Securitisation 2022

Last Updated January 13, 2022

Switzerland

Trends and Developments


Authors



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 6 partners and 12 associates for Swiss securitisation transactions. The firm has been involved in almost all Swiss first-time transactions (first Swiss RMBS transaction for Zürcher Kantonalbank 2001, first covered bond transaction for UBS AG 2009, first insurance-linked synthetic transaction for FIFA 2006, etc) and continues to be involved in most public and private ABS transactions, synthetic transactions, covered bond transactions and other securitisations. In particular in auto lease ABS (and consumer lending more generally) and mortgage loan transactions. Accordingly, Walder Wyss is regularly retained by market participants, including Swisscard, Cembra Money Bank, AMAG Leasing, Multilease, Ford Credit, PSA, BMW Schweiz, Credit Suisse, UBS and Goldman Sachs. Walder Wyss is also active in relation to various regulatory initiatives in the structured finance area and is part of a larger working group led by the Swiss Bankers Association.

Overview

In 2020 and 2021 the public Swiss securitisation and asset-backed securities (ABS) market was impacted by the COVID-19 pandemic like capital markets in general. Still, the Swiss securitisation and ABS market has proven to be relatively robust. During that period, it became clear that securitisation and ABS transactions continue to be an important tool for diversifying funding sources. In situations of market disruptions, certain funding sources might become more expensive or might not be available at all. Therefore, during the COVID-19 pandemic, constant issuers continued to tap the securitisation, ABS and covered bond markets.

The Market during the COVID-19 Pandemic

General situation in Switzerland

The COVID-19 pandemic has disrupted markets across the world and, obviously, Swiss debt and ABS capital markets were affected as well. On 16 March 2020, the Swiss Federal Council declared an “extraordinary situation” and introduced more stringent measures, including the lockdown of schools, shops, restaurants, bars, and entertainment and leisure facilities. Certain restrictions are currently still in force (January 2022), even though the restrictions are not as harsh as in other European countries. The Swiss government passed various regulations in response to the COVID-19 pandemic, including measures to avoid bankruptcies of businesses which may arise as a consequence of the COVID-19 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, and temporary standstill measures ). Most of these regulations have been implemented into a law that has been approved by parliaments and approved by popular vote.

Impact of the COVID-19 pandemic on portfolios and existing transactions

Following the announcement of the lockdown, originators, issuers, investments banks and rating agencies monitored the portfolios under ongoing transactions more closely. The outbreak of the COVID-19 pandemic had a massive impact on the ability of originators to originate new assets during the months of March, April and May 2020. Since essentially all structures in Switzerland are revolving transactions, originators in Switzerland started working on contingency plans to ensure a proper replenishment of the portfolios or to further allow the substitution of assets by cash. However, in June 2020, business picked up quite smartly and portfolios started to grow again. For example, in the auto lease sector, June, July and August 2020 were again record months for some originators. However, so far, portfolios appear to be stable. Accordingly, public ABS transactions proved to be very robust, even during the crisis and the situation in Switzerland appears to be under control. Since Spring 2021, the situation has deteriorated again and auto lease companies are experiencing difficulties covering a very high demand as a consequence of disruptions in the supply chains and the delay in delivery of new vehicles. Again, ongoing transactions continue to be on track.

Responses of capital markets to the COVID-19 pandemic

Capital markets in Switzerland reacted quite heavily and, as in most European countries, April and May 2020 were very difficult months for the Swiss capital markets in general. However, by June 2020, the first ABS transaction since the lockdown had been successfully marketed in Switzerland. Whilst coupons have been higher than in previous transactions, it was important for originators and the market more generally that this transaction was successfully placed. It would appear that the market for unsecured bonds was more difficult at that time. Accordingly, ABS has proven to be a solid and crisis resistant source of funding. In the latest transactions, coupons were lower again, even though the level remains slightly higher than prior to the outbreak of the COVID-19 pandemic.

