Banking & Finance 2021

Last Updated October 05, 2021


Law and Practice


Lenz & Staehelin has the largest banking and finance team in Switzerland, with approximately 80 specialised lawyers offering leading expertise on transactional and regulatory matters. The firm acts for a strong domestic and international client base, and is involved in a high proportion of the most significant matters in Switzerland. The team advises on the full range of banking and finance matters, including financings, regulatory matters, regulatory proceedings, capital markets, asset management, derivatives, private banking and fintech matters.

The lending market in Switzerland is well developed, with experienced participants (lenders, borrowers and advisers). The Swiss lending market has been stable for many years now, including during the 2008 financial crisis and the COVID-19 pandemic. Although the Swiss market is largely in the hands of Swiss banks, non-Swiss banks and non-traditional lenders (such as specialised debt funds) play an important role as well.

Tax incentives, as well as the negative interest rates introduced by the Swiss National Bank in 2015, and subsequently by most banks, have had the effect of fostering investments and supporting loan market activities. The availability of credit facilities remains high.

The Swiss Financial Market Supervisory Authority (FINMA) is keen to ensure that lending is sustainable and that the solvency of banks is not put at risk as a result of over-lending. To this end, FINMA monitors banks to ensure that they have sufficient capital to withstand changes in risk-drivers. The continuing pressure on profitability may result, according to FINMA, in banks taking on increased risks in lending or in interest rate risk-management; for instance, by ceasing to hedge interest rate risks.

The COVID-19 pandemic resulted, among other things, in a significant increase in the liquidity requirements of corporate borrowers. The Swiss bank debt market (and to some extent the capital market) has been able to accommodate those needs.

Also, especially during the first few months of the pandemic, a large number of covenant holidays/resets/amendments were put in place for existing financial covenants on bank financings. Most notably, leverage ratios were (temporarily) replaced with liquidity ratios.

It is further noteworthy that, early on during the pandemic, the Swiss financial industry and the government (legislator, central bank and regulator) set up a liquidity programme designed to provide access to liquidity for companies, mainly SMEs, affected by the pandemic.

It remains to be seen what the mid and long-term impact of the pandemic will be, both on the market and on market practice.

High-yield debt securities have been an increasingly popular means of external debt financing during the past few years.

Frequently, large transactions, especially leveraged transactions, are structured with both loans and high-yield debt. For Swiss withholding tax reasons, the notes' issuer is often a non-Swiss entity.

Alternative credit-providers – such as specialised debt funds, pension funds and insurance companies – have been increasingly active in the Swiss market, especially in international leveraged transactions. The “Swiss non-bank rules” (see 4.1 Withholding Tax) are an important element to be addressed when structuring such transactions.

As regards debt securities transactions in Switzerland, these are generally co-ordinated by Swiss banks (or non-Swiss banks) with a broader investor base than in the bank loan market.

As mentioned above, alternative credit providers have been increasingly active in the Swiss market during the past few years.

In addition, crowdfunding is a relatively new development in Switzerland to finance (typically similar) projects (see 1.6 Legal, Tax, Regulatory or Other Developments). Under current Swiss rules, crowdfunding is not subject to specific regulatory requirements. Similarly, crowdfunding platforms are, for the time being, not subject to licensing requirements (see, however, 1.6 Legal, Tax, Regulatory or Other Developments).

Platform operators have to be careful, however, to comply with the traditional banking rules, and structure their activities in a way that does not trigger a licensing requirement under banking laws. This could, for instance, be the case if the operator accepted deposits from the public (see 1.6 Legal, Tax, Regulatory or Other Developments). In addition, their activities are generally subject to anti-money laundering regulations.

Promotion of Fintech-Based Business Models

In August 2017, the Swiss regulatory framework was amended in order to promote the emergence of innovative business models based on financial technology, such as crowdfunding.

Under the revised rules, it is possible, under certain conditions, to accept public deposits of up to CHF1 million without requiring a banking licence, even if the funds in question come from more than 20 depositors (a so-called sandbox). In addition, funds received can remain on a settlement account for up to 60 days (increased from a previous seven days' limit) without qualifying the funds as a public deposit and consequently triggering the banking licence requirement.

In addition, the Swiss Parliament has adopted an amendment to the Swiss Federal Banking Act, which entered into force on 1 January 2019 and introduced a new type of licence (the “FinTech licence”) for companies accepting public deposits without using such deposits to fund the traditional lending business. Under the FinTech licence, the aggregate amount of public deposits is limited to CHF100 million. Such funds must neither be invested nor be interest-bearing. The Swiss Parliament also amended the Swiss Consumer Credit Act (SCCA) to include in its scope crowdlending activities, under certain conditions.

Regulation of ICOs

Reportedly, more than half of the initial coin offering (ICO) transactions that took place in geographical Europe since 2014 were planned or executed in Switzerland (among which, the largest ICOs worldwide). Currently, ICOs are not subject to specific regulatory requirements under Swiss law. Against this backdrop, FINMA issued, in February 2018, guidelines for enquiries regarding the regulatory framework for ICOs, which set out FINMA’s stance on the application of the current Swiss regulatory framework to ICOs. Depending on the way an ICO is structured, securities regulations, in particular, may apply.

Broadly, FINMA assesses ICOs according to the economic function, purpose and transferability of the tokens issued. Tokens representing assets such as participations in companies, earnings streams, or an entitlement to dividend or interest payments (“asset tokens”) are, as a rule, treated as securities under Swiss law. The same holds true for tokens conferring digital access rights to an application or service (“utility tokens”) if, in addition, they function as an investment economically. By contrast, “payment tokens”, which are solely intended to function as a means of payment and are readily transferrable, do not, as a rule, qualify as securities under Swiss law. That said, in practice, tokens often have hybrid features and qualify for more than one of such categories.

A qualification of tokens as securities will often trigger the application of prospectus requirements, but may also trigger licensing requirements under securities laws. In addition, depending on the structure of the transaction, the funds raised in the context of the token issuance may qualify as “deposits from the public” and may trigger licensing requirements under banking laws. In addition, the application of anti-money laundering requirements has to be assessed closely within ICO projects and will, in particular, be relevant where “payment tokens” are issued. FINMA has repeatedly indicated that it will closely scrutinise ICO business models and will consistently investigate alleged breaches of financial market laws. In March 2019, FINMA disclosed having investigated an issuer in relation to an ICO whose structure was tantamount to deposit activities and would have required licensing under banking laws. The issuer filed for bankruptcy in the course of the investigation and consequently no further regulatory action was taken.

Regulation of Financial Services

Finally, the Swiss Federal Financial Services Act (FinSA) and the Swiss Federal Act on Financial Institutions (FinIA) entered into force on 1 January 2020. These statutes overhaul the regulatory framework applicable to the provision of financial services. They are largely based on EU directives (MiFID, Prospectus Directive, PRIPs project). The purpose of FinSA, in particular, is to regulate financial services in Switzerland by introducing specific rules of conduct, regardless of whether the services are performed in Switzerland or on a cross-border basis. In a nutshell, as far as the offering of financial instruments is concerned, FinSA provides for uniform rules with regard to the prospectus duty that applies to all securities offered publicly into or in Switzerland or admitted to trading on a trading venue in Switzerland. It further provides for a key information document that is to be prepared for all financial instruments, including bonds, offered to retail clients.

