US high-yield funds see Swiss franc appeal

Fri Mar 22, 2013 10:28am EDT

* Sunrise PIK toggle attracts US funds seeking diversity

* Lack of ratings to keep a lid on international demand

By Jon Penner

LONDON, March 22 (IFR) - US high-yield investors wanting to diversify away from dollars but nervous about exposure to euros have become an unexpected driving force in some recent Swiss franc high-yield deals.

The Swiss market has seen a smattering of junk issues over the past couple of years, mainly from domestic companies such as telecoms firm Sunrise, sector rival Orange Switzerland, and Crossover issuer Clariant.

A nascent rise in US demand for the currency, however, has helped add more depth to the market, and even supported the emergence of riskier structures such as Payment-In-Kind toggles.

Sunrise last week priced a dual-tranche PIK toggle in euros and Swiss francs, after dropping plans for a third dollar-denominated tranche that had been included as a precautionary measure to top up demand.

As it turned out, the euro and Swiss books were healthily subscribed - despite this being the first PIK toggle in Europe since the financial crisis - with US accounts that had shown interest in the dollar tranche willing to switch into the Swiss deal.

"There was a debate before we announced Sunrise about which would be the target market for the Swiss franc tranche," said Henrik Johnsson, head of high-yield and loan capital markets at Deutsche Bank.

"That market is usually driven by private wealth and high net worth individuals, but interestingly on this transaction we also saw a lot of interest from US high-yield accounts that were looking for currency diversification. That demand allowed us to drop the USD tranche."

COMPETITIVE PRICING

The Sunrise 7-year non-call 18-month euro and Swiss franc tranches both offered an 8.75% coupon and printed with a relatively small OID of 99.50.

The pricing was competitive with other dollar-denominated PIK toggles issued this year by European issuers including chemicals business Orion Engineered Carbons and education provider Nord Anglia.

Nord Anglia's "pay if you want" USD150m 5NC2 security priced with an OID of 98 to yield 9%, while Orion's 6NC1 USD425m pays a coupon of 9.25% and priced at par.

Although the dual-tranche Sunrise deal was identical in terms of coupons, the franc deal offered a much better spread compared with prevailing swap rates, which was also attractive from investors' point of view.

NICHE MARKET

Dutch cable company UPC priced its debut Swiss high-yield deal on Thursday which will match the roughly 25% of its revenues that are derived from the Swiss market.

The dual-tranche 10NC5 senior note, managed by global co-ordinators Credit Suisse and Morgan Stanley, was split between a CHF350m and EUR450m tranche. Both carried 6.75% coupons.

With five-year euro swaps at 0.915% and Swiss at 0.448% on Thursday, the pick up for taking the franc plunge is around 47bp.

In the grand scheme of things, however, high-yield issuance is still thin on the ground in Switzerland compared to the USD34bn that European issuers have printed so far this year.

The last BB corporate credit to come to the market was Fiat Finance and Trade in November 2012 with a CHF400m four-year at 5.25%. The deal was not attractive to international buyers, however, given that it came at levels inside its euro curve.

One of the major turn-offs for international funds is the general lack of official ratings for many Swiss issuers.

So even though there have been plenty of unrated issuers - including Meyer Burger, Actelion, OC Oerlikon Corp, AEVIS Holding SA, Von Roll, Autoneum and Zur Rose - that offer higher yielding coupons in excess of 4%, the deals have not appealed to international buyers.

The smaller denominations of these domestic deals, targeted to retail investors, are particularly undesirable for larger funds who dislike the tight pricing and thin liquidity.

Neither is this new-found Swissie popularity likely to spread to more domestic names, one banker said. He highlighted a CHF300m perpetual non-call five from local baker Aryzta this week, and a CHF150m 10NC5 tier 2 issue from Valiant Bank.

Neither saw any take-up of paper by accounts outside of Switzerland, the banker said.

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