure themselves and investors that their market access remained unimpeded even under extreme economic stress, argues Marco Superina, head of M&A Switzerland at Credit Suisse. “As liquidity needs and worries about market access have receded now, issuance has reverted to its customary pace,” he says.
Unlike companies in the eurozone, domestic issuers in Switzerland are not directly benefitting from the SNB’s quantitative easing. The central bank has expanded its balance sheet relative to the size of the economy more than any other leading monetary authority, but its chief focus is containing pressure from currency appreciation.
This doesn’t help Swiss companies much. Funding rates for corporate issuance in Swiss francs have not compressed further as a consequence of quantitative easing. On the other hand, the SNB’s focus on buying foreign currency under its asset-purchasing programs also suggests there will be no yield backlash for Swiss corporates once central banks taper off and eventually cease quantitative easing.
Given stubbornly high funding rates, some of the larger Swiss companies have long been tapping markets abroad.
“We regularly seek funding in alternative currencies to the Swiss franc,” says Rodolfo Savitzky, CFO of Lonza, a Basel-based pharmaceuticals and biotech company. “We are attracted to funding abroad by the lower cost of funding and the larger issuance size. For instance, issuances in the eurobond market can provide substantially higher volume than locally in the Swiss-franc market. Other markets may also allow for longer tenors, providing a better fit for the desired debt maturity profile.”
Switzerland’s corporate tax regime is another hindrance. “Special and unfavorably designed taxes on bonds make bond financing less attractive compared to other solutions, such as private debt,” says Rühl. Swiss lawmakers are expected to deliberate on changes to those taxes soon. Should they follow through, they could potentially shake up Swiss capital markets by making corporate bond issues more attractive.
M&A Rebound Expected
Another byproduct of the withdrawal of federal loan support and central-bank monetary support could be a rebound in mergers and acquisitions, given the possibility that corporate bankruptcies will rise. M&A activity in Switzerland was initially subdued during 2020, at less than half the previous year’s level, according to the Institute for Mergers, Acquisitions and Alliances.
Credit Suisse’s Superina argues that this was due only in part to the pandemic; the structure of the Swiss economy also contributed. Switzerland’s comparative advantage lies in industrials, finance and health care, he says, sectors where global M&A deals were treading water last year. In addition, the negative interest rate environment in Switzerland has led to high company valuations that may have deterred some deals.
Having safely steered their companies through the tumultuous start of the pandemic, Bachmann says CEOs may now want to solve “old problems” under the cover of Covid-19, meaning that most companies engaging in M&A activity will undertake transactions that help them concentrate on their core strengths.
Lonza, which recently divested its specialty ingredients business, has historically operated through two distinct business segments: pharma, biotech and nutrition on the health care side and specialty ingredients on the other.
“These two businesses are exposed to different end markets and have different priorities and financial profiles,” says Savitzky. “The sale of the specialty ingredients business will allow Lonza to focus on driving profitable growth in the core pharma and biotech business.”
Similarly, acquiring companies are looking for bolt-on investments close to their core operations; companies purposefully diversifying their product offerings are the exception, says Superina.
That, together with the prospect of tax reform and the resilience of the house-bank system, suggests that the Swiss corporate finance sector is well placed to continue to thrive once the environment normalizes.