As in other leading financial centres, ESG and sustainability linked lending is a major topic in Switzerland and is gaining rapid traction. It is, in particular, in the bank debt market that it is becoming more and more common for syndicated loan transactions (and also for large bilateral loan transactions) to see some sort of ESG or sustainability link.

No uniform approaches have yet developed (and may not develop, given the important factual differences between different groups of companies) but market practice is starting to crystallise more and more, especially in terms of what the relevant triggers are (external ratings and KPIs as most common triggers), reporting and what the implications are (eg, margin increase/decrease).

In the debt capital market, the topic is more and more radar and we expect that, increasingly, new bond transactions will contain an ESG or sustainability link.

Lending activities are generally unregulated in Switzerland, provided the lender does not accept deposits from the public or refinances itself via a number of banks. A Swiss-based entity that combines lending activities with deposit taking from the public or refinancing from a number of banks will generally qualify as a bank, which triggers licensing requirements under Swiss banking laws.

In addition, the Swiss regime for the cross-border provision of financial services, including lending services to Swiss borrowers, is still rather liberal: foreign-regulated entities operating on a strict cross-border basis (without having a business presence in Switzerland) do not need to be authorised by FINMA. If, however, these activities involve a physical presence (such as personnel or physical infrastructures) in Switzerland on a permanent basis, the cross-border exemption is generally not available. In practice, FINMA considers a foreign entity to have a Swiss presence as soon as employees are hired in Switzerland. That said, FINMA may also look at further criteria to determine whether a foreign bank has a Swiss presence, such as the business volume of that bank in Switzerland or the use of teams specifically targeting the Swiss market.

This liberal stance has changed somewhat with the introduction of FinSA and FinIA (see 1.6 Legal, Tax, Regulatory or Other Developments). These two statutes respond to the “third-country rules” of the EU Financial Services Directive (MiFID II) and introduce, inter alia, an obligation for foreign financial service providers that would be subject to an authorisation in Switzerland to register in Switzerland, as a prerequisite to providing financial services to Swiss-based investors. Certain exemptions are available for regulated financial institutions targeting exclusively institutional and professional clients in Switzerland.

Lending to individuals for purposes other than business or commercial activities (ie, consumer credits) is regulated by the Swiss Consumer Credit Act (SCCA). Lenders contemplating consumer credit activities falling under the SCCA have to register with the canton in which they are established. Exemptions from this registration requirement are available for Swiss-licensed banks and for lending services that are ancillary to the commercial activity of the lender (ie, for the purpose of financing the acquisition of goods or services provided by the lender itself).

With the exception of consumer credit activities, foreign lenders are not restricted from granting loans to Swiss-based borrowers under Swiss law (see 2.1 Authorisation to Provide Financing to a Company). Certain Swiss tax law points are to be considered where security is taken over Swiss real estate assets (see 3.2 Restrictions on Foreign Lenders Granting Security).

There are no generally applicable Swiss law provisions restricting or prohibiting the granting of security or guarantees to foreign lenders in Switzerland, such as restrictions on the basis of national interest. That said, depending on the nature of the collateral, the type of security interest and the industry sector, specific restrictions may apply or may impact the enforcement of the security interest by a foreign secured creditor.

One noteworthy example is the restrictions applicable to real estate financing transactions in Switzerland. The background is that the acquisition of Swiss real estate assets by foreign investors or foreign-controlled companies is subject to restrictions under the Swiss Federal Law on the Acquisition of Real Estate by Persons Abroad (the so-called Lex Koller).

In particular, residential properties can only be acquired by foreign investors or foreign-controlled companies if a licence is issued (and such licences are granted on limited grounds). This generally covers both direct investments in residential real estate and acquisitions of shares in a residential real estate company. The concept of “acquisition” under the Lex Koller is such that it also includes secured financings by foreign lenders if those financings exceed certain loan-to-value thresholds.

The acquisition of commercial properties, by contrast, is subject to fewer restrictions, which mainly concern premises that are empty, contain residential parts, or that are acquired in anticipation of expansion plans without concrete plans to build at the time of acquisition.

In addition to this Lex Koller point, a Swiss tax at source can become applicable where the security package of a financing by foreign lenders includes Swiss real estate assets. Exceptions apply if the foreign lenders act through jurisdictions with a double taxation treaty providing for full exemption from such tax.

Also, in certain regulated industries – such as the financial sector (in particular, banking), telecommunications, nuclear energy, media and aviation – shareholders and controlling interests in companies active in the sector may be subject to review and approval by the competent Swiss authority with a view to ensuring proper business conduct and, as the case may be, reciprocal rights for Swiss investments abroad. Such restrictions can also become relevant in connection with secured financings to companies in such sectors.

There are no restrictions or controls on foreign currency exchanges or on the import and export of capital under Swiss law.

There are no specific statutory restrictions on a Swiss borrower’s use of proceeds from loans or debt securities under Swiss law. Parties do, however, generally agree contractually on the permitted use of funds.

Swiss law does not provide for specific rules governing the use of agency or trust structures in the context of secured lending transactions. However, such concepts are recognised and commonly used in practice.

As a rule, it is possible under Swiss law that security be granted to, and held by, an agent or trustee and for security documents to be drafted in such a way that it is not necessary to amend them upon a change of the secured parties. Depending on the type of security interest, the role and powers of the agent or trustee need to be structured differently:

  • where the security interest is a security assignment or a security transfer, the security can be held on trust (ie, by a security agent acting in its own name and for the benefit of the secured parties); or
  • by contrast, where the security interest is a right of pledge, it is necessary that the security agent act as a direct representative of the secured parties (ie, in the name and on behalf of the secured parties), because a Swiss law pledge is accessory in nature to the claims it secures. This requires, among others, that the secured parties are identical to the creditors. Having the security agent act as a direct representative is the standard approach in Switzerland to address this. Alternative approaches (such as parallel debt) remain untested in Swiss courts, but practitioners generally take the view that the "parallel debt" concept should work under Swiss law.

As regards trusts in particular, it should be noted that a substantive trust law does not exist in Switzerland. It is therefore not possible to set up a trust under Swiss law. That said, foreign trusts, as defined under the Hague Convention on the Law Applicable to Trusts and on their Recognition of 1985 (which Switzerland ratified in 2007), may be recognised in Switzerland. This recognition is governed by the Swiss Private International Law Act (PILA).

Loan transfers are generally achieved either by way of an assignment of a lender’s rights under a credit facility or by a transfer of its rights and obligations. Swiss law does not provide for general restrictions on such mechanisms. However, parties to a facility agreement frequently restrict such assignments and transfers contractually by, inter alia, subjecting them to a borrower’s consent regime, such that the borrower's consent is required unless an exemption applies (eg, assignments or transfer upon the occurrence of an event of default or to an existing lender or to an affiliate).

