Credit Suisse «Swiss Credit Handbook» - Swiss capital market: Benign credit environment not without risks Dienstag, 23. August 2016 - 11:05
• The Swiss Credit Handbook published today features credit assessments of the most important Swiss issuers and participants in the Swiss-franc capital market. Compiled by Credit Suisse Global Credit Research analysts the report covers Swiss corporates, utilities, partner plants, cantons and cities, as well as an overview of the industry sectors, many of which are not rated by international credit rating agencies.
• Against the backdrop of mixed global economic growth, Swiss issuers have generally performed well since the last edition of the annual handbook, despite the strong Swiss franc limiting local currency revenue growth. 50% of the issuers covered in the handbook improved margins in FY 2015,the other half reported a drop.
• The drop in margins was more significant than the increases which were mainly supported by cost-saving initiatives rather than underlying growth. This indicates that the risk pendulum could be about to swing back the other way.
• At the same time, dividends rose or were maintained, and there was a substantial increase in share buybacks among the companies covered, eating into available internal cash. To fund this gap, issuers have often taken advantage of attractive funding conditions. The largely solid liquidity of Swiss issuers has cushioned this to some extent (80% of issuer ratings have a Stable rating outlook, 90% excluding Swiss utilities), although downgrades cannot be ruled out if this trend persists.
• There have been nine rating downgrades since the last edition of the handbook. Utilities and partner plants account for seven of them due to the challenging market conditions. Ratings in the corporate and the public sector have for the most part been stable.
This year's edition of the Swiss Credit Handbook includes
108 issuers (corporates, utilities, cantons and cities), covered by
Credit Suisse Global Credit Research analysts. Many of these issuers are
not rated by international credit rating agencies. To set the scene for
the issuer credit profiles, the Swiss Credit Handbook also provides
peer overviews and an outlook for banking, building materials, capital
goods, chemicals, food, healthcare, insurance, public, real estate,
retail and utility sectors.
The risk pendulum could be about to swing
Looking back on 2015, the global economy grew by 3.2%, led by China
and India with 6.9% and 7.3% gross domestic product (GDP) growth,
respectively, and with notable divergences across the world. Against
this backdrop, Swiss corporates under our coverage were by and large
able to grow revenues thanks to higher volumes and better prices, in
various cases also fueled by acquisitions. That said, the strong Swiss
franc has again offset local currency revenue growth for many companies.
Despite cost savings and efficiency programs, only half of the companies
were able to improve margins in FY 2015, while the other half reported a
drop. Not only were drops in margins more significant than increases,
we also believe that the increases were also mainly supported by
cost-saving initiatives rather than underlying growth. We thus believe
the risk pendulum could be about to swing back the other way as lower
profitability will be reflected in cash and credit metrics.
Nevertheless, FY 2015 margins still outperformed the 7-year average
reading, illustrating that profit margins still remain high
historically. Also, weaker margins were mainly generated by capital
goods and building materials companies, and/or those suffering most from
the strong Swiss franc and European competition.
Benign credit environment not without risks
While funds from operations reflected lower profitability for 50%
of the companies in our coverage in FY 2015, operating cash flow
remained relatively stable thanks to working capital efficiencies.
Capital expenditure across our coverage was actually slightly higher
when excluding outlier Glencore, which cut capex markedly following the
drop in commodity prices.
On top of slightly weaker free cash flows, dividends rose or were
stable. In addition, share buybacks increased substantially across our
coverage, totaling CHF 13.7 bn, and representing a 60% increase YoY and
429% versus FY 2013. That said, these high shareholder payments are
supported by currently very attractive refinancing conditions and
central bank support for the fixed income asset classes, offering good
access to capital markets within the investment grade universe. Hence
some corporates might even take a rating downgrade into consideration
when initiating share buybacks and/or acquisitions while refinancing
conditions remain attractive.
Overall, Swiss corporates continued to enjoy very solid liquidity with
available cash on hand and unused credit lines in FY 2015. The Stable
outlook for around 80% of the companies we cover (90% excluding Swiss
utilities) reflects this. Currently, only three corporate ratings carry a
Positive outlook, underpinning our view that shareholder focus and
acquisitive growth will continue.
Persisting challenges for utilities drive negative rating trend
Credit ratings in our coverage have deteriorated somewhat in line
with our expectations. This was mainly due to the ongoing challenging
situation for electric utilities. Since we released our last handbook in
August 2015, there have been nine rating downgrades and only one
upgrade.
