All questions


i The covid-19 pandemic

In Switzerland, as in many other jurisdictions, financial markets struggled in 2020 as a result of the covid-19 pandemic. In March 2020, the Swiss Federal Council (Bundesrat) declared the 'extraordinary situation' and introduced stringent measures, including the lockdown of schools, shops, restaurants, bars and entertainment and leisure facilities.

The Swiss Federal Council and the Swiss government passed various regulations in response to the covid-19 pandemic, including the set-up of the Swiss Covid-19 Loan Programme under an emergency ordinance (the Covid-19 Ordinance on Joint and Several Guarantees). Covid-19 loans with an aggregate volume of over 17 billion Swiss francs were granted under the programme. Covid-19 loans with an aggregate volume of approximately 6 billion Swiss francs were repaid by September 2022 and loans amounting to roughly 500 million Swiss francs have been honoured by the guarantee provided by the Swiss authorities. Hence, a significant number of covid-19 loans are still outstanding. While no further covid-19 loans were granted after July 2020, a number of important restrictions apply to companies that continue to be financed by covid-19 loans. This is because the purpose of such loans is, in short, limited to ensuring continuity of the business. While the restrictions under the Swiss Federal Act on Covid-19 Credits with Joint and Several Guarantee are more relaxed than under the original emergency ordinance, certain key restrictions still apply. Hence, a borrower of a covid-19 loan must not:

  1. pay dividends or bonuses to shareholders or repay equity capital to shareholders;
  2. grant loans or repay loans or other obligations to affiliated parties, unless such loan or other obligation was pre-existing;
  3. refinance intragroup loans, except for pre-existing obligations for the payment of interest and amortisations; or
  4. on-lend, or make otherwise available the proceeds of covid-19 loans to group companies outside Switzerland, except for pre-existing obligations for the payment of interest and amortisations.

These restrictions are problematic for operating entities that form part of a larger group of companies, where the group relies on cash flows generated by these operating entities. Debt servicing on the top level of a group becomes difficult where the operating entities are restricted to upstream cash flows. Also, there remains uncertainty over whether the sole granting of a guarantee, or the granting of security to guarantee or secure liabilities of a shareholder, could be considered as ;paying dividends;. If so, such a security or guarantee might be affected as to its validity by the provisions of the Swiss Federal Act on Covid-19 Credits with a Joint and Several Guarantee.

These restrictions affect the structuring of financing transactions and, accordingly, borrowers are incentivised to repay covid-19 loans sooner rather than later to rid themselves of such restrictions. Also, where group financing transactions have had to be renegotiated and covenant or even payment holidays have been granted by the lenders, the lenders have normally insisted on a clear road map towards early repayment of the covid-19 loans.

ii LIBOR cessationStatus

The London Interbank Offered Rate (LIBOR) for Swiss francs and other currencies was phased out on 31 December 2021 and has been replaced by alternative benchmarks in the form of risk-free rates. In Switzerland, the most comment risk-free rate used in the lending market is the Swiss Average Rate Overnight (SARON).

Hence, throughout the past year, banks have been intensively working on the transition of their loan portfolios from LIBOR to SARON and on updating the respective legal documentation. It seems that the Swiss lending market has adapted to this change quite well, and it appears that the transition process has been relatively smooth in most instances.

However, while the transition process is complete for some currencies (including Swiss francs), the process is ongoing, as other currencies (including the US dollar) are still to be phased out and replaced by alternative benchmarks. Most importantly for the Swiss market, EURIBOR continues to be used as a euro-based rate for now, but upcoming developments need to be closely monitored.

Calculation methodology used in the Swiss market

In Switzerland, during the initial phase of the transition, the calculation methodology 'cumulative compounded SARON' has been frequently used as an alternative benchmark for the new compounded SARON as recommended by the Swiss National Working Group on Swiss Franc Reference Rates. The legal documentation has been updated accordingly. This calculation methodology differs from the methodology applied by the Loan Market Association (LMA) as reflected in the LMA-recommended form rate switch documentation (i.e., daily non-cumulative compounded rate). It turned out that non-Swiss banks and lenders were not very familiar with the Swiss approach. As a consequence, during a later phase of the transition process and in situations where there are non-Swiss financial institutions in the syndicate of lenders, the LMA calculation methodology has typically been introduced in the legal documentation. Also, in multicurrency facilities agreements, in order to avoid different methodologies being implemented in relation to the different facilities, the daily non-cumulative compounded rate is used for calculating interest on a daily basis.