Under Swiss law, a debtor does not need to be notified of the assignment of rights for it to be valid. However, a non-notified debtor may still validly discharge its obligations into the hands of the assignor. As mentioned above, a loan can also be transferred pursuant to Swiss law. In such a case, the lender, with the agreement of the borrower, will transfer its rights and obligations relating to the loan agreement to a new lender.

Security interests of an accessory nature, such as a right of pledge, will, as a rule, follow the claims they secure when transferred. Security interests of an independent nature (such as security assignments, security transfers or certain types of personal guarantees) will, in principle, not automatically follow the claims they secure and must be transferred expressly with the consent of the security provider. As a result, it is generally recommended expressly to assign, and respectively novate, the security package to the benefit of the new lender in the case of a loan transfer, unless the relevant security documents are prepared with a security agency concept, in which case there is no need to assign or transfer the security package.

Finally, assignments and transfers are subject to continued compliance with Swiss non-bank rules (see 4.1 Withholding Tax).

There is no specific regulation addressing debt buy-back under Swiss law (provided the debt instrument does not provide for an equity option or a conversion feature).

In practice, where finance documents address the question of debt buy-backs, such transactions are generally contractually prohibited or restricted. In some cases, the parties may also provide that the participation of a borrower or financial sponsor (or other affiliates) will be disregarded when it comes to voting matters.

Swiss takeover laws provide for “certain funds” rules and requirements that must be complied with in the context of public takeovers. These are generally similar to other well-known standards, such as the certain funds standards in the UK. In a nutshell, details about the financing of the transaction have to be included in the offering prospectus and a review body has to confirm that the bidder has the necessary funds available (or has taken measures to ensure their availability).

With regard to private M&A transactions, Swiss law does not provide for certain funds requirements. In this area, the matter is up to the parties to negotiate, and contractual clauses on funding certainty vary in practice. In domestic acquisitions (where the parties are non-financial entities), the threshold of certain funds is often low and accompanied by a “highly confident letter” or with a term sheet from a bank. In certain instances – for instance, in smaller transactions – a seller may even accept that the acquisition be subject to financing (ie, a financing-out). By contrast, in larger transactions, certain funds requirements are typical and the threshold is a high one, on occasion higher even than it would be for a public takeover.

Generally, under Swiss domestic tax laws, interest payments by a Swiss borrower under a loan are not subject to withholding tax. By contrast, interests on bonds are subject to Swiss withholding tax (currently at a rate of 35%).

In order to avoid a requalification of a loan facility into a bond issuance (ie, a financing from the public) and the levy of Swiss withholding tax on payments under such financing, the so-called Swiss non-bank rules have to be complied with. Under such rules, a facility is at risk of being requalified into a bond issuance if:

  • more than ten non-bank lenders participate (or sub-participate) in the facility agreement (the "ten non-bank rule");
  • a Swiss obligor has, on an aggregate level (ie, all of its lenders and not just the lenders in a particular transaction), more than 20 non-bank creditors (the "20 non-bank rule"); or
  • a Swiss obligor has, on an aggregate level (ie, not only on a transaction-specific level), more than 100 non-bank creditors under financings that qualify as deposits within the meaning of the guidelines issued by the tax administration (the "100 non-bank rule").

Under these rules, a bank is generally defined as a financial institution licensed as a bank in Switzerland or abroad, carrying out typical banking activities with infrastructure and personnel of its own. A breach of the Swiss non-bank rules will result in the application of Swiss withholding tax, which has to be withheld by the Swiss obligor. As the case may be, this tax might be (partly or fully) recovered by a lender, depending on any applicable double taxation treaty.

It is noteworthy that the Swiss non-bank rules are applicable also where there is no Swiss borrower but where a Swiss entity acts as guarantor or security provider. Depending upon the structure, various approaches are available in such transactions to address the Swiss non-bank rules.

Finally, one should note that Swiss withholding tax laws generally prohibit a Swiss obligor from indemnifying a lender for Swiss withholding tax, so that standard gross-up clauses will not typically be valid and enforceable in Switzerland. However, in practice there is an attempt to achieve the same commercial result by including a provision in facility agreements that provides for a recalculation of the applicable rate of interest (if and to the extent that Swiss withholding tax should become applicable and the tax gross-up not being valid). Such clauses remain untested in Swiss courts.

The Swiss government is currently considering a revision of Swiss withholding tax laws that, if and when enacted, would likely do away with the Swiss non-bank rules restrictions.

Aside from the Swiss non-bank rules discussed above in relation to payments by Swiss obligors under a facility (see 4.1 Withholding Tax), tax issues may arise depending on the security package.

First, Swiss tax at source can apply on financings by non-Swiss lenders where the security package includes Swiss real estate assets. Applicable double taxation treaties, if any, may provide for exemption from such tax.

Second, as mentioned above, the Swiss non-bank rules need to be considered and addressed where a Swiss entity acts as guarantor or security provider.

Finally, the granting of a guarantee or security by a Swiss direct or indirect subsidiary for the obligations of a parent (so-called upstream security) or a sister company (so-called cross-stream security) may trigger Swiss withholding tax on payments under the guarantee or on the enforcement of such security interests (see 5.3 Downstream, Upstream and Cross-Stream Guarantees).

Except in the area of consumer credit, there is no specific limit on the maximum amount of interest that may be charged on a loan. However, high interest rates might be considered excessive and be subject to general Swiss law principles on usury.

In this context, the maximal allowable rate of interest depends on several factors and on the circumstances of the case. There is no clear test or threshold, but practitioners and scholars usually agree on a limit in the range of 15-18% per annum. Also, Swiss law prohibits compound interest so that, for instance, default interest due cannot itself bear default interest.

The type of security interest, as well as the applicable formalities and perfection requirements, will generally depend upon the asset used as collateral. Typically, in corporate lending transactions, a security package will consist of a combination of a pledge over shares, a security assignment of (certain) rights and receivables, a pledge over bank accounts and guarantees issued by certain group entities.

As a matter of Swiss law, the creation of a security interest requires parties to enter into a security document identifying the collateral (see also 5.2 Floating Charges or Other Universal or Similar Security Interests) and determining the secured claims in a sufficient manner. As the case may be, formal requirements might apply for the security document to be valid, such as for mortgage agreements, which must take the form of a notarised deed. Perfection requirements, however, will vary according to the type of security and collateral.

