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Structuring a lending transaction


Who are the active providers of secured finance in your jurisdiction (eg, international banks, local banks or non-bank financial institutions)?

Local banks are the most important providers of secured financing in Switzerland, followed by international banks and non-bank financial institutions.

Is well-established market-standard facility documentation used in your jurisdiction for secured lending transactions?

Large secured lending transactions with a volume in excess of Sfr50 million are typically documented using facility agreements following the recommended forms prepared by the Loan Market Association. Such documentation is widely used and accepted in the Swiss lending market. Smaller transactions, especially where the volume is lower than Sfr20 million, are most often documented under the standard bilateral facility documentation used by the respective lender.


Are syndicated secured loan facilities typical in your jurisdiction?

Yes, syndicated secured loan facilities are widely used in Switzerland, particularly to finance leveraged acquisitions or large real estate portfolios.

How are syndicated facilities normally structured? Does the law in your jurisdiction allow a facility agent to be appointed to act on behalf of other banking syndicate members?

Syndicated facilities are typically either arranged by a bank mandated for that purpose by the borrower or granted by a group of lenders pre-selected by the borrower (a so-called ‘club deal’).

Usually, a member of the lending syndicate is appointed as agent for the other syndicate members under the facility agreement. The agent's duties under the facility agreement are mechanical and administrative in nature (eg, managing payments between the borrower and the syndicate members, determining interest rates, receiving notices and distributing information to the syndicate members). The agency role is typically fulfilled by a dedicated department within the relevant bank.

In secured syndicated lending transactions the syndicate members will also appoint a security agent (often the same entity as the agent), which holds and administers the security for the syndicate.

Does the law in your jurisdiction allow security and guarantees to be held on trust by a security trustee for the benefit of the banking syndicate?

Under Swiss law it is not possible to set up a trust. However, foreign trusts will be recognised in Switzerland subject to the respective provisions set out in the Swiss Private International Law Act and the Hague Trust Convention, which was ratified by Switzerland in 2007. Subject to the prerequisites of these, a trust created under foreign law for the benefit of a banking syndicate will therefore be recognised by Swiss courts.

In the case of lending transactions governed by Swiss law, the security agent will act either as a direct representative in the name and for the account of each secured party or as an indirect representative in its own name but for the account of each secured party, the latter concept being more akin to a common law trust. The security agent will be required to act as direct representative in respect of security for which Swiss law requires that the creditor of the secured debt be identical to the person holding the security interest (ie, so-called ‘accessory’ securities, such as pledges). Parallel debt structures, where the debtor of the secured debt stipulates a separate debt in favour of the security agent to allow the creation of accessory security solely in the security agent's name, have to our knowledge not yet been tested in Swiss courts and it is therefore uncertain whether they would be considered valid if brought under judicial scrutiny.

Special purpose vehicle financing

Is it common in secured finance transactions for special purpose vehicles (SPVs) to be used to hold the assets being financed? Would security generally be given over the shares in the SPV or would lenders require direct asset security?

In Switzerland, SPVs are commonly used in leveraged acquisition financing transactions, where sponsors typically do not wish to be liable for the acquisition debt if the cash flow of the acquired business is not sufficient to service the debt. SPVs are also used in other contexts, such as export financing and project financing, albeit less frequently. SPVs are not commonly used in general secured lending transactions (eg, to finance large corporates' working capital needs).

Where an SPV is used for a secured lending transaction, security over the shares in it is typically required. Security over the assets acquired by the SPV will also typically be sought by lenders, though there may be legal limits as to the practicality of taking such security (eg, in respect of inventory) or its commercial value (eg, upstream limitations).


Is interest most commonly calculated by reference to a bank base rate or a market standard variable reference rate (eg, LIBOR, EURIBOR or HIBOR)? If the latter, which is the most commonly used reference rate in your jurisdiction?

Interest is typically calculated by reference to reference bank rates plus a margin. The base rate is typically EURIBOR in respect of euro borrowings or LIBOR in respect of other currencies. In recent years, due to the fact that LIBOR rates for Swiss francs have been negative, lenders have typically required that the interest calculation mechanism provide that the base rate may not be less than zero.

Are there any regulatory restrictions on the rate of interest that can be charged on bank loans?

With the exception of interest on consumer credit loans, the maximum interest rates allowable in Switzerland are primarily subject to legislation on a cantonal, rather than federal, level. Typical limits are between 15% and 18% per year. Interest rates in excess of this may in addition be found to violate federal law, though no fixed limit is set in federal legislation. Against the background of prevailing low interest rates, the maximum interest limits currently have no practical relevance in commercial lending transactions.

Use and creation of guarantees

Are guarantees used in your jurisdiction?

Yes, the use of guarantees is common in Switzerland. In typical commercial lending transactions, affiliates of the borrower often provide guarantees in favour of the lenders.

What is the procedure for their creation?

Guarantees are created by contract, through either a provision included in the facility agreement or a separate guarantee agreement. Generally, the creation of an enforceable guarantee does not require registration under Swiss law.

The guarantee undertaking in Swiss law – governed syndicated credit documentation usually follows the wording set out in the Loan Market Association recommended form, with a few alterations.

