In the aftermath of the unprecedented credit market upheaval the previous year, 2009 saw a record volume of new issues in the Swiss franc bond market. With 242 listings of bonds, volume increased from CHF71.7 billion ($66.8 billion) in 2008 to CHF83.8 billion in 2009. While tapping the Swiss debt capital market was of enormous interest to foreign issuers in the first half of 2009, activities slowed during the second part of that year – but have picked up again in early 2010. In this article, we will describe the legal framework governing issuing and listing bonds in Switzerland which was partly overhauled in 2009, as well as the most important trends and transactions in the year after the Lehman collapse.
Regulatory framework
Compared to other jurisdictions, offering debt securities (bonds or notes) in Switzerland is fairly straightforward, due to a lenient regulatory framework. The rules are more complex if debt securities are listed at the SIX Swiss Exchange, the country's main stock exchange. In particular, as long as debt securities are not listed on the exchange, their offering is not subject to authorisation by, or registration with, any governmental or self-regulatory body. Special rules apply to the offering of domestic and foreign collective investment schemes, as well as structured products.
In public offerings of debt securities in Switzerland, the issuer – whether Swiss or not – is obliged by law to prepare an offering prospectus in accordance with the Swiss Code of Obligations (CO). In addition, issuing certain debt securities, in particular those by non-Swiss issuers with the participation of a Swiss bank by way of a private placement, may be subject to the Swiss Bankers Association's Directive on Notes of Foreign Borrowers, from May 2001.
Unlike other jurisdictions, Swiss law does not provide for clear-cut private placement exemptions in case of debt securities. A public offering of bonds or notes requiring an issuance prospectus is generally viewed as an offering made to an indefinite number of investors. An offering is deemed to be private if it is addressed to a limited number of people. There is no numerical threshold that must not be exceeded in order to keep the private character of a placement. However, in practice, a safe harbour is often assumed for offerings addressed to not more than 20 selected potential investors.
In terms of soliciting customers potentially interested in debt securities, Swiss law makes no distinction between sophisticated customers (institutional investors or high net worth individuals, for instance) and other customers. Because of this, the level of regulation stays the same, irrespective of the quality of the investor. This means that if an offering of debt securities qualifies as a public offering, although exclusively addressed to sophisticated investors, an offering prospectus must be prepared. This is unsatisfactory because marketing foreign collective investment schemes follows a more liberal regime.
According to the CO, an offering prospectus must provide information on, inter alia, the issuer's share capital, its latest audited annual and semi-annual financial statements and its recent dividend history. In case of debt securities, the prospectus must also contain the terms and conditions of the bonds or notes. Compared to the EU Prospectus Directive, the statutory disclosure requirements for a Swiss prospectus are relatively basic. But in recent years, issuers have started to include additional information in their offering prospectuses to meet investors' expectations (who are often used to more comprehensive international standards) and to avoid prospectus liability claims.
Prospectus liability
The Swiss rules on prospectus liability state that anyone who intentionally or negligently participates in the drafting of an incomplete, incorrect or misleading offering prospectus is liable for damages, provided that there is a direct causal link between the misstatement or omission in the prospectus and the damage suffered by the investor. A prospectus is deemed incomplete if the statutory disclosure requirements are not met (if there is no prospectus at all where required by law, or if the prospectus contains only part of the required information.) It is misleading if facts that are material to the investment decision are omitted.
Potential plaintiffs in prospectus liability suits are all persons, in particular the initial subscribers and subsequent purchasers of debt securities who suffered damages as a result of a violation of the disclosure requirements. Potential defendants can include the issuer itself, its directors and senior (and potentially other) officers, the auditors, the underwriters and the advisers to any of them.
Swiss law does not outline the specific measures needed to ensure that the offering prospectus is not incomplete, incorrect or misleading. As a general guideline, it must be ensured that the process followed in the preparation of the offering prospectus is a sound one. In a decision of 2002, the Swiss Supreme Court explicitly accepted a due-diligence defence brought forward by the Swiss lead-manager of a foreign bond issuer who was in default.
Listing at the SIX Swiss Exchange
The listing of debt securities such as bonds and notes at the SIX Swiss Exchange is governed by the SIX Listing Rules and its implementing rules and regulations. In a reorganisation of the SIX Swiss Exchange at the beginning of 2009, the former SIX Admission Board was replaced by two separate bodies, the Regulatory Board and the SIX Exchange Regulation. While the Regulatory Board acts as a rule-setting body for issuers and participants, the SIX Exchange Regulation is responsible for the listing of securities as well as surveillance and enforcement. On 1 July 2009, a new set of SIX Listing Rules came into force, replacing the old rules from 1996. The purpose was to streamline the structure of the previous regulations and to bring them in line with today's international capital markets practice. In respect of bonds, convertibles, bonds with warrants, asset-backed securities and loan participation notes, the SIX Listing Rules have been supplemented by the Additional Rules for the Listing of Bonds.
To be eligible for a SIX listing, a debt securities issuer (or a third party acting as guarantor) must have existed as a company for at least three years, and presented its annual accounts for three complete financial years before submitting the listing application. The issuer's reported equity capital must also amount to at least CHF25 million. Special rules apply to sovereign issuers.
