• The debt moratorium improves companies’ prospects to save financially distressed businesses and its jobs. This tool is becoming especially useful in the context the current Covid-19 pandemic.
• The debt moratorium is an underused tool yet. Between January 2019 and September 2020 only 100 Swiss companies chose to enter a debt moratorium. Of the c. 70 procedures opened in the year 2019, 17 cases led to a successful outcome either through a restructuring or through an ordinary composition agreement, where 21 procedures are still ongoing
• In 2019 the number of debt moratoria recorded in Switzerland represented only 1.4% of the number of 2019 commercial bankruptcies (in 2020 as of September only 1.2%), which is significantly less than the 14% of Chapter 11 procedures out of commercial bankruptcies recorded in the US in the same year.

Zürich – The measures adopted by the Swiss Federal Council and the cantonal authorities to mitigate the second wave of COVID-19 infections are hurting many industries, such as restaurants, tourism and stationary retail. Even though the retail sector has been able to catch up somewhat since the easing of measures after the first wave of pandemic, the newest measures taken against the second wave are likely to cause a severe setback for non-essential stationary retailers during the extremely important season of Christmas. The pandemic has also left deep scars on the strongly export-oriented manufacturing industries already after the first wave of the pandemic. In addition to an already noticeable decline in demand for the majority of companies in this sector, the subsequent effects ahead are still difficult to assess.As a result, many companies might face liquidity problems and may have to consider filing for bankruptcy despite having a viable business model. A new study published by Alvarez & Marsal and the Swiss Turnaround Association suggests that a debt moratorium could be a powerful tool to save those businesses and the related jobs.

Executive leaders should assess financial situations more objectively

The study found that companies in financial distress often wait for too long before starting to elaborate and assess the available options for restructuring when they do, crises are often advanced to a degree that little room to manoeuvre remains, and the business ultimately has to file for bankruptcy.

Instead, business leaders of financially distressed businesses, be the situation triggered by liquidity shortfalls or over-indebtedness, should objectively analyse the situation, elaborate and evaluate the restructuring options at earlier stages of the crises and consider a debt moratorium as a possible restructuring tool. This restructuring mechanism is provided by the Swiss Debt Enforcement and Bankruptcy Act (DEBA) and helps companies to buy time by gaining protection against creditors’ actions and to improve the prospects of finding solutions. A debt moratorium can – in the best case – prevent companies from laying off employees and ultimately going bankrupt.

Among executive leaders, however, the debt moratorium according to DEBA is still little-known, and out-of-court solutions are often preferred. In 2019, only circa 70 Swiss companies chose to enter into a debt-restructuring moratorium. Compared to the 4,691 commercial bankruptcies in the same period, the instrument of the debt moratorium was only used in approximately 1,4% of all total Swiss bankruptcies. This is a very low number, as in the US the number of comparable and clearly more known Chapter 11 filings in the same period was ten times higher (14%). Thus, there is some room to catch-up for Swiss restructuring situations to make use of this tool to protect their creditors and employees and to secure the continuance of viable and competitive businesses.

About 40% of companies were successfully restructured through a debt moratorium

17 (or 38%) of the companies that were granted a debt moratorium in 2019 and for which the procedure has been concluded, were successfully restructured either through a pure restructuring or via an Ordinary Composition Agreement (OCA) with its creditors.

In 28 (or 62%) of the completed procedures, the legal entity were dissolved. Based on the data received, in 5 cases a solution was found through a business transfer into a hive-off (i.e. the healthy part of the business became an independent entity) or a disposal to a third party. 

Alessandro Farsaci and Tobias Fritsche, Managing Director and Associate Director with A&M Switzerland’s Restructuring practice, state that: “The debt moratorium is still little used in Switzerland. When situations of financial distress are carefully and objectively evaluated at early stages, the tool clearly represents an opportunity to safeguard jobs and businesses. Especially in the current challenging business environment, the debt moratorium could be an excellent tool to save viable and competitive businesses that suffer from the COVID-19 shock.”

In 2020, only 34 companies entered into a debt-restructuring moratorium

From January 2020 until the end of September 2020, 34 companies were granted a debt moratorium. The linearly annualized number of cases corresponds to 45; this represents a 30% decrease compared to 2019. This decrease can be explained by the financial support and reliefs of executives’ duties included in the supporting measures of the Swiss federal council in reaction to the COVID-19 pandemic. For comparison: the number of corporate bankruptcies also fell by around 20% year-on-year until September. In relation to the 2,760 commercial bankruptcies in the same time period, the instrument of the debt moratorium was only used in about 1,2% of all bankruptcies.

On top of the ordinary procedures, only 22 companies made use of the COVID-19 light moratorium, simplified procedure which was implemented for smaller businesses and less complex situations and was available until 19 October 2020 as protection against the COVID-19 shock. This shows that so far a wave of insolvencies was effectively avoided by the other COVID-19 measures of the Swiss government. The package of measures included government-backed COVID-loans, the easing of short term work compensation and the temporary suspension of the notification of over-indebtedness pursuant to Art. 725 of the Swiss Code of Obligations (CO).

About the authors of the study

Alessandro Farsaci, CFA

Alessandro Farsaci is Managing Director and heads Alvarez & Marsal’s Restructuring & Turnaround practice in Switzerland. He is also Board Member of the Swiss Turnaround Association.

Tobias Fritsche

Tobias Fritsche is an Associate Director and member of Alvarez & Marsal’s Restructuring & Turnaround practice in Switzerland.

The complete study can be viewed here.

About Alvarez & Marsal

Alvarez & Marsal (A&M) is an unlisted company owned by its two partners since its inception in 1983 and provides multidisciplinary services worldwide. A&M supports and assists private and public companies, creditors and stakeholders of distressed companies, boards of directors, private equity firms, law firms and government agencies facing complex challenges such as restructuring, due diligence, transformation and change management.

With more than 5,000 employees worldwide, A&M teams are comprised of experienced professionals who have held operational and financial leadership positions in leading corporations, supervisory and regulatory bodies. Since 2019, A&M is represented in Switzerland in Zurich and Geneva.

To learn more, visit AlvarezandMarsal.com.

Kontakt

Alessandro Farsaci, Managing Director, Alvarez & Marsal

Tel: +41 78 600 50 66

afarsaci@alvarezandmarsal.com

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Cabinet Privé de Conseils s.a. (CPC-PR)

Michael Füglister

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