Do any laws affect or restrict the granting or enforceability of guarantees in your jurisdiction (eg, upstream guarantees)?

Upstream and cross-stream guarantees granted by a Swiss guarantor (ie, guarantees granted for the benefit of such a guarantor's parent or sister companies) must be examined in the light of the restrictions and conditions imposed by Swiss corporate and tax laws.

From a corporate law perspective, the granting of upstream or cross-stream guarantees should generally be made only on arm's-length terms, as directors of a Swiss company must act in the best interests of that company at all times. Since there are no safe haven rules or other guidance as to what conditions will be considered as arm's-length terms, it is highly recommended that cautionary measures be taken, in case the arm's-length nature of the up or cross-stream security or guarantees is later denied. For one thing, the guarantor’s articles of association should explicitly permit the granting of up and cross-stream guarantees, as the commitment in question could otherwise be deemed ultra vires and thus null and void from the outset. If required, the necessary changes to the articles of association can usually be made within two to three weeks. In addition, any up or cross-stream guarantee should be unanimously approved by the shareholder(s) and the members of the board of directors of the Swiss guarantor in written resolutions.

Where an up or cross-stream guarantee is not granted on arm's-length terms between the Swiss guarantor and its relevant parent or sister companies, payments under the guarantee will constitute a constructive dividend or, if no sufficient freely distributable reserves are available, amount to a prohibited repayment of share capital. To avoid such a repayment (and related liability for members of the board of directors of the relevant guarantor), up and cross-stream guarantees should be granted only subject to market-standard limitation language which provides that the guarantee may be enforced only to the extent that the Swiss guarantor has freely distributable reserves. To the extent that the enforcement in an amount up to the freely distributable reserves constitutes a constructive dividend, certain corporate formalities must be fulfilled – such as the preparation of an (audited) interim balance sheet and approval by the shareholders' meeting of the Swiss guarantor.

From a tax perspective, if up or cross-stream guarantees are not granted on arm's-length terms, the difference between the consideration granted by the affiliate to the Swiss security provider (if any) and an arm's-length consideration may constitute a hidden dividend distribution on which Swiss withholding tax (currently 35%) is payable. Further, in case an up or cross-stream guarantee which is not granted on arm's-length terms is enforced, any amount recovered may be considered a distribution and as such will also be subject to Swiss withholding tax. While this is generally recoverable if the recipient or beneficiary is a Swiss resident entity, a non-resident may be entitled to a refund only if there is an applicable double taxation treaty.

Subordination and priority

Describe the most common methods of structuring the priority of debts and security.

Subordination of debt under Swiss law can be achieved contractually through an agreement between the debtor, the subordinated creditor and the senior creditor in which the subordinated creditor's claims are subordinated to the claims of the senior creditor. It is also possible for more than two parties to agree on more complex ranking systems. Generally, subordination undertakings not only refer to the ranking of the creditors in an insolvency of the debtor, but also set out an obligation for the debtor not to repay the subordinated debt until the senior debt has been repaid in full.

In addition or as an alternative to a contractual subordination, structural subordination can be achieved if the subordinated loan is extended to a holding company while the senior loan is extended to a subsidiary of such holding company.

Documentary taxes and stamp duty

Are any taxes, stamp duty or other fees payable on the granting of a loan, guarantee or security interest, or on its enforcement?

As a general rule, the granting or enforcement of a loan, guarantee or security interest does not in itself trigger any Swiss taxes. However, cantonal stamp duties (eg, in the canton of Ticino) must be checked with a view to the specific transaction.

If security is granted over real property, notaries' fees, registration fees (for the land register) as well as cantonal and communal stamp duties may be payable depending on the transaction.

With regard to withholding taxes, interest paid on loans extended to a Swiss borrower are generally not subject to Swiss withholding tax. However, interest payments on bonds are subject to this (at a rate of 35%). The Swiss tax authorities have issued guidelines according to which a loan is considered a bond if either the aggregate number of non-bank lenders (including sub-participations) exceeds 10 under a facility agreement with identical terms or if the aggregate number of non-bank lenders of a Swiss borrower exceeds 20. Against this background, transfer restrictions and other Swiss 10/20 non-bank rules-related language must be incorporated into the respective loan documentation. The restrictions may also apply if no Swiss company acts as borrower but solely provides security.

Guarantees or securities for the benefit of a foreign borrowing subsidiary – in particular if of a downstream nature – may be relevant for the assessment of whether Swiss interest withholding tax on bonds or debentures will be triggered in respect of interest payments by the foreign borrowing subsidiary. Swiss interest withholding tax may also apply if a Swiss or a foreign borrower benefits from (downstream) guarantees of a Swiss affiliate and uses the proceeds directly or indirectly in Switzerland and has more than 10 non-bank lenders in a facility with identical terms or more than 20 non-bank lenders under all its credit facilities in total.

Further, the Swiss Confederation and the cantons or communes levy a withholding (source) tax on interest paid to foreign lenders which benefit from mortgage security on Swiss real estate. The combined rate of the tax is between 13% and 33%, depending on the canton and commune in which the real estate is located. This interest withholding tax is reduced (to zero) under a number of double taxation treaties, including those with the United States, the United Kingdom, Luxembourg, Germany and France.

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