SWITZERLAND
A EUROMONEY SURVEY - MARCH 1996
The Swiss financial market
Published estimates of the total funds under management in Switzerland are in excess of Swfr2,500 billion. It has been further estimated that these funds generate an annual cash flow, in the form of dividends and interest, of between Swfr70 billion and Swfr100 billion.
Between 60% and 70% of these funds are believed to be owned by private individuals. While French, Italian and German individuals have traditionally channelled their savings into Switzerland, investors from all over the world are now making good use of the Swiss financial market. The main international fund managers in Europe are the three big Swiss banks, while the numerous Swiss private banks, notably in Geneva, Zurich, Basle and Lugano also manage large funds. In addition, the insurance companies and pension funds are increasingly investing in international bonds and equity related securities.
Because of the large amounts of funds under management and a broad investor base, Swiss banks have become major players in financial centres such as New York, London, Tokyo and Frankfurt. They place debt and equity products in all currencies both in-house and directly to external institutional and/or private investors. In particular, they have special expertise in the underwriting and placement of Swiss franc denominated bond and note issues for domestic and foreign borrowers.
The fixed-income marketForeign issuers in the Swiss franc bond market again led the way in 1995, representing 57% of all issues launched during the year, with a total of 301 transactions and a volume of Swfr33.7 billion. Domestic issuers (including the Swiss government), tapped the market on 187 occasions and for a total of Swfr25.3 billion.
There are two main types of instruments in the Swiss fixed-income capital market: publicly-listed bonds and unlisted notes. Bonds and notes differ primarily in denomination, maturity and the fact that the latter are not listed. Notes are not genuine private placements, although they are sometimes still called so.
An ever increasing number of international borrowers have put medium term note programmes (MTNs), or Euro-medium term note programmes (EMTNs), in place over recent years. While one-to-one transactions (ie one borrower, one investor) have been frequently issued under MTN programmes involving Swiss francs, the issuing of Swiss franc denominated public bonds under an MTN programme still needs to be clarified in the context of the current listing regulations of the Swiss Admission Board. These listing regulations are now being revised with a view to creating a more modern and less restrictive set of rules this year.
Other products common to the Swiss market include convertible bonds, which are very popular for issuers from the Far East, traded bond derivatives, OTC options, structured products and bond warrants. The market for warrants on Swiss government bonds is particularly active, as well as other warrants on US, Asian and European bonds, offered to Swiss and foreign clients.
The domestic bond marketIn 1995 the capital market for domestic issuers was again dominated by the strong presence of the public sector. The Swiss cantons and municipalities were more active than in the preceding year and convertibles and bonds with warrants launched by large corporates met with an excellent reception. However, the tax burden on new issues (stamp duty and withholding tax), has caused many Swiss corporate issuers to borrow in the foreign bond segment (via non-Swiss issuing vehicles). The Swiss treasury estimates the confederation's gross funding requirements for 1996 to be around Swfr5 billion. Swfr3.5 billion of this is still to be issued, and will be distributed over five payments during the year. However, in view of the government's substantial liquid reserves, 1996 could mirror 1995, when just 55% of the announced Swfr4.5 billion gross funding requirement was taken up.
The foreign bond marketIn 1995 the Swiss franc was the fourth largest borrowing currency worldwide. The biggest issuers in the Swiss market in 1995 were state agencies (42%), followed by banks (21%), and corporates (19%), normally with an A rating or better. The Swiss market, which is predominantly retail- oriented, is highly receptive for household names.
The Swiss franc has consistently offered the lowest long-term interest rates in the Western hemisphere. Even after netting out Swiss currency appreciation versus weaker currencies, break-even calculations show that in many cases a long-term borrowing in Swiss francs could have been cheaper than borrowing in dollars or in other European currencies. As a consequence, many large borrowers have a substantial part of their foreign debt in Swiss francs. Furthermore, a Swiss franc issue can often generate cheaper funds through a currency swap than a financing operation done directly in the desired currency. The name of a specific issuer often gets a better reception in Switzerland than in the country of the target currency. Therefore, lower cost of funding is possible through a hedged Swiss franc issue.
The many types of investors in the Swiss market, ranging from individuals to large institutions, allow for a broad spectrum of borrowers. As Switzerland is a typical retail market, investors' preferences are often different to those in the Eurobond market, where institutional investors are dominant. In 1995, the bulk of issuers were from Germany (20%), Japan (17%) and Austria (14%). As a comparison, in 1993 Japanese borrowers represented 35% of all new issues, while the Austrians and Scandinavians each had an 11% share.
