LIBOR transition 2.0

While the Swiss market seems to have coped very well with the transition away from CHF/Swiss Franc and GBP/Great British Pound LIBOR, the big job of LIBOR transition is not yet entirely done. Currently, the biggest remaining topics seem to be the following:

• The impending cessation of USD LIBOR.
• The future of Euro Inter Bank Offered Rate (EURIBOR).
• Credit adjustment spreads (CAS).

As regards the impending cessation of USD LIBOR, we have seen the first Swiss banks actively transitioning their USD LIBOR- based loan agreements. Although market participants seem to be interested in the concept of Term SOFR/Secured Overnight Financing Rate, we have only seen switches to SOFR compounded in arrears. Anecdotally, Term SOFR is predominantly used in the New York market, whereas the London market distinguishes between whether or not the borrower group or the bank syndicate has a strong US nexus. If there is a strong US nexus, the interest calculation for USD-denominated loans will often be based on Term SOFR. If there is not, SOFR compounded in arrears will typically be used.

For EUR-denominated loans, we have so far exclusively seen EURIBOR as the base rate in the Swiss market. However, market participants are well advised to closely monitor the emerging recommendations of the Working Group on Euro Risk-Free Rates in general and any developments around the use of EUR STR in particular.

We are currently continuing to see CAS ("Bloomberg Spreads") in new loan agreements that use compounded RFR from the outset. CAS are designed to compensate lenders for the difference between LIBOR and the compounded RFR that replaces it. The Bloomberg Spreads were fixed on 5 March 2021 and express the median average difference between the two rates over the five years prior to their fixing. Accordingly, over time, the Bloomberg Spreads will become less representative of the actual difference between the two rates, and it would be surprising if the Bloomberg Spreads were to remain a feature of compounded RFR loans in the long term.

New corporate law

After several years in the making, a major revision of the law applicable to corporations (Aktiengesellschaften, sociétés anonymes) and limited liability companies (GmbH, Sàrl) (LLC) will come into force on 1 January 2023. The revision is extensive and shall adapt the corporate law to better reflect current economic conditions and needs. The most significant changes relevant to lending transactions relate to the following topics:

a) The capital regulations will become more flexible

The share/quota capital no longer necessarily has to be denominated in Swiss francs but may also be denominated in USD, EUR, GBP or JPY provided that the relevant currency is essential for the company's business activity and the company's accounting is in the same currency. Further, the nominal value of one share/quota must only be greater than zero (currently, it must be at least one Rappen for shares and 100 Swiss francs for quotas). Moreover, the general meeting can decide to distribute interim dividends to shareholders, the permissibility of which has been disputed so far. Finally, for corporations only, a new instrument in the form of a capital band is introduced, which will give the board of directors the flexibility to increase or decrease the share capital within a certain range (not more than 50% of the company's share capital registered in the register of commerce) for a maximum period of five years. This new instrument will replace the current instrument of the authorized capital. The increased flexibility in the structuring of the share capital and any relating positions (reserves, dividends) may, in particular, be relevant in the area of upstream/cross-stream undertakings as the resulting potential fluctuations may have an impact on the freely available amounts.

b) The conduct of the shareholders' meeting and the meeting of the board of directors will become more flexible

Similar to the temporary measures adopted during the COVID-19 pandemic, the shareholders will be able to make decisions by means of virtual or hybrid meetings (i.e., part of shareholders not being physically present), provided that the technical means ensure that live participation is possible. Virtual shareholders' meetings will require a statutory basis. Moreover, shareholders may take decisions by means of circular resolutions without verbal deliberation, email being permissible. The board of directors already had, to a certain extent and subject to certain conditions, the above flexibility under the current law and practice. The new law now explicitly reflects the possibility of holding meetings by electronic means and taking resolutions in electronic form (including email).

c) Clarification of rules in case of over-indebtedness and introduction of new obligations in case of an imminent payment incapacity

The board of directors will have the duty to initiate restructuring measures not only in case of capital deficit but also in case of an imminent payment incapacity. This presupposes, in addition to the obligation to monitor the balance sheet, also a monitoring of the solvency (liquidity) of the company by the board. Furthermore, the cases in which a notification of the court can be omitted will be regulated more restrictively: i) a subordination of claims will only be valid if the interest is also subordinated and ii) a silent restructuring will only be permissible if the overindebtedness can be remedied within an adequate period but in any case within 90 days after the audited interim financial statements are available, provided that the claims of the creditors are not additionally jeopardized. On the other hand, the new law clearly states that a debt/equity swap is always permissible regardless of the financial situation of the debtor company.

Sanctions

The Federal Council reacted swiftly to the Russian forces' invasion of Ukraine. On 4 March 2022, it enacted the Ordinance on Measures in Connection with the Situation in Ukraine ("Ordinance") based on its competencies in the Federal Constitution and the Embargo Act. The measures set out in the Ordinance mirror the sanctions enacted by the EU. They are to be interpreted along the general guideline "no stricter than the EU". However, the Ordinance does deviate from EU law in certain points ("Swiss finish") and Swiss State Secretariat for Economic Affairs (SECO), the authority responsible for implementing the Ordinance in Switzerland, consciously applies certain interpretations deviating from EU law.

