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.

“Lost Opportunity”?

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. 

Last summer, a financial scandal threatened to upend the rock-solid foundations of Austrian corporate finance. Authorities discovered that Martin Pucher, CEO of Commerzialbank Mattersburg, a regional bank in an eastern state, had been systematically falsifying the bank’s accounts for more than a decade. Over half the bank’s declared assets were pure fiction, and companies and cooperatives may lose over €100 million ($122 million) in uninsured deposits. Commerzialbank’s fall came after the closure of another significant player, Anglo Austrian AAB Bank, in a flurry of money-laundering allegations.

Banks are the principal source of external funding for Austrian corporates, in line with other EU countries, including Germany. Yet when the dust settled, treasurers could exhale a sigh of relief; funding conditions for corporates in the Alpine nation were not impacted, and lending rates continued their long march to ever-lower levels.

All the work banks had undertaken over the prior decade to improve levels of capitalization, profitability and resilience had paid off, it seemed. “As opposed to the financial crisis in 2008 and 2009, the financial sector is currently part of the solution rather than part of the problem,” says Peter Unger, head of corporate finance solutions at Raiffeisen Bank International (RBI) in Vienna.

Corporates, too, went into this year’s crisis with much stronger balance sheets than in past crises. “Austrian companies, especially the larger ones, really made good use of the favorable funding conditions,” Unger says, and “built up financial cushions to deal with the current liquidity pressures.” Oesterreichische Nationalbank, Austria’s central bank, reports that last March, corporate deposits were twice the size they had reached before the 2008 financial crisis.

Signs of Life

Austria’s investment bankers face another challenge now, however: finding a role in the nation’s recovery from a pandemic-induced economic slump that seems sure to last a solid year before it abates.

Austrian companies get the lion’s share of their external funding via long-term debt, almost exclusively from domestic sources. According to S&P Global, the debt of nonfinancial corporates surpassed 100% of GDP in 2019—far ahead of the 60%-70% range more typical of Austria’s larger euro-area peers.

When the pandemic arrived, short-term corporate loan demand actually surged briefly as companies worried about financing for inventories and working capital. Conditions improved, thanks to an extensive web of government support amounting to as much as 13% of GDP. Much of the stimulus is designed to benefit companies directly. Those most affected by the pandemic will be in tourism, hospitality and the wholesale and retail trade sectors, which are dominated by small to midsized enterprises (SMEs).

“In a year characterized by pandemic-related uncertainties, corporate treasurers in Austria have concentrated their funding on bilateral and syndicated bank loans,” says Hans-Werner Grunow, managing director of corporate finance consultancy Capmarcon. “But bond issuance has also perked up.”

The bond market remains a reliable source of funds for Austrian corporates, however, both small and large. SMEs dominate the corporate landscape and are typically too small to issue tradable debt. Large companies typically look to markets abroad, says Thomas Gehrig, Professor of Finance at the University of Vienna. “Blue chip companies can find more liquidity and a larger investor base abroad, which keeps bond issues in Vienna in short supply,” he says.

Austrian companies are among the most prolific issuers of so-called Schuldscheine, or promissory notes, a form of private debt typically held to maturity and not traded. Unrated smaller companies occupy this market; banks are the most important investors, including, increasingly, foreign institutions.

The economic crisis has put a crimp in this expanding market, however. “After four record years in a row, Schuldscheine issuance will be down by about a quarter in 2020,” says Michael Bures, head of debt capital markets, corporates, at RBI. “Thanks to the unprecedented flooding of the market with liquidity and bond buying by the European Central Bank, many corporates in the investment-grade range find even more attractive funding options in outright bond issuance.”

A Green Wave

Another promising frontier for Austrian corporates and their bankers is sustainable finance. “In approximately two-thirds of our client meetings, we now discuss green finance,” says Bures. “We’re going to clients with the topic, and they are also explicitly demanding it.”

Until last year, Austria was a relative laggard in this field; but that’s changing, says Gehrig. With a doubling of demand for green and ethical investments in 2020, he expects the supply of green bonds to follow suit. “This trend will only gain speed in coming years,” Gehrig says. “Austrian companies are nowhere near exploiting that fast-growing segment, even if Austrian investors have long shown an interest.”

Until 2018, only two private issuers had ventured into the green bond market, a fraction compared to the similarly sized Netherlands. Then in 2019, green and sustainable issuance took off in Austria as conditions emerged for sustainable corporate bonds to outprice their conventional cousins. The government is now preparing a comprehensive Green Finance Agenda, which could give a further boost to this segment.

One place not likely to generate greater corporate finance activity is Austria’s equity market, close observers say. Market valuation is only around 5% of GDP and the ATX equity index remains more than 25% below its all-time early 2018 high, lagging significantly behind other European indexes. Equity finance is not a popular option in Austria, in part due to the primary ownership structure of most companies. SMEs, the so-called Mittelstand, are a mainstay of Austria’s corporate landscape; and they are often family owned. Typically, these companies are too small for liquid rights issuance and their owners can be reluctant to dilute their stakes and shoulder more exacting disclosure obligations.

For this reason, initial public offerings have been few and far between; mergers and acquisitions also have been less than vibrant. In the last three years, only 80 deals have closed, with a median deal value of less than €70 million ($85 million)—and the largest segment was real estate.

