In October 2014, the Regulatory Board of the SIX Swiss Exchange AG cleared the way for the listing of high-yield bonds in Switzerland. This is of particular relevance since in recent years, Swiss issuers have increasingly been tapping the high-yield bond market.
Previously, listing of high-yield bonds on the SIX Swiss Exchange was not possible since typical high-yield bond issuers, namely SPVs, were usually unable to satisfy the listing requirements (eg, track record of three years). Furthermore, it was not possible to have these listing requirements satisfied by a substitute guarantor since the SIX listing requirements only allowed direct or indirect parent companies of the issuer to act as substitute guarantors. However, since high-yield bonds usually only benefit from upstream or cross-stream guarantees, there was hardly ever a guarantor that could act as substitute guarantor for the issuer. As a consequence, high-yield bonds could not be listed on the SIX Swiss Exchange and, therefore, were generally listed in Luxembourg, Ireland or elsewhere outside Switzerland. For companies with shares listed on the SIX Swiss Exchange, this resulted in having to simultaneously comply with different listing and disclosure requirements.
The change in the Regulatory Board’s practice that facilitated listing of high-yield bonds on the SIX Swiss Exchange was its decision to also allow direct or indirect subsidiaries or sister companies of the issuer to act as substitute guarantor - that is, group companies of the issuer which are granting upstream or cross-stream guarantees. The Regulatory Board also addressed any investor protection concerns resulting from this change by simultaneously raising the applicable disclosure standards. Furthermore, high-yield bonds are typically guaranteed (via both upstream and cross-stream guarantees) by a number of guarantors that collectively represent a fair share of group-wide earnings before interest, tax, depreciation and amortisation (EBITDA).
Groupe Arcotec SA was the first issuer to benefit from the new regulatory regime. On 22 September 2016, Groupe Arcotec SA issued the first Swiss law governed high-yield bonds that were listed on the SIX Swiss Exchange. It issued 106 million Swiss franc 4 per cent bonds due for 22 November 2021. The bonds were guaranteed by a group of guarantors collectively representing 66.2 per cent of the aggregate EBIT of the group, most of them incorporated in Switzerland, which granted upstream guarantees subject to Swiss law and Swiss financial assistance limitations. Bank loans, on the other hand, will become subject to stricter regulation.
Switzerland implemented the Basel III capital framework with effect as of 1 January 2013. In addition to this capital regime for all banks, special (higher quantitative and specific qualitative) requirements apply for systemically important banks (SIBs). Subject to certain phase-in provisions until end 2019, SIBs must hold sufficient capital that absorbs current operating losses to ensure that they can continue their business as a going concern even in financial stress scenarios, they neither require state support nor need to be restructured or wound up (going concern requirement). This going concern requirement fully applicable in 2020 consists of (i) a minimum requirement of 8 per cent of risk-weighted assets (RWA) and 3 per cent of leverage exposure, and (ii) a buffer of (i) 4.86 per cent of RWA and 1.5 per cent of the leverage exposure, leading to a so-called base requirement of 12.86 per cent of RWA and 4.5 per cent of leverage exposure, and (ii) an additional buffer surcharge, depending on the degree of systemic importance measured according to the market share and size criteria that already exist in the current system. In general, this requirement for systemically important banks must be met by common equity tier 1 (CET1) capital, with up to 3.5 per cent of RWA and 1.5 per cent of the leverage exposure of the minimum requirement and up to 0.8 per cent of RWA in the buffer permissible to be held in additional tier 1 capital instruments that would be converted into common equity or written down if the CET1 ratio falls below 7 per cent. The going-concern requirements for the two big banks of 5 per cent overall for the leverage ratio and 14.3 per cent overall for risk-weighted assets. The going concern requirement does not include any countercyclical buffers, which have to be held on top (see below).
For systemically important banks operating internationally (G-SIBs), such as Credit Suisse or UBS, additional requirements for loss-absorbing capacity apply. In addition to the going concern requirement, they must issue sufficient qualifying debt instruments to allow for restructuring without recourse to public resources (gone concern requirement). Similar rules apply to domestically systemically important banks (D-SIBs), with certain quantitative alleviations and qualitative specialities (mainly driven by the legal nature of some of the existing D-SIBs).
Furthermore, Swiss capital requirements provide for a supplemental counter-cyclical buffer of up to 2.5 per cent of a bank’s risk-weighted assets. Since 30 June 2014, the counter-cyclical buffer has been set at 2 per cent of a bank’s risk-weighted assets pertaining to mortgage bonds that finance residential property in Switzerland. Effective from 1 July 2016, Switzerland introduced the option of an extended countercyclical buffer, which is based on the BIS countercyclical buffer that could require banks to hold up to 2.5 per cent of RWA in the form of CET1 capital.
The effect of these increased capital adequacy ratios and gone concern ratios on bank loans is that it will become even more expensive for banks to extend bank loans because the capital adequacy requirements to support counterparty risks caused by this lending activity (and the resulting RWA) will be increased. Instead of granting bank loans at increased costs, banks may become inclined to convince clients to refinance by issuing capital market instruments such as high-yield bonds.
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