OREANDA-NEWS. The Swiss National Bank's 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.

There could be a negative impact on cash flow for companies that report in Swiss francs 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. But we believe the impact in Switzerland will largely be felt by unrated small and medium exporters that manufacture domestically and whose costs are therefore predominantly in francs. 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.

The end of the currency cap could also weaken debt coverage ratios for companies that borrow predominantly in francs. 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 francs, such as Nestle and Roche, will decline due to the translation of the euro and dollar 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 we do not expect this to result in rating actions.

In the longer term the franc's 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. But 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 francs, but we believe the transaction is fully hedged and should not be affected. Nor do we expect the merger between Holcim and Lafarge to be affected, as the deal is a merger of equals and is well advanced.