Running two different regimes in the same market is not very efficient and it seems that the market in Switzerland is now shifting away from the 'Swiss solution' to the more common international standard suggested by the LMA. Even in new lending transactions that are purely domestic, the calculation methodology used is now most often the daily non-cumulative compounded rate.

Break costs

In transactions where LIBOR applies or applied, the borrower was under an obligation to pay break costs to the lenders upon prepayment of a loan during an interest period. The break cost concept assumes that each lender matches the funding of its loans to the actual term of the respective interest period of a loan and potentially suffers a loss if the interest that a lender should have received for the remainder of the interest period exceeds the actual amount that a lender would be able to obtain by redepositing the money for the period from prepayment of the loan until the last day of the interest period.

This rationale does not apply where a loan references risk-free rates, as risk- free rates accrue on a daily basis and are not an approximation of the cost to the bank of maintaining the loan over the interest period. Nevertheless, the agent and lenders may incur a loss if their funding arrangements for maintaining a loan are interrupted by a prepayment and for any administrative burdens. There are different ways to address this. A prepayment could trigger a one-time fee per prepayment or a portion of the margin could still be due for the remainder of the interest period. Alternatively, the number of voluntary prepayments could be limited during a year for purposes of avoiding revolving facilities being used almost as overdraft facilities. It now seems that a standard has evolved for the Swiss market, which is a combination of a limitation of the prepayments allowed and a one-time fee to be paid by the borrower upon prepayment, but it should be noted that there are still various options to play around with these elements.

iii Sanctions

Following the invasion of Ukraine by Russian military forces, the Swiss Federal Council enacted the ordinance on measures relating to the situation in the Ukraine on 4 March 2022 based on the powers assigned to it by the Swiss Federal Constitution and the Swiss Federal Embargo Act. Since 4 March 2022, the ordinance has been constantly revised and expanded.

Generally, the Swiss sanctions regime follows the sanctions regime enacted by the European Union. However, there are some deviations, in particular as regards the list of sanctioned persons. In addition, the Swiss State Secretariat for Economic Affairs (SECO), which is in charge of implementing the ordinance, has published certain FAQs thereby providing further guidance to the market.

The ordinance is applicable to all people and companies within Switzerland, but, other than the EU and the US sanctions rules, is not addressed to Swiss citizens living outside Switzerland.

Like the EU sanctions regime, the ordinance addresses and covers the following elements:

  1. commercial restrictions, preventing the sale of certain goods to Russia (e.g., weapons, dual-use goods, certain technology goods, goods related to the aerospace sector and the shipping sector (including the rendering of services), goods related to the oil and energy production sector, energy, luxury goods and gold);
  2. a general asset freeze of assets held by sanctioned persons;
  3. reporting obligations in relation to such assets held by sanctioned persons;
  4. a ban on taking deposits from Russian citizens and certain institutions;
  5. a ban on the rendering of financial, financing, trading and investment services to – and the financing of – certain counterparties;
  6. travel bans for sanctioned persons and a general ban on air traffic for aircraft registered in Russia;
  7. limitations on dealing with certain counterparties, such as the Russian Central Bank and other government authorities;
  8. a ban on honouring and paying certain claims if they arise under an agreement that is otherwise limited by the Swiss sanction rules;
  9. a ban on establishing trusts if the beneficial owners are specific persons or entities; and
  10. a ban on rendering services in the areas of tax, accounting, auditing and certain other services to entities located in Russia.

