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Swiss bond outperformer makes the case for crossover credits

Swiss bond outperformer makes the case for crossover credits

Non-investment grade bonds have emerged as an attractive opportunity in the domestic Swiss market in a relatively short period of time since issuance began, according to Citywire + rated Yannik Zufferey.

Zufferey, who runs several Swiss-focused bond strategies at Lombard Odier IM, said there was close to zero issuance in this sector just three years ago but changes in financial regulation has fuelled appetite in this area.

‘Under the pressure of Basel III, banks are in deleveraging mode and have tightened credit standards for small and medium-sized enterprises, especially in the non-investment grade space, forcing alternative financing sources to be sought,’ said Zufferey.

While the Swiss bond market undergoes these changes, Zufferey said there are some interesting opportunities in small and medium Swiss companies which have strong fundamentals despite being so-called crossover names.

One such company is Sunrise Communications, a Swiss telecommunications provider from Zurich, which Zufferey opened a 1.5% position in his LO Funds – Swiss Franc Credit Bond (Fgn) fund. He said it remains attractive despite a recent rally.

‘Despite a strong recovery since the lows reached at the end of third quarter, Sunrise Communication still trades at relatively wide spread,’ said Zufferey.

While the appetite for corporate bonds globally has grown as investors diversify away from government bonds, Zufferey said that net new issuance in CHF corporate bonds this year was negative.

‘There was more demand than supply which is supportive for credit spreads in this specific segment of the market,’ said Zufferey.

Strong Swiss background

The fund manager has a positive outlook for the Swiss economy in 2016 and said the low growth environment will prove to be positive for Swiss credit.

‘Despite of the shock of the Swiss franc being unpegged from the euro, Switzerland is managing to deliver positive growth this year,’ said Zufferey.

In the meantime, he said the Swiss National Bank remains dependent on ECB action, which is more relevant for the local economy than the Federal Reserve’s expected interest rate rise.

Zufferey said there are three more options for SNB in order to play out the extension of the QE programme by the ECB.

One way, according to the fund manager, is to cut rates further, while the second option is to remain active in the currency market. The third option is to reduce the exemption threshold.

‘The third way could be painful for some domestic Swiss banks as they have large deposits at the SNB and would therefore be even more impacted then they already are at the moment,’ said Zufferey.

International operations

Elsewhere in his fund, Zufferey shifted towards an underweight in Brazilian corporates in LO Funds - Swiss Franc Credit Bond (Foreign) fund before the S&P downgraded the country. After the downgrade took place, the fund was underweighted by 0.3 percentage points.

The fund manager also remains underweight most Russian issuers in Swiss francs. Zufferey went underweight Russian banks following the escalation of tension in Ukraine, as he expected bonds to be downgraded below BBB-.

‘To compensate the loss of carry, we over-weighted Sberbank short-dated bonds as it was rated higher, had stronger fundamentals and is the biggest bank in Russia with a “too big to fail” status,’ said Zufferey.

Elsewhere, the fund manager is also underweight Australian banks due to their exposure to emerging markets through commodities trade.

The LO Funds – Swiss Franc Credit Bond (Foreign) fund, which is the Luxembourg-domiciled version of Zufferey’s Swiss-domiciled fund, has returned 5.8% in Swiss franc terms in the three years to the end of November 2015.

This compares to a rise of 7.68% by the Swiss Bond Index Foreign AAA-BBB TR, its Citywire-assigned benchmark, over the same period. Both measures are in Swiss francs.

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