The minimum nominal amount for a bond to be listed is CHF20 million. Due to a regulatory change in February 1 2005, the former requirement that terms and conditions of bonds listed on the SIX Swiss Exchange must generally be governed by Swiss law was replaced by a more liberal framework which accepts the laws of any OECD member state (or of any other jurisdiction recognised by the SIX). There is also no more requirement to provide for a place of jurisdiction in Switzerland in the terms and conditions, provided that a place of jurisdiction has been designated in the jurisdiction whose laws are applicable to the bonds or notes (subject to certain exemptions for public-sector issuers).
For the purpose of the listing, a listing prospectus in German, French, Italian or English must be prepared. Such a prospectus must provide enough information for knowledgeable investors to reach an informed assessment of the assets and liabilities, financial position, profits and losses and prospects of the issuer, as well as the rights attached to the securities. Any special risks also need to be disclosed. The prospectus may take the form of a standalone prospectus, or alternatively a domestic issuance programme (subject to Swiss or foreign law). Domestic issuance programmes need to be approved by the SIX and are valid for 12 months following registration with the exchange. The listing of single tranches under such programmes merely requires the submission of a final term sheet. Foreign issuance programmes, (ie, programmes not approved by the SIX) do not qualify for this purpose. From an SIX perspective, an issuance under a foreign issuance programme, such as a Euro Medium Term Note Programme (MTN) is deemed a standalone issue. This means that any additional information required by the SIX Listing Rules is typically covered by a Swiss wrap-up (or country supplement) to the Euro MTN base prospectus.
The listing prospectus must contain information about the issuer, the guarantor (if any), the securities, and the people or companies responsible for the contents of the prospectus. The precise scope of the information required in respect of debt securities is set out in a disclosure scheme known as Annex E to the SIX Listing Rules. In addition, the listing prospectus must contain the financial information required by the SIX Listing Rules, either as an annex or by way of incorporation by reference. For the listing of debt securities, financial information for only two previous business years is required, and there is no obligation to provide interim financial statements. The listing prospectus must be published no later than on the day of the listing. A listing notice is no longer required for debt securities.
Bonds intended for listing are normally admitted provisionally to trading on the SIX. Such provisional trading may begin three trading days after the respective application has been lodged via the SIX electronic platform (Internet Based Listing).The formal listing application needs to be lodged within two months of that start of provisional trading. The issuer must also provide a declaration that the listing prospectus is complete, and that there has been no material deterioration of its financial situation since the listing prospectus was published. For first time SIX issuers, a new pre-approval system has been implemented in 2009. In addition, issuers (and guarantors, if any) must sign a declaration of consent in respect of legal proceedings provided for in the SIX Listing Rules, especially the arbitration clause.
Following the listing of the bonds or notes, the issuer (and the guarantor, if any) has to comply with the ongoing obligations for the maintenance of listing as set forth in the SIX Listing Rules, such as periodic reporting.
New Act on book-entry securities
Debt securities are normally issued in bearer form and certificated in a permanent global note which is then deposited with SIX SIS or another depository recognised by the SIX. Under the new Swiss Federal Act on Book-Entry Securities (BESA) which has come into effect on January 1 2010, the debt securities so deposited qualify as book-entry securities. Because BESA introduced a new legal regime applicable to intermediated securities, the bond documentation of new issuances, in particular the terms and conditions of bonds, has to be adapted to the new system.
Book-entry securities may represent, among other things, shares, bonds, derivatives and units of collective investment schemes (ie, fungible claims and membership rights against an issuer). As regards bonds, they are created in a two-step process: First, a permanent global note is issued and deposited with SIX SIS or another depository. Should the bond issue be represented by noncertified securities, this first step is substituted by registering the bond issue in a register of noncertified securities held by the issuer or its agent and an additional registration in the main register held by SIX SIS or another depository. Second, the bonds deposited or registered are credited to securities accounts. With the creation of book-entry securities, the rights in the underlying (certified or noncertified) securities are suspended and any sale of book-entry securities may only be carried out through electronic bookings following a corresponding instruction or, as regards securities, in the same manner or by way of a control agreement.
Trends and transactions in 2009
As mentioned, the Swiss franc bond market saw a record volume of new issues in 2009, with 242 bonds listing, representing an issue volume of CHF83.8 billion. Foreign issuers were extremely active in the first half of 2009, while activities decreased during the second part of the year, partly due to the fact that most issuers had already completed their funding programs for 2009, and partly due to rather unattractive currency swap rates. In addition, the year saw several first issuers tapping the Swiss debt capital market, and a number of noteworthy transactions.
UBS mandatory convertible securities
The issue of CHF12.5% 6 billion convertible notes 2008 – 2011 by UBS, acting through a Jersey vehicle, in late 2008 was a landmark transaction in the Swiss capital markets for various reasons. The notes were fully underwritten by the Swiss government and enabled UBS to provide the equity portion to a fund entity controlled and owned by the Swiss National Bank and created in connection with a transfer by UBS of up to $60 billion of illiquid securities and other assets from UBS's balance sheet. The transaction also helped UBS maintain a Tier One capital ratio. In August 2009, the Swiss government announced that it exercised its conversion rights and sold the resulting shares in an accelerated book-building to Swiss and foreign institutional investors. The coupon payments were sold back to UBS. The transaction resulted in a net profit of CHF1.2 billion for the Swiss government.
