Switzerland: an introduction
Niederer Kraft & Frey
Zurich
Switzerland is a small country with a large and well established international corporate base. Swiss multinationals, in particular major banks and insurance companies such as UBS, Credit Suisse, ZFS and Swiss Re, as well as food and pharmaceutical firms such as Nestlé, Novartis and Roche or commodities producers and marketers like Glencore, contribute considerably to Switzerland's economy and GDP.
Switzerland is also an attractive base for international companies and organisations. Leading international companies that have relocated their global or regional headquarters include ACE, Alcoa, Allied World Assurance, Amgen, Colgate, eBay, Google, IBM, JTI, Medtronic, Procter & Gamble, Tyco, Transocean, Weatherford and Wolseley. When asked what the primary drivers are for relocating their headquarters to Switzerland, executives emphasise Switzerland's quality of life, stable political environment, central location in Europe, highly educated and multilingual workforce, favourable tax regime, liberal labour market and solid transportation and communication infrastructure. Switzerland also continues to host important international organisations such as the UN and non-governmental organisations such as the Red Cross, IOC, FIFA and UEFA.
Back towards 'courant normal' after the financial crisis
Whereas at the beginning of 2010 the Swiss legal market was still dominated by the financial crisis which led to a shift in legal work from standard inbound referral work by international firms to more complex domestic work, at the end of 2010 and so far in 2011 legal work has partly bounced back to a more courant normal (normal state), including an increase in M&A and finance transactions.
Effects of the financial crisis – regulatory constraints
While 2009 and the first half of 2010 were marked by the (still on-going) negotiations of double tax treaties between Switzerland and various countries evoked by the increased pressure on Swiss banking secrecy and the consequence of adopting OECD standards on administrative assistance in tax matters, the second half of 2010 and 2011 has seen a focus on political debate about the 'too big to fail' risk and Basle III.
As a regulatory response to the financial crisis and to further reduce risks associated with systemically important financial institutions (SIFIs), the Swiss legislator proposed comprehensive amendments to the banking rules. These amendments are aimed to strengthen capital and liquidity requirements (Swiss Finish to Basle III) and to create restructuring rules for financial institutions deemed 'too big to fail', i.e. Credit Suisse and UBS. To implement the more stringent capital and liquidity requirements applicable to Swiss SIFIs and to Swiss banks under Basle III generally, the government proposes to introduce two new capital instruments in the Swiss Federal Banking Act: reserve capital (Vorratskapital) and convertible capital (Wandlungskapital). The convertible capital would serve as a source of capital for contingent convertible bonds (CoCos), which convert into shares on the occurrence of certain triggering events. As an accompanying measure, the government also envisages certain tax measures to promote the issue of bonds, including CoCos, in Switzerland, some of which, however, will only be presented to parliament at a later stage.
The government has submitted a draft bill to the Swiss parliament in April 2011 which will deal with the proposal during its sessions in the autumn. The new law may be enacted as early as January 1 2012 with a transitional regime to end by 2018.
The TBTF legislative proposals and the implementation of Basle III are therefore likely to have a major impact on Swiss capital markets.
Capital markets – banking
2010 and the first half of 2011, have seen an increase in syndicated loans both in the cross-border and in the domestic market. Volumes have not reached pre-crisis levels and loan refinancings, covenant resets and addition of new collateral remain a focus.
Because of remaining capital constraints of lending banks, due to the implementation of Basel III, and the mass of credit facilities maturing between 2012 and 2014, Swiss issuers that have traditionally relied on bank loans are likely to turn to the capital markets as an additional source of finance. A pioneering transaction that has attracted attention in Switzerland and beyond was the SFr3.3 billion financing by CVC of the Sunrise acquisition in October 2010, which was financed by a blend of credit facilities and high yield bonds.
In anticipation of the more stringent capital and liquidity requirements, Credit Suisse successfully issued in February 2011 $2 billion CoCos (Tier 2 BCNs) to investors and entered into an agreement on the issuance of $6 billion CoCos (Tier 1 BCNs) with two strategic investors. With this landmark capital markets transaction, Credit Suisse has taken a leading role in developing a market for CoCos in Switzerland and Europe.
While the Swiss equity market has seen a limited number of successful IPOs, SIX listed companies have raised over SFr3.1 billion in secondary market capital raisings in 2010 and the first half of 2011. An improved market environment meant that issuers with a strong equity story were able to offer new shares without discount in so called at-market rights offerings.
Mergers and acquisitions
Switzerland's M&A market in 2010 and the beginning of 2011 was very active. Mega-deals such as the completion of Novartis' acquisition of the remaining Alcon shares for $41.2 billion, ABB's acquisition of Baldor Electric Company for $4.2 billion, the $2.3 billion acquisition of Landys + Gyr by Thosiba, the €9.6 billion acquisition of Nycomed by Takeda and the $21.3 billion tender of Johnson for Swiss medtech company Synthes are just some of the examples.
Due to the increasingly strong Swiss Franc, inbound M&A activity into Switzerland may become more challenging, on the other hand this creates attractive outbound acquisition opportunities for Swiss corporates. While many potential sellers still seem to be wait for even better market conditions, there are indications that the M&A market will continue to see a substantial upturn in the near future.