Underwriting, listing & trading
The placement of a bond issue is usually made by a bank or a group of banks underwriting the securities on a firm basis. Transactions launched on a best-effort basis are rare. For monetary policy and supervision purposes, the Swiss National Bank has adhered to the rule that only a bank whose domicile is Switzerland, regardless of whether it is under Swiss or foreign control, is eligible as lead-manager in the Swiss franc primary market. This rule has ensured that no Euro-Swiss franc bond market has been created outside Switzerland. However, since April 1 1993, the other syndicate members in a Swiss franc issue by an international borrower are no longer required to be based in Switzerland. In addition, the Swiss stamp tax on new issues by foreign borrowers in Switzerland was lifted on the same date.
Listing on the stock exchange of Zurich and, in some cases, in Basle and Geneva, is usual for public bond issues. The listing procedure is straightforward and is handled by the lead-manager.
Investors in Switzerland can make use of a highly developed infrastructure and a large number of secondary market specialists. Switzerland currently has three stock exchanges, of which the Zurich stock exchange is by far the largest. The full introduction of the electronic exchange trading system (Elektronische Börse Schweiz, or EBS), currently taking place, marks an important change for Swiss and international market participants. Once fully implemented, EBS will enable continuous trading of all products and, most importantly, will lead to an increase in trading liquidity by merging the current regional stock exchanges into one electronic exchange.
In line with foreign derivatives markets, the Swiss market has developed rapidly in recent years. The Swiss Options and Financial Futures Exchange (SOFFEX), the first fully electronic derivatives market in the world, started trading in 1988. At a later stage, the trading division of SOFFEX will be integrated into the new electronic exchange trading system, creating a trading organization with one common technical platform. With the planned introduction of the new Swiss federal exchange law, the previous cantonal exchange laws become obsolete. The supervision over the stock exchange will move over to the federal banking commission when the Swiss federal exchange law becomes effective.
Immediately after the launch of a new issue, bonds may be traded in the primary market. In Switzerland, the primary market is formally defined as the place where securities are traded from the time of launch until one day before the end of the subscription period, ie for about two to three weeks.
The top 15 bonds in turnover are government bonds. These account for 50% of domestic bond market volume and are considered benchmarks on the domestic side. Other highly liquid bonds include the European Investment Bank, the Kingdom of Denmark and the Republic of Austria, all of which are Swfr1 billion issues, and are considered benchmarks for foreign bonds along with the swap curve. Yields are expressed on a 30/360 basis and coupons are computed annually.
Outlook
Prices on the Swfr bond market, as in other markets, rose continually in 1995. The yield on 10-year confederation bonds dropped from over 5.2% to below 4%. One of the main reasons for lower interest rates is weak economic growth. The lower demand for cash, moderate growth in money supply, and low inflation allowed the Swiss National Bank to pursue a considerably more expansive monetary policy in 1995. The discount rate was reduced in four steps from 3.5% to 1.5% - a level not seen since 1979. Money market rates therefore fell even more sharply than capital market rates last year, resulting in a relatively steep yield curve.
In 1995 the Swiss franc gained further strength (trade-weighted, it appreciated by 6%). Against the leading currencies, $, Dm and Yen, it advanced 12%, 4.5% and 7% respectively.
Since spring 1995, GDP growth has dropped dramatically and is currently below its long-term potential of 2%. The deteriorating business climate kept unemployment at an uncharacteristically high 4% and increased fears of further job losses. Because of stagnating real disposable income and cautious government spending, the best scenario to be expected in 1996 is a weak economic recovery. In the current low interest rate environment, investors will probably remain hesitant about committing themselves to long maturities. With a potential for a rate upswing in the second half of the year, the new issues market should be less active than in 1995. However, to some extent the Swiss franc will probably retain its role of safe-haven and diversification currency, and the Swiss bond market will continue to benefit from this.
For more information, please contact:
Peter H. Schmuki,
Fixed-Income Capital Markets Tel: 411 333 7930
Hans-Ruedi Stadler,
Syndication Tel: 41 1 333 6551
Markus Loretz,
Sales Tel: 41 1 335 7513
Uetlibergstrasse 231, CH-8070 Zurich