The Ordinance is unprecedented under Swiss law in terms of both its breadth (substantive scope) and its width (affected persons). All persons in Switzerland are required to comply with the rules. As opposed to EU sanctions, they are not generally applicable to all citizens regardless of where they are.

While everyone in Switzerland is required to comply with the Ordinance, banks are especially concerned by the measures since they are at the center of storing affected assets and financing affected persons and entities. Apart from the general asset freeze and benefits prohibitions for designated persons, notably Russian oligarchs (art. 15 and Annex 8), the provisions directly targeting Russian-held bank deposits (art. 20) and securities trading (art. 23) are relevant. Additionally, the Ordinance sets out financing and investment services bans regarding certain designated entities (art. 18 and 19), limitations on dealing with the Russian Central Bank and other governmental entities (art. 24 and 24a), and certain further general financing and services prohibitions (art. 25 to 28e). Art. 25 to 28e also set out bans relating to enterprises operating in the Russian energy sector (art. 28b) and a prohibition regarding the performance of administrative services for trusts (art. 28d), which may have far-reaching implications for certain banks. The banks also have to implement reports to SECO, notably in connection with frozen assets and benefits for designated persons (art. 16) and existing bank deposits of affected persons (art. 21). In addition to these provisions, the measures restricting trade (art. 2 to 14e) may be relevant for banks, e.g., art. 9 in connection with aircraft leasing. It's further worth mentioning in the banking context that fulfilling certain claims based on trading business restricted under the Ordinance is forbidden (art. 30).

The legal situation regarding the Ordinance and the interpretation of the Swiss provisions will remain highly dynamic. Not only will the Swiss regulator implement further sanctions enacted by the EU, but a discussion on the enactment of proper Swiss sanctions is ongoing as well. The interpretation and application of the Ordinance will remain dynamic as well, given the constantly expanded and updated regulatory guidance from Swiss and EU authorities.

ESG lending

Environmental Social Governance (ESG) has become an important feature in the global lending market. In Switzerland, we see the number of loans with a sustainability link increasing, whereas green and social loans are still rare.

"ESG lending" comprises sustainability-linked loans, green loans and social loans. Green loans and social loans are instruments aimed at exclusively financing green (e.g., energy-efficient buildings, renewable energies) or social projects (e.g., fair conditions in the workplace, appropriate remuneration). One of the key differences between such loans compared to sustainability-linked loans is the use of proceeds. While the proceeds of green/social loans have to be used for a green/social project, the use of proceeds of a sustainability-linked loan is not restricted/tied to a specific project. Rather, one looks at the sustainability performance of the borrower by defining sustainability performance targets (which should be ambitious, set in good faith and remain relevant for the borrower's business throughout the life of the loan, as they form the basis of the aim to improve the borrower's sustainability profile) that are measured by predefined key performance indicators. Where the borrower meets the targets, it receives a margin discount. If it fails to meet the defined targets, it may need to pay a premium or another penalty (bonus/malus system). Lenders often donate such premiums or penalties for ESG projects in order not to make a profit on the borrower's "green breach". Given the proceeds of a sustainability-linked loan can be used freely, such instrument is used for both terms and revolving credit facilities and is also suitable for medium-sized entities that cannot come up with a green or social project large enough for an independent structured loan.          

For all types of these loans, reporting is a core component. The borrower should regularly provide the participating lenders with sufficient and up-to-date information for them to monitor whether performance targets are met or whether the loan proceeds are used for the designated eligible projects. Transparency and disclosure to the participating lenders are key, in particular, for credibility purposes and to avoid greenwashing.

Collateral in tokens

While collateral in tokens is still a rare phenomenon in banking practice, the concept is the subject of lively discussion in the financial industry.

Under Swiss law, collateral can only be provided on property, rights and claims. Since payment tokens are merely data, no collateral can be provided to them. Alternatively, however, the code could be written on a piece of paper (although this is not very practical) and pledged as movable property, or the code could be deposited with a third party and the claim for surrender pledged. Utility tokens are usually based on a right or claim. However, the token itself only represents data, which then leads to the same problem. With asset tokens, on the other hand, the legal situation is different: With the introduction of ledger-based securities (Registerwertrechte) under the new distributed ledger technology (DLT) legislation, at least asset tokens representing security can be pledged and transferred by way of security, which will be discussed below. However, this does not apply to other assets or to most NFTs.

The pledge on registered securities is specifically regulated in Art. 973g of the Code of Obligations. The security ("security without transfer") is validly created if the collateral is visible in the securities ledger and it is ensured that only the secured party can dispose of the ledger-based security in the enforcement event (para. 1). In addition, the general principles of the Civil Code apply, such as the principles of causality and accessoriness (para. 2). Although the regulation is more or less clear, it will take a while before the pledge on the asset token becomes banking practice, which is probably mainly due to the fact that the secured parties still bear the high risk that the token does not convey the right it promises to convey.