  • With regard to financial instruments (such as shares), a right of pledge is typically granted. The creation of the right of pledge requires parties to enter into a security document. Perfection requirements vary, depending on the type of financial instrument. Certificated financial instruments must be physically transferred to the secured creditors or a security agent. If the certificates are registered, they must, in addition, be duly endorsed, typically in blank. A specific regime applies to intermediated securities that can be pledged either by a transfer of the intermediated securities to the account of the secured party or by virtue of an irrevocable written agreement between an account-holder and the depositary institution (control agreement) providing that the institution complies with any instructions from the secured party.
  • With regard to movable assets, the most common form of security interests is the right of pledge. The perfection of a pledge requires, in addition to a valid security document, that the security provider transfer possession of the pledged asset to the secured party or to a third-party pledgeholder. In practice, this requirement often collides with operational requirements and restrictions, and means that security is often not taken over movable assets (or just over selected movable assets in relation to which it is feasible to transfer possession). This requirement does not apply to aircraft and ships for which a public register exists. Similarly, a pledge over registered intellectual property rights – such as patents, designs or trade marks – is typically also registered in the relevant intellectual property register.
  • Security over claims and receivables, such as receivables or rights under contracts, can be taken by means of a security assignment or a right of pledge. In practice, putting in place a security assignment is the typical approach. These arrangements allow for the transfer of the full ownership of collateral assets. The use of the title is, however, contractually limited to the liquidation of the assets in an enforcement scenario and the retention of the proceeds up to the amount of the secured claim. The advantage of this form of security interest resides in the fact that, in the case of bankruptcy of a security provider, the collateral will not fall in the bankruptcy estate of the security provider (see 7.2 Impact of Insolvency Processes). The assignment for security purposes requires a written agreement between the assignor and the security provider.
  • Where bank accounts are concerned, the typical approach is to work with a right of pledge. One point to consider in connection with bank account security is that the account bank will typically have a first-ranking security interest (and other preferential rights, such as a right of set-off) over its client’s account by virtue of the applicable general terms and conditions. In practice, parties often attempt to obtain a partial or full waiver from the account bank for such priority rights. Where no full waiver is granted, and in order to perfect the then second-ranking security interest, it is required that the bank be given notice.
  • Where security is taken over real estate, the security will take the form of a mortgage certificate or a mortgage. No other type of charge on real property is permitted under Swiss law. Mortgage certificates are usually preferred in practice, as they constitute negotiable instruments, which can be pledged or transferred for security purposes. A mortgage certificate can take the form of a registered mortgage certificate (paperless) or a mortgage certificate on paper. Both types of mortgages are created and perfected by an agreement of the parties on the creation of the security right (by a notarised public deed) and an entry in the land register. Notary and registration fees vary, depending on the cantons where the real estate is located, and will often be calculated as a percentage of the secured amount.

Generally speaking, the notification of a debtor is not required to create a secured interest validly. However, it is nonetheless advisable to notify, given that in the absence of a notification, a debtor can validly discharge its obligations in the hands of the security provider.

Floating charges and similar security interests over all present and future assets of a company or blanket liens are not available under Swiss law. Such security interests are not in line with the Swiss law requirement that collateral be specifically identified.

In addition, the requirement that a security provider must transfer possession of movable assets to the secured party(ies) would render any “floating” charge over inventory, machinery, equipment or other movable assets excessively burdensome and impracticable.

Under Swiss law, upstream guarantees (ie, guarantees for obligations of a direct or indirect parent company) or cross-stream guarantees (ie, guarantees for obligations of an affiliate other than a subsidiary) are subject to certain limitations and formal requirements.

In very basic terms, upstream and cross-stream guarantees are treated like dividend distributions as far as formal requirements and substantive limitations are concerned. In particular, it is held that upstream or cross-stream guarantees should be limited to the amount of freely distributable equity; ie, the amount that could be distributed as a dividend. Otherwise, amounts paid in excess of this amount could be deemed to represent unlawful returns of capital. From a formal perspective, the granting of an upstream or cross-stream guarantee should be approved by both the board of directors and the general meeting of shareholders of the Swiss guarantor. In addition, payments under upstream or cross-stream guarantees may be subject to tax, including Swiss withholding tax.

By contrast, downstream guarantees (ie, guarantees for obligations of subsidiaries of the guarantor) are generally not subject to restrictions, except in particular circumstances; for example, if the secured subsidiary is in substantial financial hardship or if it is not a wholly owned subsidiary of the guarantor.

When a Swiss target grants guarantees or other security interests for obligations of an acquirer, any such security interest would be upstream in nature and therefore subject to the limitations discussed in 5.3 Downstream, Upstream and Cross-Stream Guarantees.

Several steps need to be considered in this respect. Firstly, the articles of association of the Swiss target should expressly permit upstream financial assistance. Secondly, the guarantees should be approved not only by the board of directors but also by the shareholders of the Swiss target company. Thirdly, the finance documents should include language to limit such upstream undertakings to the amount of freely distributable equity and provide for a compensation of the Swiss target by a security or guarantee fee, as well as include certain undertakings of the Swiss target to mitigate upstream limitations. Finally, certain Swiss tax withholding issues should also be addressed in the finance documents.

Another issue that arises, in particular where the target is a listed company, is the issue of minority shareholders. If and for as long as a guarantor/security provider is not a wholly owned subsidiary of the parent entity whose obligations are to be guaranteed/secured, minority shareholder considerations can constitute a material issue/risk.

The main restrictions in connection with the provision of security interests in the context of financings are those relating to upstream and cross-stream undertakings (see 5.3 Downstream, Upstream and Cross-Stream Guarantees).

Other restrictions might also apply depending on the context, such as bankruptcy legislation (avoidance actions, see 7.5 Risk Areas for Lenders) and general restrictions in connection with the principle of good faith and public policy.

A security is generally released through a release agreement and a release action. The release action depends upon the type of security interest that is to be released. Essentially, the release action will consist of “reversing” the actions that were necessary for the perfection of the security interest, such as a return of movable assets or share certificates, or the reassignment of rights and receivables. Also, it is good practice to notify all relevant parties (eg, account banks) of the release.

As far as real estate assets are concerned, the priority of competing security interests results from the time of entry of the mortgage or mortgage note into the land register. The same applies to the public register for aircraft and ships. The land registers contain all pre-existing security interests with rank and amount. Security interests on real estate may be established in a second or any lower rank provided that the amount taking precedence is specified in the entry. Unless an agreement providing for advancement in rank is recorded in the land register, when security interests of different ranks are created on real property, any release of higher-ranking security interest will not entitle the beneficiaries of lower-ranking security interest to advance in rank.

As far as movable assets and certificated shares are concerned, the perfection of a security interest requires a transfer of the particular asset to the secured party. As a result, third parties are not able to take and perfect subsequent security interest over these assets without the consent of the secured party, with the exception of good faith acquisitions (a third party acting in good faith will acquire a valid security interest over the assets, irrespective of the fact that the pledgor had no authority over the assets).

As far as rights and receivables are concerned, the order of priority is chronological, with the first security interest granted in time being senior to any subsequent security interest. Parties can, however, agree on a different ranking among themselves. Because there is no public register, legal due diligence is sometimes conducted to verify that the particular assets are free from third-party rights. Also, it is customary to obtain a respective representation and to provide for the necessary negative undertakings (eg, no disposals, negative pledge) in the relevant security document(s).

As a general rule, priority ranking can be contractually varied and Swiss law recognises agreements setting priorities. Any party having a first-ranking security interest can decide to waive its priority right. Generally speaking, contractual subordination provisions will usually survive in insolvency proceedings of a Swiss security provider but questions can arise, in particular as to whether an insolvency official is bound to them and, where things are unclear, it is not uncommon in practice to bolster the contractual arrangements by means of security assignments of claims among different groups of creditors.

Security interests can be enforced if a secured party has a secured claim that is overdue. The finance documents will generally define the enforcement trigger.

