The Swiss financial landscape is poised for potential evolution as SIX Swiss Exchange embarks on a consultation concerning its rating criteria for bonds included in the Swiss Bond Index (SBI). This development is particularly significant for domestic issuers, especially those newly entering the bond market, amid a backdrop where international agencies often remain unattainable due to cost considerations.
The SBI is a critical barometer for the Swiss franc bond market, showcasing the majority of the approximately 580 billion Swiss francs in bonds listed on the SIX Swiss Exchange. With the current SBI criteria requiring a so-called Composite Rating of at least BBB from either international rating agencies or domestic providers, the foundation for recent discussions was laid when SIX acknowledged requests from market participants for greater clarity and access regarding bond inclusion.
Historically, the hierarchical arrangement between international and domestic rating agencies has favored the former. A bond issuer must present a single credit rating from one of the major international agencies—Standard & Poor’s, Moody’s, or Fitch—to gain entry into the SBI, while domestic issuers are subjected to a different standard. For them to be eligible, a bond must secure ratings from at least two of three domestic agencies: UBS, Zürcher Kantonalbank (ZKB), or Fedafin. This structure has created barriers, particularly for first-time issuers who often cite cost as a significant impediment to obtaining ratings that are a prerequisite for inclusion in the index.
Market participants have voiced concerns about the practicality of current rating requirements. Many domestic debutants lack the financial means to obtain the ratings necessary, particularly from established international agencies. While in the past, Swiss firms had a broader array of options, including former domestic rating providers such as Credit Suisse and Vontobel, the current environment presents a more constrained landscape, limiting flexibility for emerging issuers.
“There are challenges facing Swiss first-time issuers, especially in the corporate sector, due to a lack of investment research from domestic banks,” a summary from the SIX consultation process stated. It underlines the importance of ensuring accessible entry into the domestic bond market—an essential step for firms excluded from the global bond markets dominated by larger players like Roche and Novartis. Moreover, with many banks tightening their lending practices, the challenge of obtaining requisite ratings becomes even more pronounced.
Among the challenges not overtly addressed in the SIX’s deliberations are the implications of Rating Restrictions, which can arise if a Swiss bank is temporarily barred from issuing ratings for an issuer. The current SBI rules dictate that, in such a case, the existing rating can only be applied for up to six months.
In light of industry needs, SIX has expressed disappointment over the apparent lack of initiatives from banks intending to provide additional investment research to alleviate the situation. Nonetheless, they remain open to encouraging such initiatives, underscoring a commitment to expanding resources available to the market.
A potential solution to the existing rating bottleneck may lie with Raiffeisen, a key player in the Swiss financial ecosystem, which has yet to step into the void left by Credit Suisse. Roger Reist, head of Corporate Clients, Treasury & Markets at Raiffeisen, hinted earlier this year at the possibility of developing a rating service should market demand necessitate it. “The rating coverage is sufficient today, but if a clear market need arises for an additional provider, we would consider establishing our credit analysis,” he stated.
Despite these considerations, SIX is contemplating elevating Fedafin’s status as a domestic rating authority. Currently the only one recognized by the Swiss Financial Market Supervisory Authority (Finma), Fedafin may soon have the opportunity to have its ratings accepted as standalone, eliminating the requirement for dual ratings. Such a shift would enhance Fedafin’s stature and could motivate financiers to more confidently enter the bond market.
Adrian Oberlin, Fedafin’s managing director, expressed optimism regarding the future of ratings in April, foreseeing a decline in reliance on bank-generated ratings. He positioned Fedafin as an institution ready to adapt and serve a growing need for independent assessments. “We have been advocating for some time that our ratings qualify independently for inclusion in the SBI, especially for new issuers or in cases where existing ratings from banks fall away,” he noted.
While the potential reform is still in a nascent stage, the process of consultation, which allows market participants to provide feedback until August 29, will determine the way forward. Those insights will be compiled and reviewed by the Bond Index Commission, and the SIX’s decision regarding revisions to the rating rules will follow this evaluation. Any changes enacted will not take effect until at least three months after they are publicly announced, leaving the future landscape of the Swiss bond market in a state of careful anticipation.
This period of reflection could signify a pivotal moment for domestic issuers, particularly as they navigate the intricate landscape of bond ratings amid shifting market dynamics. As the SIX explores the avenues for reform, the focus remains on fostering a financial environment conducive to both emerging and established enterprises, ensuring that the Swiss Bond Index continues to reflect the vibrancy of the market while maintaining the stringent criteria that investors value. Engaging with industry voices will be critical in determining if the prevailing rating structure serves its intended purpose or requires further adjustment, underscoring the delicate balance between maintaining standards and ensuring accessibility for new entrants into the bond market.
The outcome will undoubtedly have far-reaching implications not only for the composition of the SBI but also for the broader investment landscape in Switzerland, where the demand for robust yet accessible ratings remains pivotal as the market evolves. As stakeholders await the results of the ongoing consultations, the focus remains firmly on how best to recalibrate the rating environment to support domestic issuance and sustain investor confidence in the face of changing economic conditions.