The Swiss National Bank’s (SNB) recent decision to
scrap its currency cap
is broadly negative for Swiss companies, but the impact on Fitch-rated corporates will be limited, Fitch Ratings says. A large proportion of their costs are overseas and the currencies of their assets and liabilities tend to be well matched.
The credit ratings agency (CRA) adds that there could be a negative impact on cash flow for companies that report in Swiss francs (CHF) as the currency move will reduce revenue and to a lesser extent earnings, while dividends will continue to be paid in francs.
A sharp increase in a currency is generally bad news for exporters, which become less competitive. However, Fitch believes the impact in Switzerland will largely be felt by unrated small and medium exporters that manufacture domestically and whose costs are therefore predominantly in CHF. Fitch-rated corporates such as Nestle, Holcim and Novartis tend to produce locally in the markets where they operate and therefore have a much larger proportion of costs in dollars and euros (USD/EUR).
The end of the currency cap could also weaken debt coverage ratios for companies that borrow predominantly in CHF. But again, larger corporates tend to match the currency of their revenue and debt to create a natural hedge, which limits the impact. Despite the cap on the franc for the last three years, Swiss corporates are used to dealing with significant currency volatility and stood up well to the last big move during the 2011 euro crisis.
The revenues of companies that report in CHF, such as Nestle and Roche, will decline due to the translation of the EUR and USD into a stronger franc. Earnings will also fall, although the impact will be mitigated by lower international costs when translated into francs. This could reduce the amount of cash available to pay dividends if companies decide to maintain them, but the CRA does not expect this to result in rating actions.
In the longer term the CHF appreciation could also affect Swiss companies’ domestic operations if greater deflationary pressure were to harm economic growth. Real estate group PSP Swiss Property, purely domestically focused, is the Fitch-rated corporate most exposed to the domestic economy. However, its use of long-term rental agreements would insulate it from a modest slowdown in growth.
Fitch-rated corporates are also in the middle of two transactions involving Swiss companies. Saint Gobain is acquiring Swiss firm Sika in a deal priced in CHF, but Fitch believes the transaction is fully hedged and should not be affected. Nor does the CRA expect the merger between cement producers Holcim and Lafarge to be affected, as the deal is a merger of equals and is well advanced.
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