Under Swiss law, there are two main avenues for enforcing a security interest. First, the enforcement of a right of pledge can follow the rules set out in the Debt Enforcement and Bankruptcy Act (DEBA). Under the DEBA, the usual form of enforcement is a public auction sale. Assets may, however, be sold without a public auction if:

  • they would lose value during the time required to prepare the auction;
  • the costs for the safekeeping of the assets are unreasonably high;
  • the assets have a market price (ie, are traded on a stock exchange); or
  • all parties agree to the private sale.

Second, where the collateral consists of pledged claims, movables or security papers (including mortgage notes), the parties are free, to a certain extent, to agree on a private foreclosure mechanism. Private enforcement is generally preferred in practice as it can be processed more expediently and with a simpler process than enforcement under the DEBA. By contrast, if a security right consists of a security assignment or transfer, enforcement can only be effected by way of private enforcement, as title to the collateral has passed to a secured creditor precisely with such purpose.

Private enforcement can be achieved through a public auction, public offering or a private sale. If a private sale has been agreed upon in the relevant security documents, it is advisable to arrange expressly in this context for the right of a secured creditor to purchase the collateral itself. The value of the collateral will be determined based on fair market value and any surplus remaining after application of the proceeds to the secured amount would be paid out to the security provider. Private enforcement of a right of pledge is, subject to exceptions (eg, for intermediated securities), only available as long as no official enforcement proceeding under the DEBA has been initiated.

A choice of a foreign law as the governing law of a contract is generally possible under Swiss law, save for specific contracts such as contracts with consumers. A choice of law to govern security documents, whilst binding for the parties, will not bind third parties.

Swiss courts will generally refuse to apply provisions of foreign law if this would lead to a result that would be incompatible with Swiss public policy. In addition, a Swiss court may apply provisions of a different law from the one chosen by the parties if important reasons call for it and if the facts of a case have a close connection with that other law.

Similarly, jurisdiction clauses are also generally binding, subject to certain exceptions.

As regards immunity, if and to the extent a person is subject to immunity, waivers are generally not possible.

As a rule, Swiss courts will generally recognise a final and conclusive judgment of a competent foreign court. Recognition of a foreign decision may, however, be denied if such a decision is manifestly incompatible with Swiss public policy, if a party establishes that it did not receive proper notice, if the decision was rendered in violation of fundamental principles of procedural law, or if the principle ne bis in idem has been violated.

Where proceedings in relation to the same subject matter and between the same parties have been started earlier in another competent court, Swiss courts will, as a rule, neither enforce a judgment nor take up the case until a decision capable of being recognised in Switzerland is rendered by the foreign court.

As for arbitral awards, Switzerland is a signatory to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards and will recognise and enforce foreign arbitration awards pursuant to and to the extent of that convention.

As mentioned further above, the purchase of Swiss real estate by foreign or foreign-controlled investors might be subject to approval by the Swiss authorities under the Lex Koller. Any acquisition of residential real estate assets in Switzerland by foreign or foreign-controlled investors, in particular, is subject to restrictions and permit requirements (see 3.2 Restrictions on Foreign Lenders Granting Security). If certain loan-to-value thresholds are exceeded, such restrictions and requirements can also apply to financings secured by Swiss real estate assets.

Furthermore, a lender's ability to enforce its rights under finance documents may be limited by the occurrence of a bankruptcy or insolvency event with the Swiss debtor (see 7. Bankruptcy and Insolvency).

The DEBA provides for composition proceedings that can be used to liquidate and realise a debtor’s assets in a more flexible manner than in a bankruptcy scenario or that may result in a debt restructuring. In other words, a debtor will either postpone the payment of the debts (debt moratorium) or propose the settlement of the debts according to a specific plan.

This rescue proceeding can be initiated either by the Swiss debtor or, under certain circumstances, by its creditors. In practice, a demand for a reorganisation by creditors is not common. In addition, a court may also stay a judgment requesting the opening of bankruptcy proceedings of its own motion if it appears that an agreement can be reached with creditors. In such a case, the bankruptcy court will transfer the file to the composition court.

Generally, a provisional moratorium of up to four months will be granted first. If the court finds that there are reasonable prospects for a successful reorganisation or that a composition agreement is likely to be concluded, it will grant a definitive moratorium for a period of four to six months (which can be extended to a maximum of 24 months) and appoint an administrator.

Where a mere restructuring moratorium does not appear sufficient, a debtor may then choose to negotiate a composition agreement with its creditors. Such an agreement may take the form of:

  • a debt-rescheduling agreement, where a debtor offers creditors full discharge of their claims according to a timeline; or
  • a dividend agreement, where a debtor offers creditors only a partial payment of their claims.

The composition agreement must be approved by creditors. It is deemed ratified if approved either:

  • by a majority of creditors representing at least two thirds of the total claims; or
  • by one quarter of creditors representing at least three quarters of the claims. Creditors with privileged claims and secured creditors (to the extent that their claims are covered by the estimated liquidation proceeds of the collateral) will not be entitled to vote on the composition agreement. Once approved by the creditors, the composition agreement will require final approval by the composition court to become binding for all creditors of claims covered thereby.

During a moratorium, realisation of collateral through enforcement proceedings or private realisation is not permitted. After the moratorium, creditors are generally entitled to liquidate the collateral through official enforcement proceedings or, if the security document so provides, by private enforcement.

Once bankruptcy has been declared over a Swiss obligor or a composition agreement with assignment of the Swiss obligor’s assets has been approved, the Swiss obligor becomes insolvent. All its obligations become due and payable and the insolvent loses legal capacity to dispose of its assets. All of its assets will form part of the bankruptcy estate, including pledged assets. Private enforcement of any assets that are part of the bankruptcy estate is no longer possible. The enforcement of creditors’ rights in this context will be governed by the DEBA.

Assets from which the legal title was transferred for security purposes, however, do not fall in the bankruptcy estate but remain with the assignee, respectively the transferee. These assets may still be privately enforced by the secured party. Any eventual surplus from liquidation must then be returned to the bankruptcy estate for distribution to other creditors.

Subject to avoidance actions (see 7.5 Risk Areas for Lenders), the initiation of insolvency proceedings should not affect valid acts of disposition made prior to such an occurrence.

In bankruptcy proceedings, claims of creditors are satisfied pursuant to a statutory order. All costs of the bankruptcy administration are paid directly out of the proceeds first. Then, enforcement proceeds are used to satisfy the claims that they secure. If several items of collateral secure the same claim, the amount realised is applied proportionally to the claim. The remainder of the enforcement proceeds is eventually used to satisfy unsecured creditors.

Unsecured creditors, together with secured creditors for the uncovered part of secured claims, are divided into three classes and satisfied out of the proceeds of the entire remainder of a bankrupt estate. The first class consists of, among others, claims of employees, claims of pension funds and some family-law claims. The second class consists of, among others, all social insurance claims and tax claims, as well as privileged deposits if the insolvent is a Swiss bank. The third class includes all other claims. Creditors of the lower ranking class will only receive payments once all claims in the higher-ranking classes have been satisfied in full. Claims within a class are treated equally and, as the case may be, satisfied proportionally.