Low Interest Environment in General

Swiss markets continue to be driven by the negative interest environment. The Swiss National Bank (SNB) continues to charge negative interest on bank deposits at currently minus 75 basis points. This is not expected to change in the near future, despite the slight increase in inflation.

As the liquidity in the markets remains at very high levels, corporate bonds and government bonds provide for very low yields and continue to be an extremely efficient funding source for corporate issuers. This holds true even in the case of a relatively low rating of the issuer. In addition, for asset managers, unsecured bonds are simple instruments and internal processes for getting to an investment decision are very efficient.

On the other hand, securitisation transactions and ABS are slightly more complex. The process for asset managers to get to an investment decision is normally more burdensome. As a result, the interest levels for securitisation transactions and ABS are relatively high compared to straight bonds, considering the significantly lower risk profile and the much higher rating.

However, it is important for issuers under securitisation transactions and ABS to continue to be present in the market and to continue being diversified. The COVID-19 pandemic and other disruptive events in the past have shown that securitisation transactions and ABS are a stable and reliable source of funding.

New Prospectus Regime

In a general attempt to bring the Swiss regulatory framework in line with international regulations, such as MiFID II and the EU Prospectus Directive, the Financial Market Infrastructure Act (FinMIA), the Federal Financial Services Act (FinSA) and the Financial Institutions Act (FinIA) have replaced major portions of the previous regulations. The FinSA and the FinIA entered into force on 1 January 2020 along with the explanatory Financial Services Ordinance (FinSO, relating to the FinSA) and the Financial Institutions Ordinance (FinIO, relating to the FinIA).

For the first time in Switzerland, the FinSA introduced a new comprehensive prospectus regime that covers and harmonises disclosure requirements for different types of financial instruments and establishes a level playing field with the EU Prospectus Directive. This also affects the issuance of instruments to the capital markets in securitisation transactions.

The most important novelties introduced by the FinSA in relation to the pros-pectus requirements are the following.

  • A prospectus must also be published in secondary offerings.
  • A prospectus must be published in the event of any admission for trading of securities on a trading platform (not only in the case of a listing).
  • A prospectus must be pre-approved prior to publication by a new regulatory body licensed as such by FINMA (reviewing body); in an attempt to keep “time to market” short, certain exemptions have been introduced for bonds and ABS issuances; accordingly, for those type of instruments, issuers are at liberty to opt for an ex post approval process and submit the prospectus for approval only post settlement.
  • There are now (further) codified exemptions from prospectus requirements.

Exemptions are based either on the type of offering, the type of securities offered or, in the case of the admission to trading only, related to the admission.

On 1 June 2020, namely five months after the introduction of the new regulatory regime, FINMA designated and granted licences to BX Swiss AG (the Berne Stock Exchange) and SIX Exchange Regulation AG (Zurich) to act as prospectus review bodies. Hence, until 1 December 2020, issuers have been able to benefit from a transitional period and the new approval process only become mandatory from 1 December 2020.

Initially, there have been some uncertainties about the practical aspects of the prospectus approval process. However, between 1 December 2020 and August 2021, a larger number of bond transactions and ABS transactions went through the approval process and prospectuses were approved by the reviewing bodies. It turned out that the approval process was relatively slim and the reviewing bodies, as contemplated by the relevant legislation, were applying a very formal approval regime (ie, there was no review of the prospectus as to substance). Thus, some initial uncertainties around the format of the prospectuses and the practical elements of the process have been eliminated.