Along with the sanction regimes of other countries, the Swiss regime will continue to evolve and expand. Also, the interpretation of the sanctions rules will continue to be highly dynamic. Hence close monitoring is key, in particular as the time periods in which such updates enter into force are normally extremely short.

iv ESG (environmental. social and governance)

The number of ESG-linked credit financing transactions is constantly increasing in the Swiss lending market. However, compared with the Swiss bond market, where a considerable number of sustainability-linked bonds, sustainable bonds, a large number of green bonds and even social bonds have been issued and listed on the SIX Swiss Exchange, the number of ESG-linked credit financing transactions is still relatively low and mostly limited to corporate credit financing transactions. Also, it seems that in private equity-sponsored Swiss leveraged finance transactions (that are mainly mid- or small-cap transactions), ESG is not (yet) a hot topic. It is, however, clear that the topic has more and more a high priority on the banks' agendas,

Typically, Swiss ESG-linked credit financing transactions do not provide for a 'use of proceeds' concept where the funds raised shall exclusively finance specific green, sustainable or social business transactions or assets. This provides the borrower with some flexibility, which is still important in revolving credit financing transactions where funds raised can be used for any corporate purposes. Rather, certain key performance indicators (KPIs) are defined in the documentation. The basis for such KPIs differs from industry to industry. Typically, there is no hard requirement to meet certain KPIs. Rather, the borrowers benefit from a reduction of the margin if the KPIs are met or even exceeded and are punished by an increase of the margin if the KPIs are not met. A challenging element of the ESG-linked transactions continues to be the monitoring, reporting and auditing of compliance with ESG criteria.

Clearly, the market for ESG-linked credit financings is rapidly growing and is becoming more and more sophisticated also in Switzerland.

Regulatory and tax matters

i Regulatory matters

The mere provision of acquisition finance does not itself trigger a licensing requirement under Swiss laws. A licensing requirement would only be triggered if lenders would refinance themselves in Switzerland by means of accepting money from the public or via a number of unrelated banks. Lending into Switzerland on a strict cross-border basis is currently not subject to licensing and supervision by the Swiss Financial Market Supervisory Authority, FINMA.

Under the Swiss Financial Services Act (FinSA), financial advisers are required to register and accordingly, financial advisers of foreign financial institutions may only be active in the Swiss market once they are registered in the register of financial advisers. However, a person advising exclusively in the context of finance (lending) transaction will be out of scope of the registration requirement.

ii Tax matters10/20 non-bank rules – political developments and the public vote of September 2022

Under the current Swiss withholding tax regime, 35 per cent Swiss Federal withholding tax is levied on interest paid to Swiss or foreign investors on bonds and similar collective debt. Any financing (including credit financings) may be subject to such a treatment in the event that the number of non-bank creditors under such a financing exceeds 10.

On 3 April 2020, the Swiss Federal Council initiated a consultation process (Vernehmlassung) regarding a planned reform of the Swiss federal withholding tax. The reform originally intended to replace the current debtor-based regime applicable to interest payments with a paying agent-based regime for Swiss federal withholding tax. As a consequence of the consultation process, the Swiss Federal Council, on 11 September 2020, decided to abolish Swiss withholding tax on interest payments (with the exception of interest payments on domestic bank accounts and deposits to Swiss resident individuals) without substitution and it submitted a corresponding legislative project to Parliament on 14 April 2021.

The abolition of Swiss withholding tax on bonds and other collective debt financings aimed to strengthen Switzerland's position as a financial market and treasury centre. All types of financing and refinancing activities in Switzerland (e.g., raising capital via bond issuances, crowdfunding platforms, ABS structures and other capital market transactions) would have been facilitated.

A referendum was initiated against such a legislative project (and the abolition of the Swiss withholding tax on interest payments) and the project therefore brought to a public vote by the people of Switzerland. On 25 September 2022, the Swiss people declined the new legislative project with 52 per cent of voters being against the reform.

Accordingly, the Swiss withholding tax regime remains unchanged and it is worth summarising the current regime again.

