A Guide To Cross-Border Financing In Switzerland
|Author:||Mr Daniel Hayek and Mark Meili|
Switzerland is home to approximately 250 banks with an aggregate balance sheet of about CHF3.23 trillion ($3.25 trillion). Consequently, the Swiss cross-border financing market is mature and well-developed. Local banks such as Credit Suisse, UBS and the Zurich Cantonal Bank (ZKB) are the dominant lenders when it comes to cross-border financing, but international banks are also active in the Swiss market. This is because the headquarters of large international groups are located in Switzerland and also because borrowers frequently have Swiss affiliates that grant security.
Since the global financial crisis, banks in Switzerland have become stricter with regard to providing loans to companies. This trend is reinforced by Basel III legislation, which requires banks to hold more equity. Notably, it is becoming harder for small- and mid-sized companies that do not have an investment grade rating to refinance and renegotiate existing debt structures. As a result, many companies are turning to alternative lenders such as funds, pension funds, insurance companies and family offices. These lenders are less conservative than banks and are willing to take more risk. They can often be the solution for troubled companies and can help them to meet their financing needs.
Over the last decade, the ratio of Swiss bank non-performing loans (NPLs) to total gross loans has continuously fallen from 1.3% in 2005 to 0.6% in 2017, which is low in comparison to other jurisdictions and marks an all-time low for Switzerland. Consequently, NPLs are not a very topical issue. A reason for this low ratio may be that NPLs suggest that obligors are facing liquidity problems. A liquidity problem is a major issue for Swiss directors. The board of a Swiss obligor has to convene an extraordinary shareholder's meeting and propose restructuring measures if half of the company's share capital and legal reserves are no longer covered by its assets. In the event that the balance sheet of a Swiss obligor shows negative equity, the board of directors must notify the court. This usually leads to bankruptcy. If the board fails to observe its obligations, the individual directors may incur personal liability. It goes without saying that the board will try to find a commercial solution with the existing lenders or try to raise additional capital from alternative sources to avoid such a situation.
Switzerland provides the legal certainty to resolve any disputes relating to large-scale financial transactions. However, borrowers and lenders tend to find amicable solutions rather than resorting to litigation.
As regards trends in the market, Brexit may have a profound impact on the mechanics of cross-border financing. In particular, it seems that cross-border financing transactions in Europe are no longer solely managed by UK law firms. Local law firms across other European jurisdictions have become more powerful and sometimes take the lead in such transactions. Apart from this,
the market has been rather steady over the last twelve months.
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