Under Swiss law, the concept of equitable subordination is primarily discussed in relation to the risk of shareholder loans being, under certain circumstances, requalified as equity and subordinated in the bankruptcy of a Swiss corporate debtor. This risk particularly exists in situations where the loan was made available when the debtor was already in financial distress, while independent loan financing could typically not have been secured. The specific circumstances that would justify an equitable subordination in this context are discussed by courts and scholars so that it is difficult to assess this equitable subordination risk in practice. That said, if admitted, an equitable subordinated claim would be treated as subordinated to all other debt in the case of bankruptcy of the Swiss corporate debtor.

Under the DEBA, dispositions taken to disadvantage certain creditors prior to the opening of bankruptcy proceedings may be subject to avoidance actions. This includes acts of disposition of assets made against no consideration or against inadequate consideration during the year preceding the declaration of bankruptcy. It also includes acts taken during the five years prior to the opening of bankruptcy proceedings with the purpose of disadvantaging creditors or favouring some creditors to the detriment of others.

In addition, the following acts may be voidable if carried out within the year preceding the opening of a bankruptcy if a debtor was at the time over-indebted:

  • the granting of collateral for previously unsecured debt;
  • the settlement of debt by unusual means of payment; or
  • the repayment of debt not due.

Such acts are not voidable if the party that benefited from the act demonstrates that it did not know and should not have known about a debtor’s over-indebtedness.

In Switzerland, the project finance market is mainly focused on infrastructure projects in the area of transport, energy and leisure. Many projects are primarily financed by public funds.

Some increased activity could be observed during the past few years in the area of private-public partnerships (PPP) (see 8.2 Overview of Public-Private Partnership Transactions). Several PPP projects were completed in recent years or are pending, notably in the sectors of sport infrastructure, medical infrastructure and other infrastructures.

Switzerland does not have specific federal or cantonal legislation dealing with PPP transactions. The applicable rules therefore vary depending on the sector involved.

An important aspect of PPP transactions when these are structured within public procurement projects will be to abide by the rules for participation and awarding public projects. At the federal level, these rules are set out in the Federal Public Procurement Act (PPA) and, where the Swiss federal government is party to a project, the rules of the PPA must be complied with.

In addition, Switzerland is a signatory to the WTO Agreement on Government Procurement that applies to procurements by the Swiss Confederation and the cantons, as well as public companies in the water, electricity and transport sectors.

The federal and cantonal bodies have implemented an electronic platform for public procurement purposes called “Simap”. It offers a procedure for public contract-awarding authorities to post their tenders and any relevant tender documents. Bidders and interested companies are given an overview of all existing contracts across Switzerland and documents are freely accessible.

Depending on the sector of a project and its scope, relevant documents and information may need to be submitted to competent authorities for information or, as the case may be, for approval. This will typically be the case in relation to construction, zoning and environmental issues and concessions.

Jurisdiction over public sector projects is allocated between federal, cantonal and municipal authorities, depending upon the sector involved. At a federal level, the main responsible government body is the Department of the Environment, Transport, Energy and Communications (DETEC) and the agencies attached to it. The DETEC is in charge of transport, energy, communications, aviation and the environment.

The Federal Communications Commission is the regulatory body for the telecommunications sector. It is responsible for granting licences for the use of radio communication frequencies and promulgating access conditions when service providers fail to reach an agreement.

The Swiss Federal Electricity Commission is Switzerland’s independent regulatory authority in the electricity sector. It monitors electricity prices as well as electricity supply security and regulates issues relating to international electricity transmission and trading. In Switzerland, cantonal and municipal bodies generally have authority over natural resources such as oil, gas and mineral resources.

With regard to state ownership in Switzerland, the three central sectors, which used to be fully state-owned, were railways, the postal service and telecommunications services. The Swiss federal government is currently the sole shareholder of the Swiss Federal Railways, which used to be a government institution. Shareholder responsibilities of the federal government are performed by the General Secretariat of the DETEC in co-operation with the Federal Finance Administration. In addition, Swiss Post is still entirely owned by the Swiss government as a public limited company. Swisscom (a telecommunications provider) is also a public limited company but its shares are listed on the Swiss Stock Exchange. Currently, the Swiss federal government holds the majority of the share capital and the votes in the company.

The preferred legal form of a project company is the stock corporation. Sometimes, international holding structures are also used. Tax issues should always be considered when setting up the structure.

With regard to foreign investment issues, there are only a few restrictions, and non-discriminatory competition between foreign and domestic entities prevails. The main restriction occurs with respect to real estate property by application of the Lex Koller, which contains several restrictions and authorisation requirements for the acquisition of non-commercial property by foreign or foreign-controlled investors (see 6.4 A Foreign Lender’s Ability to Enforce Its Rights). In this context, foreign investment in a project company holding non-commercial real estate may be restricted by application of the Lex Koller.

Switzerland has signed over 120 bilateral investment promotion and protection agreements (BITs) with developing and emerging market countries around the world. Switzerland has the world’s third-largest network of such agreements after Germany and China. BITs improve legal certainty and the investment climate. The purpose of BITs is to afford international law protection from non-commercial risks associated with investments made by Swiss nationals and Swiss-based companies in partner countries – and, reciprocally, investments made by nationals and companies of partner countries in Switzerland. Such risks include state discrimination against foreign investors in favour of local ones, unlawful expropriation or unjustified restrictions on payments and capital flows.

The Swiss Constitution protects property rights. However, in order to achieve planning goals, the competent authorities may, subject to the rules of expropriation, dispossess land from private entities. Expropriations are permitted if they are based on sufficient legal foundations, are in the public interest, are compliant with the principle of proportionality and if their aim cannot be achieved by other reasonable means. In addition, full compensation has to be made.

The typical funding techniques for project financings are debt financing (including ECA-covered financings), mezzanine financing, capital markets and state subsidies.

Switzerland has an official export credit agency, the Swiss Export Risk Insurance (SERV), which offers insurance and guarantee products to cover political and credit risks involved in exporting goods and services. So far, SERV’s products have primarily been relied upon for financings in the power, railways and mechanical engineering industries. That said, small and medium-sized businesses are increasingly relying on SERV’s support recently, which contributes to expanding the scope of industries seeking out SERV’s policies and commitments to facilitate financings.

Under Swiss law, land ownership extends downwards into the ground to the extent determined by the owner’s legitimate interest. Therefore, any natural resources found on a property belong to the owner of the property, with the exception of groundwater rivers.

However, mining rights and exploitation of natural resources – such as oil, gas or minerals – are usually regulated by federal or cantonal legislation, and a governmental permit, licence or concession is necessary. A concession will be granted in exchange for the payment of concession fees or royalties. The amount of concession fees typically depends upon the value of the concession. Domestic and foreign parties are treated equally in this regard. Export restrictions extend to nuclear energy, water for energy production, protected plants and animals.

Switzerland has enacted various environmental, health and safety laws and regulations. Such rules do not impact upon the financing of projects. The main regulatory body at a federal level is the DETEC. In particular, the Federal Office for the Environment within the DETEC deals with issues relating to the environment, health and safety.

