In brief: loan document terms in Switzerland

Loan document terms

What forms or standardised terms are commonly used to prepare the bank loan documentation?

No Swiss law governed form documents have been established by the Loan Market Association (LMA) or any other association. However, especially in syndicated transactions, it is quite common in the Swiss market to take the appropriate LMA form document as a starting point for the drafting of the particular facility agreement. As far as bilateral agreements are concerned, it is not uncommon for Swiss banks to work with in-house form documents, especially where the financing is straightforward and where the facility amount is not large.

What are the customary pricing or interest rate structures for bank loans? Do the pricing or interest rate structures change if the bank loan is denominated in a currency other than the domestic currency?

In the Swiss bank loan market, both fixed rate and floating rate pricings are seen, the latter much more frequently. The pricing on a floating rate financing is determined by reference to LIBOR or EURIBOR (or another reference rate, depending upon the relevant currency) and by adding the contractually agreed margin (which, in turn, is often determined by reference to a margin grid). The various IBORs (such as LIBOR) are currently being replaced by RFRs (such as, for instance, SARON for CHF-denominated loans) in facility agreements, both in new facility agreements and in existing facility agreements.

The currency of a bank loan does not usually have an influence on pricing or interest structures (other than that the underlying reference rate will be different, eg, LIBOR versus EURIBOR). On occasion, it can be observed in the market that lenders request an additional interest element where a particular currency is concerned. For instance, an additional interest element (eg, an extra 100 basis points) is sometimes charged on US dollar-denominated loans.

Have any procedures been adopted in bank loan documentation in your jurisdiction to replace LIBOR as a benchmark interest rate for loans?

The replacement of IBORs by RFRs is currently work in progress. The Swiss National Working Group has published the relevant recommendations and lenders are currently approaching their borrowers to commence the amendment process of the existing facility agreements. As far as new facility agreements are concerned, parties often choose to set up the financing with RFRs to begin with, rather than to commence with an IBOR documentation with replacement language.

What other bank loan yield determinants are commonly used?

In light of the current, very low levels of interest rates, it is common to see facility agreements providing for a ‘floor at zero’ regime, meaning that if LIBOR is negative, it is deemed to be zero for the purposes of calculating the level of interest rate owed on the bank loan. The same holds true for RFR-based documents, where market practice seems to develop such that the sum of the relevant RFR and the relevant credit spread adjustment is floored at zero. Original issue discount transactions are not frequently seen in the Swiss market.

Describe any yield protection provisions typically included in the bank loan documentation.

In line with international standards, facility agreements in the Swiss law bank loan market typically provide for a tax gross-up clause (backed up, for Swiss tax law reasons, with a minimum interest clause or recalculation of interest clause), a tax indemnity clause, an increased costs regime and, in IBOR-based financings, the concept of break costs (relevant, in particular, in the context of prepayments). 

Do bank loan agreements typically allow additional debt that is secured on a pari passu basis with the senior secured bank loans?

In addition to other undertakings, facility agreements typically provide for restrictions on additional debt (with certain exceptions, negotiated on the specific deal) and for a negative pledge undertaking (again with certain exceptions, negotiated on the specific deal).

Accordion options (and similar concepts) are seen in the market on deals where these are required by the borrower and meaningfully possible from a lenders' perspective.

What types of financial maintenance covenants are commonly included in bank loan documentation, and how are such covenants calculated?

Financial covenants are negotiated on a transaction-specific basis. In the Swiss market, the most commonly used financial covenant is the leverage ratio. Sometimes, other financial covenants are also used, for instance, interest cover ratios, cash flow ratios, equity ratios, liquidity tests or tests relating to net assets. 

Financial covenants are typically tested twice a year (but this can differ).

Equity cure rights (ie, the right of the borrower to cure a financial covenant’s breach by means of a capital contribution) are not standard in the Swiss market generally, but they are fairly common in leveraged transactions and, on occasion, also seen in other financing transactions. 

Describe any other covenants restricting the operation of the debtor’s business commonly included in the bank loan documentation.

Covenants (more specifically, negative covenants, positive covenants and information covenants) are negotiated on a transaction-specific basis to fit the specific financing and borrower group. Typically, as far as negative covenants are concerned, a common core of negative covenants would include restrictions on additional financial indebtedness, a negative pledge, possibly a restriction on disposals, possibly a restriction on mergers and acquisitions and other changes to the group structure and possibly a restriction on the change of the business. Other covenants are typically seen as well, depending upon and tailored to the specific financing and borrower group.

What types of events typically trigger mandatory prepayment requirements? May the debtor reinvest asset sale or casualty event proceeds in its business in lieu of prepaying the bank loans? Describe other common exceptions to the mandatory prepayment requirements.

Mandatory prepayment regimes are negotiated on a transaction-specific basis. In the Swiss market, it is not uncommon to have mandatory prepayments triggered in case of receipt of insurance or litigation proceeds or in case of refinancing transactions. It is also not uncommon to see mandatory prepayments triggered in case of disposals or in case of a change of control. It is not uncommon to find provisions in facility agreements allowing for a reinvestment of the relevant proceeds (where this is agreed as a concept, it typically applies to insurance proceeds, litigation proceeds and disposal proceeds), thus doing away with the obligation to make a mandatory prepayment in case of reinvestment. Other exceptions (such as adverse tax consequences associated with the repatriation of funds from foreign subsidiaries) are seen in leveraged transactions but not frequently otherwise.

Describe generally the debtor’s indemnification and expense reimbursement obligations, referencing any common exceptions to these obligations.

In line with international standards, a debtor must generally indemnify its lenders for costs and expenses and for a breach of representations or covenants. Typically, there are certain negotiated exceptions to these regimes. In addition, one would typically see tax indemnities, funding indemnities, currency indemnities and increased costs and break costs regimes.

Law stated date

Give the date on which the above content is accurate.

26 May 2020.