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SBI composite rating

May 2019
Marketing Material

Insights: Change of the SBI composite rating methodology

The new methodology for SBI composite ratings coming into force in September will make the composition of the index more stable

In 2018, SIX, the Benchmark Administrator of the Swiss Bond Indices (SBI®), conducted a market consultation about a possible adjustment of the SBI® index methodology to determine the SBI composite rating.

The new methodology received positive feedback and its implementation will come into force on September 2nd 2019.

The current methodology

In the current methodology, to enter the index, a bond must be rated by at least one international agency (Fitch, Moody’s or S&P) or by two Swiss institutions (Fedafin and four Swiss banks, ZKB, Vontobel, CS, UBS). If a bond is not rated, the ratings of its issuer, guarantor or joint security apply. The SBI composite rating is then decided by the lowest rating provided.

The new methodology

The new methodology provides a new set of rules to determine the SBI composite rating if several ratings are available.

  • If only two ratings are available, the rule of the lowest rating is applied.
  • For odd number of available ratings, the median is used. 
  • For an even number of available ratings higher than two, the sub-median (the next lower rating below the median) is used. 

To be included in the SBI, at least one rating from an international agency is still required, or two ratings from Swiss Institutions. The composite rating must be investment grade. It should be noted that the SBI composite rating does not have any notches (+ or -).

The following table illustrates how the composite rating will be determined:
Determination of the SBI  composite rating
Swiss Bonds SBI rating
Source: SIX, April 2018

Our analysis 

There are practical impacts to such a change in methodology.

According to our calculations, a number of issuers will move to better ratings (as of 30 April 2019):

  • From AA to AAA: - 2 issuers
  • From A to AA: - 16 issuers
  • From BBB to A: - 9 issuers
  • From BB to BBB: - 3 issuers

From our analysis, the size of the SBI AAA-BBB index will not be affected. Only three issuers will join the benchmark universe.

The major impact will be a stabilisation in the BBB bucket  for some issuers that were on the brink of being downgraded to non-investment grade. Examples include Alpiq, Lonza, Implenia and Oerlikon. This is a welcome evolution as historically in the Swiss bond market, a downgrade to non-investment grade by a single rating agency could trigger some forced selling. In future, this will not systematically lead to exclusion from the SBI indices. This will make the composition of the index more stable over time and ease downgrading pressures. Thus, for BBB- bonds in particular, the liquidity premium will fall and might result in tighter credit spreads in future. The same applies for SBI sub-indices (SBI AAA to AA or A for example) where we will see the same effect for bonds linked to their respective lowest rating category. However, at current credit spread levels, the potential for a decrease in credit risk premium for those issuers is currently small. In terms of sectors, financial companies will see the most upgrades in SBI composite rating with 17 names moving either from BBB to A, A to AA or AA to AAA.

The new methodology comes into effect on September 2nd 2019. Further information as well as the  expected changes in the index composition will be shared with investors during summer on the SIX Website.