The main federal acts regarding the environment, health and safety are the Federal Act on Protection against Dangerous Substances and Preparations, the Federal Act on the Protection of the Environment, the Federal Act on the Protection of Waters, the Federal Act on Narcotics and Psychotropic Substances, the Federal Act on Radiological Protection, the Federal Act on Foodstuffs and Utility Articles, and the Federal Act on Protection Against Infectious Diseases in Humans. Many secondary federal ordinances are also applicable in various areas, such as biodiversity, climate, contaminated sites, biotechnology and major accidents. In addition, cantonal or municipal legislation is abundant.

Lenz & Staehelin

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Walder Wyss Ltd is a leading law firm in Switzerland with around 240 legal experts across offices in Zurich, Basel, Berne, Geneva, Lausanne and Lugano, including a team of 14 partners and additional 30 legal experts in the area of banking and finance. Walder Wyss advises all major Swiss and international banks as well as borrowers in domestic and cross-border lending transactions. Further, Walder Wyss advises a considerable number of private equity investors in leveraged acquisition finance transactions. Another core competence of the team is its knowledge of and experience in refinancing transactions of credit portfolios through various public and private structures.

A Brief Overview of Banking and Finance in Switzerland

In Switzerland, as in many other jurisdictions, financial markets struggled in 2020 due to the COVID-19 pandemic. In March 2020, the Swiss Federal Council declared the “extraordinary situation” and introduced stringent measures, including the lockdown of schools, shops, restaurants, bars, and entertainment and leisure facilities. Most of these strict measures were lifted during summer 2020. However, during November 2020 through March 2021, certain measures were imposed again, but generally, restrictions were relatively light, as compared to other jurisdictions in Europe.

The Swiss government passed various regulations in response to the COVID-19 pandemic, including measures to avoid bankruptcies of businesses which were expected to arise as a consequence of the pandemic (eg, availability of an emergency moratorium for small and mid-cap size businesses of up to six months, subject to less formal requirements than a general composition moratorium, temporary standstill measures and others). Most of these regulations have been implemented into law that has been approved by parliament (even though such laws are currently the subject of a referendum).

In many industries, the EBITDA of corporate borrowers declined dramatically during Q2 of 2020. According to the Swiss State Secretariat for Economic Affairs, the Swiss GDP fell by approximately 8% in Q2 of 2020, which is the biggest decline since the start of the collection of quarterly data in Switzerland. There were, however, certain industries that were not affected by the outbreak of the COVID-19 pandemic or even benefited, such as IT, the online and the pharma industries. Most industries recovered rapidly and in Q3 of 2020, the Swiss GDP was only 2% below pre-crisis level. Whilst the Swiss economy recovered since then quite well, certain industries continue to be heavily affected by the measures imposed in response to the COVID-19 pandemic (eg, the travel, tourism, and event industries, restaurants, etc).

As a consequence of the COVID-19 pandemic, there was a massive increase in liquidity needs for corporate borrowers, but the Swiss banking market and to some extent the capital market, with the support of the Swiss Confederation, the Swiss Cantons and the Swiss National Bank has been able to bridge such liquidity needs. Various programs have been set up for these purposes.

Effects of the COVID-19 Pandemic on the Swiss Lending Markets

Following the ordering of the first lock-down by the Swiss Federal Council on 16 March 2020, corporate borrowers were in crisis mode. It became obvious, that a large number of leveraged finance transactions would come immediately under distress and, depending on the industry, also corporate debt finance transactions with relatively low leverage were under pressure.

The banks in Switzerland acted very responsibly and there was essentially no opportunistic behavior of market participants. A huge number of transactions had to be amended. Normally, covenant holidays and in some cases even payment holidays have been granted. Leverage ratio covenants have often been replaced by liquidity covenants. Also, the restrictions applying under the COVID-19 loan program had to be addressed, because the up-streaming of cash flows was restricted for those operating entities within a group that had borrowed under a state guaranteed COVID-19 loan (see also below).

Some borrowers had to be refinanced for purposes of ensuring the continuation of the business. In some instances, transactions were supported by the Swiss Confederation and the Swiss National Bank.

It remains to be seen what the mid and long-term impact of the COVID-19 pandemic will be, both on the market and on market practice. However, it is very remarkable that, with a few exceptions only, the Swiss debt financing market seems to be back on track. Of course, the continuing high level of liquidity in the market and the very low interest rates (currently, the Swiss National Bank continues to charge minus 75bps on sight deposits of banks) continue to be drivers in the market.

COVID-19 Loan Programme

In March 2020, only a week after the first lockdown had been ordered by the Swiss Federal Council, the Swiss COVID-19 Loan Programme has been set up by the Swiss Federal Council under an emergency ordinance (the COVID-19 Ordinance on Joint and Several Guarantees). The program aimed at supporting SMEs with immediate liquidity needs (as a consequence of the pandemic). Rapid access to liquidity facilities was granted. COVID-19 loans were granted between 26 March and 31 July 2021. As of 19 December 2020, the COVID-19 Ordinance on Joint and Several Guarantees has been transformed by Swiss parliament into a formal federal act. Accordingly, on 1 January 2021, the Swiss Federal Act on COVID-19 Credits with Joint and Several Guarantee entered into force.

COVID-19 loans were originated, disbursed and serviced by the Swiss banks.

Terms of the COVID-19 loans

Affected SME’s were able to apply for COVID-19 loans in an amount of not more than 10% of their maximum annual turnover and in any event not more than CHF20 million. Furthermore, it was a requirement that the SME was incorporated before 1 March 2020, was not in bankruptcy or under a moratorium, was affected by the COVID-19 pandemic and did not receive any liquidity protection based on other emergency programmes. There are two different COVID-19 Loans: loans up to CHF500,000 (“COVID Loans”) and loans in amounts between CHF500,000 and CHF20 million (“COVID Plus Loans”).

COVID-19 loans up to an amount of CHF500,000 are fully backed by the Swiss Confederation and an interest rate of zero applies. COVID-19 loans have been granted without any credit check and have normally been paid out within hours only.

COVID Plus Loans are 85% baked by the Swiss Confederation. The remaining 15% credit risk is taken by the bank. Therefore, a normal credit approval process was necessary. Those loans provide for an interest rate of 0.5% per annum.


According to data provided by the Federal Department of Economic Affairs, Education and Research, 136,716 COVID-19 loans (with an aggregate volume of roughly CHF14 billion and 1,134 COVID-19 plus loans (with an aggregate volume of roughly CHF3 billion) have been granted between 26 March and 31 July 2021. As of mid-September 2021, about CHF3 billion have been fully repaid. The lending banks have drawn on the supporting guarantee form the Swiss Confederation in relation to COVID-19 loans in an amount of approximately CHF240 million.

There are relatively few actual or alleged cases of abuse as compared to the overall size of the program.