For banks and large investors, that leaves the debt market. Even though domestic banks are likely to remain the principal funding source for Austrian corporates, new long-term borrowing may remain subdued, Unger says. As long as pandemic-related uncertainty lingers, he argues, most companies will stick to a wait-and-see approach and hold off on new investments and the corresponding loan funding.

Longer term, the outlook may be brighter. Fixed-income securities markets, including Schuldscheine and green bonds, show growing promise; and banks are eager to lend to reduce their rapidly rising excess liquidity, which weighs down profitability.

“Every company with half-decent prospects will for the foreseeable future have no problem attracting all the funding it needs,” Bures predicts.

To give themselves financial incentives to achieve sustainability targets—and signal to stakeholders that they are serious about reaching those goals—a growing number of companies around the world are taking out sustainability-linked loans to meet their financing needs.

At the end of the third quarter of 2019, sustainability-linked loans totaled $71.3 billion, more than double the $32 billion in deals raised during the same period of 2018, Reuters reports. Europe captured the lead position, with 74% of the environmental, social and governance (ESG) volume through late October 2019. The pace picked up in Asia (14% of the total), followed by the Americas (11%) and Japan (1%). These loans, often used to refinance consortium loans, link preset sustainability targets, such as reduced carbon emissions or expanded levels of diversity on the board of directors, to the financial terms of the loan.

Companies may favor these ESG-linked loans over green bonds because the loan proceeds can be used more flexibly; green bonds must be used for a particular project that has a positive environmental or climate impact. ESG instruments can also lead to lower financing costs if companies meet their targets, which can then raise the ESG ratings from external agencies. Increasingly, sustainability is perceived as a material threshold in company financial statements, not only by regulators and investors, but also by the companies themselves.

Karsten Löffler, who leads the Frankfurt School-UNEP Collaborating Centre for Climate & Sustainable Energy Finance, says that using the loans only makes sense if a company has a broader commitment. “Sustainability linked loans are a step in the right direction to linking long-term goals to real changes in business models and business strategy,” he says. The center is a venture of the Frankfurt School of Finance and Management and the United Nations Environment Program.

In March 2019, representatives from leading financial institutions active in the global syndicated loan markets launched the Sustainability Linked Loan Principles, offering guidance on how the instruments should fit into a company’s corporate social responsibility strategy, target-setting, reporting practices and review process. 

In December 2018, Germany joined the list of European countries actively using sustainability-linked loans and bonds when the consumer goods and chemical company Henke set up a green syndicated credit facility. That was followed offerings from technology company Voith Group, Deutsche Böerse Group, communal services and electricity provider Stadtwerke Müenchen, mechanical engineering company Norma Group and Telefónica Deutschland.

The Green Party’s strong showing in recent elections for the European Parliament highlights the increasing importance of sustainability for companies looking to attract investors, engage with the public and adapt their business models to the operational and financial risks of climate change.

The “green wave” is getting a boost in the USfrom the so-called Green New Deal promoted by progressive Democrats in Congress, and from civil protests such as the one led by Swedish teenager Greta Thunberg and the UK’s Extinction Rebellion. But responsible investing is also being enabled by new technologies that make processing data, including nontraditional financial information, faster, easier and cheaper.It is also empowered by activists using social mediato influence policymakers.

“People are increasingly putting value on long-term thinking,” says Ulf Moslener, professor of Sustainable Energy Finance at the Frankfurt School of Finance. “This has lots of potential to drive institutions and policymakers toward the question, ‘Is this business model going to be workable given the structural changes going on?’ This is a question that strategic investors are asking themselves and the companies they invest in.”

That means companies must demonstrate that they can deftly negotiate the transition toward a long-term sustainable economy that is low on carbon emissions and successfully manage the risks of ambitious climate regulation. Moslener recommends that companies conduct an audit of their operations, looking at both upstream and downstream environmental impact, and engage in more forward-looking, scenario-based analyses instead of relying on classical risk models based on data from the past.

A recent report by KPMG China also notes the importance of building capacity at the top level for managing environmental, social and governance (ESG) issues. Forty-three percent of business leaders surveyed by KPMG expect an increase in investment in the next three years to improve their company’s tracking of ESG issues and related communications to the board.

Some companies are going further. Last year, insurer Allianz announced it was divesting from businesses involved in large-scale, coal-fired power plant expansion projects. That was followed by Japanese insurerMitsubishi UFJ Financial Group’s decision to no longer financecoal-fired power generation projects effective July 1, 2019.

Much has changed since former UN Secretary General Kofi Annan got the ball rolling on ESG investing in 2004 with his letter to CEOs of major financial institutions. Now, ESG integration is increasingly seen as part of management and the board’s fiduciary duty. Plus, industry sector–specific reporting is on the rise. In June, the European Commission published a taxonomy laying out which economic activities are “green,” making benchmarking easier and more effective.

However, there is still a long way to go in combatting climate change, say scientists as well as green-oriented policymakers and activists. A good starting point for companies, Moslener says, is to scrutinize activities not just for carbon impact, but with an eye toward other requirements for managing the transition to a long-term sustainable economy.