Within corporates, the utility sector again accounted for the lion's
share of rating downgrades. Axpo was downgraded in December 2015 and
Repower in April 2016 following weak FY 2015 results. While the rating
outlook for Axpo remained Negative after the downgrade (which implies
potential further negative rating changes), Repower convinced investors
by means of a capital increase, bringing in two new anchor shareholders
and restoring the company's financial metrics to levels that would be in
line with an investment grade rating. A successful execution of
Repower's strategy, the disposal of various assets and businesses
without weakening the current balance sheet metrics, and a stabilization
of its operating result would trigger an upgrade to investment grade.
With the downgrade of Axpo and Repower's rating, we have also revised
the credit rating of five partner plants in line with our rating
methodology for partner plants, namely KBG, KKW Gösgen-Däniken,
Kraftwerke Hinterrhein, Kraftwerke Linth-Limmern, and Kraftwerke
Sarganserland.
Corporate sector ratings largely unchanged
We downgraded Sulzer's rating after the announcement of a fully
debt-financed acquisition. Also, the company announced a special
dividend with its full-year results in March. We highlight that Sulzer
has a significant exposure to the oil & gas sector, which has
suffered from weaker commodity prices. We have downgraded Aryzta to
sub-investment grade due to its continued acquisition-driven growth and
substantially weaker credit metrics. The outlook remains Negative as a
result of the company's continued high shareholder focus combined with
integration risk and operating challenges in the current environment. We
have changed the outlook for Clariant from Stable to Negative following
the publication of the company's FY 2015 results. The revision is due
to the continuing weak cash flow performance and resulting lack of
progress in strengthening credit metrics, which we had been expecting.
We have also changed the outlook from Stable to Negative for Flughafen
Zurich, as it aims to re-leverage its balance sheet (to 3x net
debt/EBITDA versus 1.1x currently), including high shareholder payments
and potentially numerous mergers and acquisitions. In contrast, we have
changed the outlook for Valora from Negative to Stable as the company's
new strategy promises positive results (reflected in slightly improving
credit metrics with the FY 2015 and H1 2016 results). The rating outlook
for Geberit has been revised from Stable to Positive due to its solid
business profile and continued progress in deleveraging its balance
sheet.
High credit quality of public sector persists
The Swiss public sector's overall Stable rating trend reflects the
high quality of the sector. We have upgraded the rating of the Canton of
Glarus as the canton presented another solid set of FY 2015 results,
including a net cash position. The rating of the Canton of
Basel-Landschaft has been downgraded by one notch following another
challenging financial year. Although the canton was able to limit excess
expenditures to some extent in 2015, self-financing ratios remained
weak and the balance sheet deficit remained after the recapitalization
of the pension fund in 2014. We have changed the rating outlook for the
Canton of Uri from Stable to Positive. While the rating is somewhat
constrained by the canton's locational quality, Uri again presented
strong financial results last year. For three consecutive years, the
canton has achieved a self-financing ratio of clearly above 100%. We
have maintained our High AA rating for the Canton of Solothurn, but
moved the rating outlook from Stable to Negative. Following many years
of negative self-financing ratios, the canton's balance sheet weakened
further last year following the recapitalization of the cantonal pension
fund.
About the Swiss Credit Handbook
The Credit Suisse Swiss Credit Handbook has provided an overview of
the credit quality of key Swiss issuers in the Swiss franc capital
market for more than 15 years, thus contributing substantially to
investment decision-making in the Swiss economy. Its goal is to shed
light on the credit quality of Swiss issuers in the Swiss franc capital
market. The study examines the creditworthiness of the largest Swiss
bond issuers and main participants in the capital market through a
structured assessment. The authors have included all entities under
coverage (59 companies, 17 partner plants, 26 cantons and 6 cities),
including a wide range of borrowers that are not covered by the
international credit rating agencies. Applying the various credit
methodologies, which are included in this publication, the authors
assess each issuer's credit profile and assign the resulting credit
rating as well as a rating outlook. The Swiss Credit Handbook is thus
aimed at all investors and financial market participants seeking
detailed information about the current development and creditworthiness
of Swiss capital market borrowers.
Swiss Credit Handbook 2016 - Benign credit environment not without risks
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