Still, a number of uncertainties remain for securitisation transactions and ABS transactions. As an example, the FinSO requires issuers to disclose in the prospectus the financial statements of the past two years. There is not really a clear exemption for securitisation SPVs (which are typically newly incorporated prior to the launch of a transaction) but given that ABS are explicitly referred to in the FinSO, it must be concluded that not disclosing such financial statements is permissible, if they are not available. Also, the FinSO requires newly incorporated issuers to disclose in the prospectus an audited opening balance sheet. Normally, in the context of a securitisation or ABS transaction, assets are only transferred to the issuer on settlement. Accordingly, the opening balance sheet only shows the (initial) paid in capital and a small amount of cash and that information is obviously not relevant for investors when making an investment decision. Still, as the requirement is quite explicit, most issuers have, so far, decided to go through the process of auditing the opening balance sheet of the issuing SPV and disclosing it in the prospectus.

Abolition of Swiss Withholding Tax

On 17 December 2021, the current Swiss withholding tax on interest payments on bonds was abolished by the Swiss parliament with effect as of 1 January 2023. However, the abolition may be subject to a facultative (optional) referendum, in which case there would be a popular vote on the abolition.

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 (such as Swiss ABS), as well as on interest paid by Swiss banks. While Swiss withholding tax is generally recoverable, the process for doing so might be burdensome for non-Swiss investors, and even a Swiss investor would suffer a delay in recovering the withholding tax. In the event that an investor is located in a jurisdiction that does not benefit from a favourable double tax treaty with Switzerland or does not otherwise benefit from treaty protection (such as tax-transparent funds), Swiss withholding tax might not be fully recoverable, or not be recoverable at all. Swiss withholding tax can be structured away in the event that a non-Swiss vehicle is used. However, this adds some complexity to the structuring process, given that there will also be a strong focus on the true sale analysis from a tax perspective.

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 accounting equity of all non-Swiss subsidiaries of the Swiss parent company and the aggregate amount of loans granted by the Swiss parent and its Swiss subsidiaries to non-Swiss affiliates).

In order to prevent Swiss federal withholding tax from being imposed on normal loans (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 (i) 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 (ii) 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). In the context of securitisation transactions, this is relevant in the case of single investor transactions, transactions with very few investors (less than ten), and asset-backed commercial paper transactions that are refinanced through a single multi-issuances platform.

Abolition of Swiss withholding tax

The Federal Council, in response to its consultation document, submitted a request to the Swiss Parliament that withholding tax on bonds be abolished.

On April 3, 2020, the Swiss Federal Council initiated a consultation process (Vernehmlassung) regarding the 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 the notes 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 to abolish Swiss withholding tax on interest payments (with the exception of interest payments on domestic bank accounts and deposits to Swiss-resident individuals), without substitution, and it submitted a corresponding legislative project to the parliamentary process on 14 April 2021. On 17 December 2021, the Swiss parliament resolved on the abolition. Whilst the abolition should become effective as of 1 January 2023, it cannot be excluded that the abolition will be challenged by facultative referendum. In which case there would be a popular vote on the abolition and such vote might delay the abolition process or, depending on the outcome, cancel the abolition in its entirety.

Comment

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.

Walder Wyss Ltd

Seefeldstrasse 123
Zurich
Switzerland

+41 58 658 58 58

+41 58 658 59 59

reception@walderwyss.com www.walderwyss.com
Author Business Card

Trends and Development

Authors



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 6 partners and 12 associates for Swiss securitisation transactions. The firm has been involved in almost all Swiss first-time transactions (first Swiss RMBS transaction for Zürcher Kantonalbank 2001, first covered bond transaction for UBS AG 2009, first insurance-linked synthetic transaction for FIFA 2006, etc) and continues to be involved in most public and private ABS transactions, synthetic transactions, covered bond transactions and other securitisations. In particular in auto lease ABS (and consumer lending more generally) and mortgage loan transactions. Accordingly, Walder Wyss is regularly retained by market participants, including Swisscard, Cembra Money Bank, AMAG Leasing, Multilease, Ford Credit, PSA, BMW Schweiz, Credit Suisse, UBS and Goldman Sachs. Walder Wyss is also active in relation to various regulatory initiatives in the structured finance area and is part of a larger working group led by the Swiss Bankers Association.

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