Mortgage bond transactions
Following the virtual collapse of the interbank lending market after Lehman's insolvency in September 2008, the two major Swiss banks experienced increasing liquidity problems, also partly due to the fact that bank customers started transferring their savings to cantonal and local banks less affected by the credit crisis. In addition to the Swiss National Bank stepping in and offering liquidity facilities against collateral, an interesting feature of 2009 existed in a number of Swiss Pfandbriefe deals, ie covered mortgage bonds issued by UBS and Credit Suisse through a Swiss mortgage bond institution in private placements targeted at Swiss retail banks. Unlike previous Pfandbrief deals, these transactions were very significant in terms of issuance amounts and privately placed with a selected number of financial institutions with excess cash readily available.
State-guaranteed bonds
In the first half of 2009, several foreign banks such as Swedbank, Westpac and ANZ, tapped the Swiss debt capital market by way of bond issues that were supported by a state guarantee. In this context, the SIX had to deal with the question of whether the relevant listing documentation should provide the standard disclosure normally required for guarantors. In a communication of April 2009, the SIX concluded that this was not necessary – provided that the guarantee has a statutory legal basis – and further provided that the bond is guaranteed by a member state of the EU (with certain exceptions), Australia, Canada, Japan, New Zealand or the US. The second half of 2009 even saw foreign financial institutions issuing CHF bonds without a state guarantee.
Transactions structured as loan participation notes
2009 also witnessed major CHF note issues by Russian issuers Gazprom and VTB. Both transactions were structured as Loan Participation Notes which the SIX has been accepting since 2005. This offers issuers from a number of central and eastern European jurisdictions access to the Swiss debt capital market that would otherwise not be able to issue bonds to investors in a tax efficient manner. Such issues are subject to a set of special provisions under the SIX Additional Rules for the Listing of Bonds. The listing prospectus must provide information not only on the limited recourse issuer, typically a special purpose vehicle, but also on the economic issuer (the ultimate borrower of the proceeds lent by the formal issuer). The prospectus must also contain a summary of the transaction with information on the parties involved, their function, the main characteristics of the transaction structure, and the risks attached.
Standstill and default scenarios
2009 also saw various smaller convertible note issues by listed companies, which were launched in the context of standstill agreements imposing on such issuers the refinancing of bank loans. The transactions were typically privately placed to allow a smooth and swift fundraising. It is not surprising that these issues offered attractive interest rates and conversion prices to adequately reward investors for the credit risk they were willing to accept.
In that same context, several Alpine-Yen convertible notes issued by Japanese borrowers in financial difficulties, had to be restructured. This was typically done through a vote by a noteholders meeting in Switzerland on agenda items such as a reduction of the redemption amount and an extension of the maturity.
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Philippe Borens
Schellenberg Wittmer
Philippe Borens is a partner in Schellenberg Wittmer's banking and finance team in Zurich. His main areas of practice are banking and finance law, capital markets and stock exchange law, structured products and investment funds, as well as financial services regulation. Borens advises clients in all types of finance transactions, including syndicated loans, acquisition finance, domestic and international equity and debt capital market transactions, investment funds and investment companies, derivatives and structured products, securitisations, as well as securities listings on Swiss stock exchanges and regulatory issues. He is an authorised representative at the SIX Swiss Exchange and author of publications in the field of Swiss financial markets and securities law. He is also a lecturer at the law faculty of the Universities of Zurich and Liechtenstein.
Philippe Borens was born 1967 and is a citizen of Switzerland. He was admitted to the bar in Switzerland in 1997. After his graduation from the University of Basle, he completed a masters program in European economic law (LLM) at the College of Europe in Bruges (Belgium) and obtained a doctorate in law in 1999. Borens joined Schellenberg Wittmer in 1999 and became a partner in 2004.
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Martin Lanz
Schellenberg Wittmer
Martin Lanz is a partner of Schellenberg Wittmer and heads the firm's banking and finance team in Zurich.
He advises banks and other financial institutions, as well as borrowers and issuers of debt and equity, in regulatory matters and in domestic and cross-border transactions, such as bond and note issues, syndicated loans, collective investment schemes, structured products, derivatives, rights offerings, initial public offerings, tender offers, as well as the structuring of employee stock option plans. As an issuer representative recognised by the SIX Swiss Exchange, he is regularly involved in the listing of debt and equity instruments. He is the author of various publications in the field of capital markets and securities.
Martin Lanz was admitted to the Bar in Switzerland in 1983 and graduated as a Doctor of Law from the University of Basle in 1985. From 1984 until 1991, he gained practical experience as a lawyer in the legal and documentation department of the capital markets division of Swiss Bank Corporation (now UBS Investment Bank) in Zurich and London. After having worked in an international law firm in New York in 1988, he joined Schellenberg Wittmer in 1991, where he became a partner in 1995.
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