Capital structure: How are Swiss companies financed?

The total distributions, consisting of dividend payments, distributions from share premiums and par value reductions, of all companies listed on the Swiss Performance Index (SPI) amounted to 47.6 billion Swiss francs for the 2020 financial year. According to the financing study by the Lucerne University of Applied Sciences and Arts, this is only five percent less than for the 2019 financial year. The fact that the dividends of the SPI companies remained stable in total despite the COVID 19 crisis was not to be expected, according to the study authors. Thomas K. Birrer, editor of the study and lecturer at the Lucerne University of Applied Sciences and Arts, is pleased with the low impact of the COVID 19 crisis: "Although companies have reduced their share buybacks by 30 percent, distributions have remained surprisingly stable and there has been no widespread increase in debt. This is overwhelmingly positive news and the data shows that listed Swiss companies are mostly very solidly financed." A similar stable picture was seen among SMI companies. Only the mid-sized companies (SMIM) saw a significant reduction in dividends.

Not a classic IPO

2020 will go down in the history books as a year without a "classic" Swiss IPO, although international IPO activity was unexpectedly high. However, with the spin-offs Ina Invest (from Implenia) and V-Zug (from the Metall Zug Group), spin-offs and thus new listings did take place. Overall, capital increases totaling more than CHF 4.0 billion were carried out in 2020.

More interest-bearing debt

As of the end of 2020, the 199 non-financial companies surveyed had the following capital structure of the cumulative balance sheet total of 819 billion Swiss francs: 44.1 percent equity and 55.9 percent debt (FC).

The current interest rate situation in Switzerland is also noticeable in the increase in companies' short- and long-term interest-bearing liabilities. Between 2011 and 2020, interest-bearing liabilities increased by 40 percent to a total of 224 billion Swiss francs, which corresponds to an increase of 87 billion Swiss francs. On average, this is more than 3.5 percent per year. In the period under review, the change in accounting rules for lease liabilities was one of the reasons for an increase in interest-bearing liabilities of more than 30 billion Swiss francs in the years 2018 to 2020.

The effective borrowing costs of the companies surveyed have fallen since 2011, in some cases significantly. The median cost of debt (calculated as interest expense / interest-bearing debt) for 2020 is 2.04 percent, with the individual companies showing widely diverging borrowing costs.

Fundamentally healthy debt

With the increase in interest-bearing debt, net debt has also increased by around 83 percent since 2014. Likewise, the median net debt/EBITDA ratio increased from 0.39x in 2011 to 0.70x in 2020. The median net debt/EBITDA ratio for large caps is 1.60x, which is significantly higher than for mid caps (0.53x) and small caps (0.92x).

Impact of Covid-19 on the capital structure

The COVID 19 crisis has not brought about any significant change in the capital structure of the companies studied compared with previous years. The composition of the cumulative balance sheets of the analyzed companies remained relatively constant in the last three years, with a slight decrease in equity by a few percentage points and simultaneous expansion of long-term debt. Compared with 2019, higher net issuance activity was observed in 2020. This is at the second highest level in the last ten years.

Sustainability on the rise

Sustainable business and the resulting ESG (environmental, social and governance) guidelines are steadily gaining ground. The global green bond market is showing high growth momentum. For example, the global market volume increased from less than $30 billion to around $1,000 billion in the last six years. In Switzerland, the outstanding green bond volume increased from zero francs to more than six billion francs in the last four years. At first glance and compared to the total bond volume outstanding, this appears to be little, but the growth trend is likely to continue in the future. It is therefore not surprising that the volume of outstanding green bonds from Swiss issuers increased by 23 percent in the first half of 2021, as the financing study further notes.

Source: Lucerne University