Borrowers of COVID Loans are subject to certain restrictions as the purposes of such loans is, in short, limited to ensuring continuity of the business. Whilst the restrictions under the Swiss Federal Act on COVID-19 Credits with Joint and Several Guarantee are more relaxed than under the emergency ordinance, certain key restrictions still apply. Hence, a borrower of a COVID-19 Loan must not:

  • pay dividends or bonuses to shareholders or repay equity capital to shareholders;
  • grant loans or repay loans or other obligations to affiliated parties, unless such loan or other obligation was pre-existing;
  • refinance intra-group loans, except for pre-existing obligations for the payment of interest and amortisations;
  • on-lend or make otherwise available of COVID-19 Loan proceeds to group companies outside of 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, where the group relies on cash flows generated by these operating entities. Debt servicing at the top level of a group becomes difficult where the operating entities are restricted to up-stream cash flows. Hence, borrowers are incentivised to repay COVID-19 loans rather sooner than later. Also, where group financing transactions had to be re-negotiated and covenant or even payment holidays have been granted by the lenders, the lenders normally insisted on a clear roadmap towards early repayment of the COVID-19 loans.

LIBOR Cessation

The London Interbank Offered Rate (LIBOR) will be discontinued for most currencies, including the CHF LIBOR, by the end of 2021 and the financial markets are transitioning to use risk free rates. On 4 December 2020, the Swiss Financial Market Supervisory Authority (FINMA) issued its LIBOR transition roadmap as FINMA Guidance 10/2020. According to this roadmap, lenders have been asked to determine which contracts and what volume are potentially “tough legacy” as they mature after 2021 and do not contain robust fallback clauses by no later than March 2021 and to amend relevant contracts ideally by 30 June 2021. In the CHF market, the Swiss Average Rate Overnight (SARON) was recommended by the National Working Group on Swiss Franc Reference Rates (NWG).

Larger Swiss financial institutions started the process of amending existing syndicated credit facilities agreement in early 2021 and, in the meantime, a fair volume of deals have been successfully amended. Also, since around June of this year, new deals introduced the SARON from the outset of the transaction without any rate switch mechanism being applicable. Whilst parties mostly follow the guidance and template agreements provided by the NWG, a certain standard has evolved during the last couple of months.

Lookback with observation shift

Whilst various methods for calculating the compounded SARON are available, the Swiss domestic syndicated lending market clearly focused on the method “look back with observation shift” with period of five RFR business days.

Calculation of compounded SARON

In the Swiss domestic market, the compounded SARON is typically calculated on the basis of the “cumulative compounded SARON” as recommended by the NWG. The compounded daily rates are cumulated and only one interest calculation will occur in relation to each interest period. However, as this calculation methodology differs from the methodology applied by the Loan Market Association (LMA) and reflected in the LMA recommend form rate switch documentation (ie, daily non-cumulative compounded rate), non-Swiss banks and lenders are not very familiar with the Swiss approach. Hence, in situations where there are non-Swiss financial institutions in the syndicate, the LMA concept is normally applied and the compounded SARON is calculated based on the daily non-cumulative compounded rate. Also, in multicurrency facilities agreements, in order to avoid that different methodologies are implemented in one facilities agreement, the daily non-cumulative compounded rate is used for calculating interest on a daily basis.

As mentioned, under the cumulative compounded SARON concept, interest will only be calculated once at the end of the interest period. However, upon a prepayment, the calculation of interest will have to be advanced and the standard clauses that evolved address this by introducing a concept of “shortening of interest periods” which at the same time results in a shortening of the observation period.

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 loans and potentially suffers a loss in case the interest which a lender should have received for the remainder of the interest period exceeds the actual amount which 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 that revolving facilities are used almost as overdraft facilities.

Rate switch date

Whilst all transactions must switch to the risk-free rates before the year end, Swiss banks are already trying to implement the switch in September or October.


Currently, the market approaches the endgame of the LIBOR transition. Conceptually, market standards have evolved, but latest statistical data from the FINMA suggests that still a fair number of transactions will have to go through the amendment process for the introduction of SARON as new reference rate. Still, the Swiss lending market appears to be ready for the cessation of the CHF LIBOR by the end of 2021.

Debt Funds

Debt funds continue to be active in the Swiss market and it appears that the number of leveraged finance transactions involving debt funds continues to increase. However, the market share of debt funds continues to be lower than in other jurisdictions, such as Germany or the UK.

Whilst there is no exact data available, reasons for such relatively low market share of debt funds in the Swiss lending market could be the following:

  • Swiss banks continue to be very active in the market and are normally able to offer attractive rates;
  • debt funds tend to accept higher leverages as banks and accept certain other very attractive terms (eg, no equity requirement for permitted acquisitions, no limitation of permitted acquisitions (subject to leverage test only), etc), however, Swiss banks have become more flexible in this regard as well; and
  • whilst the documentation suggested by debt funds normally provides for more flexibility, Swiss banks are still considered to be reliable partners that are reasonable in granting waivers and offer pragmatic and flexible solutions upon commercially justified request.

Swiss Withholding Tax

Current status

Unlike most other countries, Switzerland does not levy withholding tax on interest paid on private and commercial loans (including on arm's-length inter-company loans). Rather, 35% 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 ten 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 (SFTA) reclassifies such foreign bonds into domestic bonds if the amount of proceeds used in Switzerland exceeds certain thresholds (ie, the combined ac-counting 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 so-called "10/20 non-bank rules" and stating that:

  • 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
  • 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.

Fundamental changes envisaged by Swiss Federal Council

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 replacing the current debtor-based regime applicable to interest payments with a paying agent-based regime for Swiss Federal withholding tax. Under such a paying agent-based regime, if introduced, a Swiss paying agent would need to levy and pay Swiss Federal withholding tax on interest payments on bonds (or loans), if the beneficiary were an individual resident in Switzerland. As a consequence of the consultation process, the Swiss Federal Council, on 11 September 2020, resolved on an abolishment of 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 the parliamentary process on 14 April 2021.


The abolition of Swiss withholding tax on bonds and other collective debt financings should significantly strengthen Switzerland’s position as financial market and treasury centre. All types of financing and refinancing activity in Switzerland (eg, raising of capital via bond issuances, crowdfunding platforms, ABS structures and other capital market transactions) will be facilitated. In the context of syndicated credit financing transactions, structuring will become more straight-forward as Swiss borrower structures would no longer have to address the "10/20 non-bank rules" and broader syndication outside the banking market would no longer be restricted.

It is unlikely that this fundamental change of the Swiss withholding tax regime will enter into force before 1 January 2024.

Walder Wyss Ltd

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Law and Practice


Lenz & Staehelin has the largest banking and finance team in Switzerland, with approximately 80 specialised lawyers offering leading expertise on transactional and regulatory matters. The firm acts for a strong domestic and international client base, and is involved in a high proportion of the most significant matters in Switzerland. The team advises on the full range of banking and finance matters, including financings, regulatory matters, regulatory proceedings, capital markets, asset management, derivatives, private banking and fintech matters.

Trends and Development


Walder Wyss Ltd is a leading law firm in Switzerland with around 240 legal experts across offices in Zurich, Basel, Berne, Geneva, Lausanne and Lugano, including a team of 14 partners and additional 30 legal experts in the area of banking and finance. Walder Wyss advises all major Swiss and international banks as well as borrowers in domestic and cross-border lending transactions. Further, Walder Wyss advises a considerable number of private equity investors in leveraged acquisition finance transactions. Another core competence of the team is its knowledge of and experience in refinancing transactions of credit portfolios through various public and private structures.

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