• The debt moratorium is a Swiss legal instrument which allows financially distressed companies to improve their survival prospects through an in-court procedure.
• In the past years, the percentage of companies undergoing a debt moratorium and achieving a successful outcome was up to 60%.
• Use of this in-court restructuring instrument remains low: Out of the total number of insolvency proceedings between 2019 and 2021, only c. 1.5% each year attempted a restructuring through this in-court procedure. This is likely due to the stigma associated with bankruptcy, low awareness of the instrument in the business world, fueled by a unfavorable naming of the procedure.

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Zurich – Global professional services firm Alvarez & Marsal released its annual survey of use of the Swiss Debt Restructuring Moratorium [‘debt moratorium’], an in-court instrument which was significantly improved in 2014. It provides financially troubled companies protection from creditors, time and valuable means to restructure and reorganize entities or business units and to execute so called “pre-pack M&A-transactions”, rather than to face bankruptcy. The latest survey, which is an update on their comprehensive 2020 compendium, found that the number of companies using debt moratoria represented only 1.6% of corporate insolvencies in 2021 (1.5% in 2020 and 1.6% in 2019), which compared to other markets remained very low.

High success rate of up to c. 60% could save many businesses and jobs

Companies which entered a debt moratorium in 2019, 2020, and 2021 had a success rate of 58%, 54%, and 33% respectively in finding solutions for their businesses or business units (i.e., restructuring in the wider sense) and thus saving related jobs. The restructuring proceedings initiated in 2019 have been completed, while many of the ones initiated in 2020 and 2021 are still ongoing, which explains the preliminary lower success rates in 2020 and 2021. If one considers the 58% success rate of 2019 as the most significant figure (the year where all procedures are completed), Swiss companies or parts thereof that face financial distress driven amongst others by increasing interest rates, inflation, supply chain shortages and the most recent energy crisis might increase their odds for success in securing their future.

Despite the economic impact of the pandemic, the moratorium has remained underused due to the tool’s association with the stigma of bankruptcy, lack of awareness of the instrument and its advantages, and the various COVID-19 state aids supporting Swiss companies. By comparison, corporate Chapter 11 filings in the U.S. – a comparable instrument – accounted for approximately 22% of all insolvency proceedings in 2020.

Tobias Fritsche, Associate Director at Alvarez & Marsal commented: “Many experts continue to expect a catch-up of insolvencies in the current year and beyond that were delayed due to the pandemic and related state aid then available. Within this context, it is essential that businesses evaluate all restructuring options available and how the turnaround strategy is best implemented. A&M’s proprietary study about the Swiss Debt Restructuring Moratorium provides an exclusive insight into number of cases and thus, it provides a valuable contribution to the overall discussion about further improvement of Swiss in-court restructuring tools.”

Figure: As a result of acting too late and not decisively enough rather than proactively designing and implementing resutructuring plans, notably through a debt-restructuring moratorium, most distressed companies directly end up bankrupt . For example, in 2019, out of a total of 4247 companies in one of the two proceedings, 98.4% filed for bankruptcy, while only 1.6% opted for a debt-restructuring moratorium proceeding. Out of the 66 companies that made use of the moratorium, 58% (38 companies) restructured their businesses successfully. Source: Alvarez & Marsal

Alessandro Farsaci, Managing Director at A&M Switzerland, further commented: “The choice of an in-court or an out-of-court process is not the starting point of a restructuring, it is often just a question of how to best implement the plan. The more important success factors of a turnaround are typically a fact-based assessment of the business (e.g. competitiveness), On whose basis a comprehensive and realistic plan should be elaborated in order to adapt the strategy and business model as well as improve its financial performance. Hence, restructuring remains a daily task of business leaders, but it is key that companies start these processes early enough and implement their plans rigorously when in financial distress.”

A&M’s study shows that while Switzerland’s legal framework provides a functioning instrument to restructure companies or business units, decision makers too often consider the route when it is too late, even for an in-court restructuring, because the procedure is seen as bankruptcy. The stigma associated with bankruptcies in Switzerland is keeping companies from taking advantage of an effective legal instrument that could significantly improve their prospects. A more proactive use of debt-restructuring procedures would help prevent avoidable bankruptcies, protect Swiss jobs and preserve value for all stakeholders.

-ENDS-

Notes to editor

Methodology

The data collection of the study is based on the official publications in the Swiss Official Gazette of Commerce (SOGC) and is limited to legal entity forms of PLC and LLCs.

For the analysis of debt-restructuring moratorium procedures which were not made public, the authors have collected data directly from the Swiss local bankruptcy courts. Of the surveyed 110 district courts, 78 and 94 responded in 2019 and 2020-21, respectively. The high response rate of 80% justifies to draw robust conclusions from the data. Furthermore, the data was discussed with a majority of administrators active over the analysed period.

The assignment of a debt-restructuring moratorium to a specific year was determined based on the first opening date of the provisional phase (for example, if the provisional phase was granted in 2019 and converted to a definitive composition moratorium in 2020, the case would be counted only in for 2019).

About Alvarez & Marsal

Companies, investors and government entities around the world turn to Alvarez & Marsal (A&M) for leadership, action and results. Privately held since its founding in 1983, A&M is a leading global professional services firm that provides advisory, business performance improvement and turnaround management services. When conventional approaches are not enough to create transformation and drive change, clients seek our deep expertise and ability to deliver practical solutions to their unique problems.

With over 6,500 people across four continents, we deliver tangible results for corporates, boards, creditors, private equity firms, law firms and government agencies facing complex challenges. Our senior leaders, and their teams, leverage A&M’s restructuring heritage to help companies act decisively, catapult growth and accelerate results. We are experienced operators, world-class consultants, former regulators and industry authorities with a shared commitment to telling clients what’s really needed for turning change into a strategic business asset, managing risk and unlocking value at every stage of growth. Since 2019, A&M has been represented in Switzerland in Zurich and Geneva. 

To learn more, visit AlvarezandMarsal.com.

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