SWITZERLAND Law and Practice Contributed by: Daniel Haeberli and Simone Gloor, Homburger
• payment-in-kind (PIK) financings (where interest is capitalised and deferred until final maturity); and • high-yield notes. Second-lien debt is subordinate to senior debt and is secured only by second-ranking security interests over the same assets that serve as security for the senior debt. 3.2 Mezzanine/Payment-in-Kind (PIK) Loans Mezzanine debt is usually unsecured and sub- ordinated to rank behind senior and second-lien debt. The subordination of mezzanine loans is typically established by a bilateral agreement between the mezzanine lender and the com- pany. In this agreement, the mezzanine lender declares that its claim under the mezzanine loan will rank behind the claims of senior lenders (including second-ranking lenders) and all other non-subordinated creditors in the event of the company’s bankruptcy or composition with its creditors. As this declaration is effective without the consent of senior or second-ranking lenders, it does not need to be included in an intercreditor agreement. Mezzanine debt is often combined with equity kickers, although they are not common in LBO transactions. Equity kickers can be used to compensate the lenders where the leverage and risk go beyond conventional standards. Under Swiss law, equity kickers (ie, means to partici- pate in the upside of the target’s value) can take different forms. For example, a company can make interest payments on a PIK basis, but not in cash. However, equity kickers are typically either conversion rights or option rights. In both cases, Swiss law requires the company to pro- vide for conditional share capital in its articles of incorporation, from which shares can be issued
upon a creditor’s exercise of its conversion or option right. The shareholder’s right to advance the subscription of any such equity-linked debt instruments may only be waived or withdrawn for valid reasons. 3.3 Bridge Loans Due to the typically tight timelines in acquisi- tion financings, syndicating the bank loan prior to closing may not always be feasible. In such cases, a bridge financing with a maturity of six to 12 months may be necessary to be refinanced through the syndicated term loan or the issuance Although pure financing through capital market instruments is rare in the Swiss market, large acquisition transactions or transactions involv- ing a major industrial buyer may include a capital market element, such as the issuance of a high- yield bond. These bonds are typically issued on the New York market. In addition, the capital market instrument may be issued in conjunc- tion with the loan structure or may be used as a take-out instrument. 3.5 Private Placements/Loan Notes of a debt capital market instrument. 3.4 Bonds/High-Yield Bonds Private placements may be used in connection with capital market instruments, but they are not commonly used in the Swiss market for acquisi- tion financing. Financing structures that use loan notes are subject to Swiss withholding tax and are therefore not typically used for acquisition financing. 3.6 Asset-Based Financing If an asset-based financing is used for an acqui- sition, the loan would be secured by specific bor- rower assets, and lenders would determine the amount of money they are willing to lend based on a loan-to-value ratio. However, asset-based
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