10/20 non-bank rules – Swiss withholding tax

Unlike most other countries, under the current Swiss withholding tax regime, Switzerland does not levy withholding tax on interest paid on private and commercial loans (including on arm's-length inter-company loans). Rather, 35 per cent Swiss federal withholding tax is levied on interest paid to Swiss or foreign investors on bonds and similar collective debt instruments issued by or on behalf of Swiss resident issuers. According to the Swiss Federal Tax Administration and the relevant regulations, credit facilities also qualify as collective debt instruments, if syndicated outside of the banking market and, as a result, there are more than 10 non-bank lenders in the syndicate.

International capital markets do not typically respond well to bonds subject to Swiss withholding tax. Therefore, the investor base is relatively often limited to Swiss investors, or, in the case of Swiss multinational groups, bonds are issued through a foreign subsidiary. However, the Swiss Federal Tax Administration reclassifies such foreign bonds into domestic bonds if the amount of proceeds used in Switzerland exceeds certain thresholds (i.e., the combined accounting equity of all non-Swiss subsidiaries of the Swiss parent company and the aggregate amount of loans granted by the Swiss parent and its Swiss subsidiaries to non-Swiss affiliates).

In the context of syndicated credit financing transactions, it must be ensured that no Swiss federal withholding tax will be incurred, as this would simply not be acceptable to lenders, even in case the Swiss federal withholding tax could be recovered at some later point. In order to prevent Swiss federal withholding tax from being imposed on credit financing transactions (in contrast to bonds triggering such tax anyway), credit facility agreements entered into by a Swiss borrower, or a non-Swiss borrower under a guarantee from a Swiss parent company, must contractually restrict free transferability and syndication by invoking the '10/20 non-bank rules' and stating that (1) the lenders must ensure that while the loan in question is outstanding, no assignments, transfers or relevant sub-participations of loan tranches will be made, as a result of which the number of ten non-bank lenders would be exceeded and (2) the borrower must ensure that it will at no time have more than 20 non-bank lenders under any of its borrowings (in both cases generally disregarding any affiliated lenders).

As a result, credit financing transactions that must be broadly syndicated outside the banking market, because the banking market would not absorb such transaction, (such as TLB transactions) cannot provide for a Swiss borrower and it is necessary to structure around this.

In addition, the Swiss Federal Tax Administration may reclassify a syndicated credit financing transaction raised by a non-Swiss affiliate in the event that (1) the proceeds are (directly or indirectly) used in Switzerland and (2) a Swiss group entity provides security or a guarantee to secure such a credit financing. In the event that the security or guarantee provided by the Swiss group entity is only of an upstream or cross-stream nature, this doctrine of the Swiss Federal Tax Administration does not normally apply, but this must be confirmed by the Swiss Federal Tax Administration by way of a tax ruling confirmation on a case-by-case basis. Acquisition bonds issued for Swiss acquisitions will thus be issued abroad on a higher-tier level and on-lent through the acquisition structure down to the Swiss buying entities.

Deductibility of interest expense

Under Swiss tax law, interest incurred at the level of the acquisition vehicle is not available for set-off against income generated at the Swiss target company level for income tax purposes. This is because there is generally no tax consolidation under Swiss tax law (neither in Swiss domestic nor cross-border situations). However, there are means to (indirectly) 'push down' the acquisition debt portion, particularly if the existing debt can be refinanced at the target level. For the purposes of the Swiss Non-Bank Rules, this would need to be structured as a downstream loan from the acquisition vehicle to the target level (or by refinancing the existing debt at the target level, although that would result in a limitation of the number of non-banks to 10 for that portion of the debt in any event). However, since the proceeds of the acquisition debt may be lent on, the Swiss Non-Bank Rules have to be carefully addressed.

Alternatively, an (indirect) pushdown can be achieved by way of an equity-to-debt swap, where equity (freely distributable reserves or even share capital that can be reduced) is distributed (but not actually paid out) and converted into a downstream loan. In recent transactions, additional pushdown of debt potential has been created by some post-acquisition restructuring steps (such as group internal sales of assets generating additional earnings and the respective debt capacity).

If such a pushdown can be achieved, some of the interest incurred on the acquisition debt may be brought to the target company level and become available for set-off against income generated at the target level. The security package structure may be improved in connection with such pushdown at the same time.