Swiss franc bonds take centre stage

The end of Quantitative Easing (QE), the exit from the COVID-19 pandemic and ongoing geopolitical jitters have resulted in inflation escalating to higher levels in the US, the Eurozone, and across major developed markets. While this has translated into concerted central bank action on interest rates in major developed markets, Switzerland’s low-inflation economy and strong currency have contained domestic inflationary pressures. The result has been a divergence of speed in monetary policy hiking between the Federal Reserve (FED), European Central Bank (ECB) and the Swiss National Bank (SNB). To put this into context, SNB has cumulatively raised 250bps, compared to the 400bps from the ECB or even higher (500bps) from the Fed. Nevertheless, recent quarters’ catch-up in interest rate hikes and increasingly hawkish tone by SNB Governor Thomas Jordan, have opened up opportunities.

According to Fred Zorzi, Global Head of Primary Markets, “BNP Paribas Global Markets has maintained a commitment to the Swiss franc market for many years given our belief that clients require consistency and support. This strategy has been rewarded as our ability to advise clients and provide financing packages enabled us to gain significant market share as we positioned ourselves at the forefront of the Swiss franc revival. Investors and issuers have looked to BNP Paribas to play a larger role in the market going forward. The professionalism and expertise of our experienced colleagues across legal, trading, sales, syndicate and DCM has helped clients navigate their return to the market and we look forward to developing our franchise further in the coming months.”

All of the above has created a favourable environment for issuers and investors, leading to a strong rally in credit spreads. While the two most frequent domestic covered bond issuers funded at around SARON MS+8 to 9bps in January, the latest issues by these same names priced at much tighter levels, around SARON MS-7bps. This, combined with the more attractive cross currency basis to major currencies, has brought CHF funding within issuers target levels, and allowed the return to CHF funding not only for cost-savings, but also for strategic purposes. Primary issuance has been strong at CHF44.1 billion year-to-date, +13.1% year-on-year, with BNP Paribas Suisse taking a lead. According to Jamie Stirling, Head of SSA, BNP Paribas, “Since the Global Financial Crisis with yields so deeply negative, the market for sovereign, supranational, agency (SSA) in CHF all but disappeared. However the recent normalisation of rates has generated demand from investors with large line capacity given the lack of issuance, aligning with strong issuer willing given their opportunity to diversify their investor base at attractive funding levels.”

In a strategic transaction for the Province of Québec, BNP Paribas jointly led a CHF 10-year benchmark bond transaction in mid-April. A combination of rarity value, due to the low supply of foreign SSA bonds, higher yields in SARON, and name-specific factors such as Québec’s L1 status as a High Quality Liquid Assets (HQLA), translated into strong demand from investors and a tight spread. The transaction is the second from Québec in the Swiss franc market in the last nine years, and a strong testament to its solid, multi-currency investor base, providing flexibility and diversification. The issuance was the largest for Québec in CHF since 2006 and the largest foreign SSA transaction since 2017.

Observing the tightening of spreads in the market, the Nordic Investment Bank returned to the CHF market at the beginning of June for the first time since 2009, raising CHF150 million at a very attractive 24bps below SARON mid-swaps, which translated into the tightest print on a spread basis until EIB’s new issuance. BNP Paribas acted as sole Bookrunner.

According to Eliya Grinman, Fixed Income Syndicate Manager, BNP Paribas Suisse SA, “It has been a very interesting first half in the Swiss franc market as we were able to witness a surge in primary market activity including a fair amount of long awaited international supply. The strong market backdrop of the past months has enabled us to bring several international issuers back to the Swiss franc market centre stage, allowing them to achieve excellent outcomes in terms of both size and price.”

Nestlé S.A. raised CHF1.15 billion via a triple-tranche 6-year, 10-year and 15-year transaction. The quality of the order book was exceptionally high and underlines the current investor appetite for long-term debt especially for high quality names. BNP Paribas acted as Joint Lead Bookrunner on this highly successful transaction.

Toyota Motor Finance (Netherlands) B.V. issued its first public CHF bond under this entity. The CHF500 million deal size represents the largest non-domestic single-tranche offering in the CHF corporate primary market since 2018. The issuance was very well received by the broadest Swiss investor base, enabling Toyota to set the spread at SARON MS+40bps – a level highly attractive versus other currencies.