The Swiss franc market has provided covered bond issuers with greater volumes of funding this year, offering welcome respite from the euro-zone’s problems – even if the currency sector has not been able to escape the effects of the worst of the year’s volatility.

Foreign covered bond issuance in the second quarter rose from Sfr1.625bn in 2010 to Sfr2.125bn (Eu1.92bn) this year, and from Sfr1.175 in 2009. Year-to-date supply has increased from Sfr6.6bn in the same period of 2010 to Sfr7.2bn, according to figures from Credit Suisse.

This makes Swiss francs the fourth largest currency for international covered bond issuance after euros, dollars and sterling – although, as one banker points out, much of this year’s sterling supply has been concentrated among UK players in terms of issuers and investors.

Recent trades in the Swiss market include a Sfr100m July 2017 Crédit Agricole deal re-offered at 30bp over, and a Sfr150m August 2019 Compagnie de Financement Foncier issue re-offered at 41bp over. Overall, 15 issuers from 10 countries have tapped the currency with either new issues or reopenings.

The Swiss market has thus offered issuers welcome respite from volatility elsewhere.

“Whenever we’ve seen difficult times in Europe,” said Andre Schmid, Head of Swiss francs syndicate at Credit Suisse, “the Swiss market has been open for top quality issues. As an issuer you can use the Swiss market as a strategic market, but you have to be aware that average transaction sizes are smaller.

“But compared to euro deals, you get more interesting levels,” he added.

Maturities in the Swiss market have varied from five to 10 years in 2011, said market participants. Schmid said the “sweet spot” for broadly distributed issues was between four and six years.

“There are two exceptions,” he added.

One was a Caisse de Refinancement de l’Habitat dual tranche at five and 10 years in March. The second was a Royal Bank of Canada April 2021, which came at 4bp over and achieved a total size of Sfr500m. The largest portion of the substantial 10 year issuance was driven by a few institutional accounts.

“The Royal Bank of Canada is also on a senior basis highly rated, and it had a very good outcome here,” said Schmid. “From a spread point of view it was the tightest of all coming to the market this year.”

Nevertheless, the Swiss franc covered bond market has been dominated by core issuers out of Scandinavia and France, said market participants. The covered bond issuer to have raised the most in the currency this year has been Swedbank Mortgage, for example.

That it is not to say the market is not open to other jurisdictions, according to UBS Swiss syndicate official Fabian Welandagoda, who said that German risk would also have been welcomed, but was too expensive on a swapped basis.

“We believe the market is open for other jurisdictions, too,” he said, “but professional investors increasingly do look at the rating/credit metrics of the underlying credit as well and expect a higher spread even if the cover pool consists of high quality assets.

“Both CIBC and Royal Bank of Canada did bigger sized transactions in the past despite the tight credit spread; it worked well as investors liked the diversification value and country exposure,” he added.

Syndicate officials said funding levels have been mostly in line with euros.

“I think we are more or less in line with Euroland, but from a spread point of view they look much tighter because there is quite a lot of basis swap in between” said Schmid at Credit Suisse. “We’re maybe a touch tighter in Swiss francs.”

Welandagoda said a Swiss franc transaction, in most cases, has to provide a certain degree of arbitrage compared to main markets to make a trade worthwhile for an issuer. An exception could be made if an issuer had to fund Swiss franc assets and did not need to swap back into a foreign currency – 95% of foreign transactions have a cross-currency swap attached – or if an issuer wants to demonstrate market access.

“The arbitrage component is predominantly a function of the limited deal size in the Swiss franc market, which is Sfr200m on average” he said. “As a general assumption, I would say we usually get all-in levels between Euro medium term note private placement quotes and euro secondary trading levels.

“It’s difficult to indicate a number, but – depending on tenor – 5bp-15bp arbitrage is a good indication in a normal market environment.”

Even the Swiss market does not remain immune to worldwide conditions though, cautioned market participants.

“The volatility makes it difficult to execute transactions,” said Schmid. “With such volatility, sometimes if you have some ideas and circle demand until you want to hit screens, you may be unlucky and the basis has widened and you’re not at the investors’ target anymore, making it very difficult to grow volume beyond initially spotted interest.

“I think investors were also nervous with the volatility and with all the headline newsflow we had in the last two or three months; they took a cautious approach and in such an environment it’s pretty hard to get deals done.”