Private Debt In Switzerland – Practitioners' Perspective | Key Considerations And Practical Solutions

Introduction

Private debt has become an increasingly relevant financing tool in the Swiss market, particularly for privately held companies, real estate ventures, and bespoke or transitional financing needs. Unlike certain European jurisdictions, Switzerland does not have a banking monopoly on lending, which has contributed to the growing role of private debt. Today, this trend is further accelerated by the tightening of traditional bank lending standards, making it increasingly challenging (and, in some cases, even impossible) for certain borrowers, such as those in financial distress or seeking mezzanine capital, to access conventional credit facilities.

In this context, private debt offers flexibility in structuring, speed of execution, and tailor-made solutions that traditional lenders may no longer be in a position to provide. However, in the absence of standardised instruments and amid a regulatory landscape that is often less prescriptive than in neighbouring jurisdictions, structuring and executing private debt deals in Switzerland requires careful consideration of legal, tax, and practical aspects.

This article provides an overview of key issues frequently encountered in Swiss private debt transactions, based on recurring challenges and practical solutions observed in the day-to-day practice of structuring such financings. It does not aim to be exhaustive but rather to highlight the main points of attention and offer practical guidance for lenders, borrowers, and advisors involved in Swiss private lending deals.

1. Initial Structuring: Term Sheet, Parties and Due Diligence

At the outset of any private debt transaction, success depends not only on the strength of the legal documentation but also (and often more importantly) on how well the transaction is structured and framed from the very beginning. A carefully negotiated term sheet, a clear identification of the relevant parties, and a focused preliminary due diligence process are essential to ensure that the deal proceeds smoothly and that later-stage issues are minimised

It is equally important to approach the transaction from a "worst-case scenario" perspective, assuming from the start that a default could occur and that guarantees or security interests may need to be enforced. Structuring the deal with this mindset helps ensure that the documentation, collateral package, and enforcement mechanics are robust from day one, thereby laying a solid foundation for the transaction and significantly mitigating downstream risks.

1.1 Term Sheet

A well-drafted term sheet plays a pivotal role in this early phase. While typically non-binding (except for certain provisions such as cost allocation, any agreed break fee, exclusivity, and confidentiality), it serves as a critical reference point for the commercial, financial, and legal parameters of the transaction. It should go beyond a mere summary of headline economics and outline the intended structure of the facility, including the type of instrument, interest rate mechanics (such as base rate, default rate, or PIK features), repayment profile, collateral package, key covenants, events of default, and any conditions precedent to funding

In addition to outlining the key structural features of the deal, a robust term sheet should also address the allocation of transaction costs. It is standard practice for lenders to require the borrower to bear their legal and external advisory expenses, sometimes even if the transaction does not ultimately close. In practice, it is considered good discipline (and a useful filter to test the borrower's seriousness) to require that all or part of these costs be paid upfront upon signature of the term sheet. Beyond ensuring that initial expenses (such as legal fees, valuation costs, and technical due diligence) are promptly covered, this approach also creates early financial commitment from the borrower and helps secure its engagement (particularly since a borrower would often explore multiple financing options in parallel). In competitive processes, this can be an effective way to lock in the relationship and deter the borrower from walking away easily. In transactions involving significant underwriting exposure, it may also be appropriate to include a break fee or termination charge, compensating the lender if the borrower unilaterally withdraws after commercial terms have been agreed.

1.2 Parties

Equally important is the early and accurate identification of the contracting parties. In group structures, it is essential to determine from the outset whether the borrower will be the operating company (OpCo) or a holding company (HoldCo), and which other entities (if any) will serve as guarantors or collateral providers. Particular care should be given to internal governance requirements, such as board or shareholder approvals, and to the need for any third-party consents (including regulatory clearances or waivers from existing lenders or contractual counterparties). Overlooking these elements can result in significant delays during the documentation phase and, in some cases, compromise the enforceability of key undertakings or security interests.

1.3 Due Diligence

Finally, conducting a targeted due diligence exercise before entering into binding documentation is strongly recommended. The goal is not to replicate a full M&A-style review, but to validate critical assumptions: the legal standing and authority of the relevant group entities, the ownership and transferability of the collateral assets, the existence of prior-ranking debt or security, and any legal, regulatory or tax constraints (such as Lex Koller restrictions on real estate (see Section 6.3 below) or Swiss withholding tax risks (see Section 7.1 below)). The outcome of this review often has a direct impact on the transaction structure, such as whether to adopt a Swiss or foreign law framework, whether to lend at HoldCo or OpCo level, or whether to include additional protections for the lender like interest reserves, enhanced covenants, or restrictions on upstream cash flow.

2. Types of Facilities and Debt Instruments

Private debt transactions commonly involve a variety of instruments and structures, many of which are derived from international market standards. These facility types are widely used across jurisdictions and are regularly applied in Swiss-based transactions, depending on the borrower's profile, the purpose of the financing, and the lender's risk appetite. While there is no "one-size-fits-all" model, a number of structures have become market practice.

Senior loans are typically secured and benefit from first-ranking claims over the borrower's assets. These facilities are usually extended to companies with predictable cash flows and high-quality collateral, and may include both term and revolving components. Junior or mezzanine debt, by contrast, ranks contractually or structurally below senior debt and often carries higher interest rates or equity-linked features (such as warrants or convertibles) to compensate for increased risk. This type of financing is commonly used in acquisition financings, growth capital situations, or balance sheet restructurings.

Secured vs. unsecured debt is a critical distinction in private lending. Secured debt benefits from collateral (such as share pledges, real estate security, or receivables), which enhances enforceability and lender protection in the event of default. However, the creation and perfection of Swiss law security interests require careful planning and documentation (see Section 6 below). Unsecured debt, while more flexible, exposes lenders to higher recovery risk and is typically reserved for borrowers with strong credit profiles or group support.

Term loans provide a lump sum disbursement, often repayable through fixed instalments or bullet payments. These are suitable for capital expenditure, acquisitions, or refinancing purposes. Revolving credit facilities, on the other hand, are drawn and repaid multiple times over the life of the facility and are more commonly used to finance working capital or operational liquidity

Finally, bridge loans and unitranche facilities have gained traction in recent years. Bridge loans are short-term instruments used to "bridge" a funding gap before a longer-term solution is put in place (e.g. a capital raise or asset sale). Unitranche structures blend senior and subordinated features into a single tranche, offering speed and simplicity to the borrower while requiring more complex intercreditor arrangements on the lender side.

Each of these instruments comes with its own set of legal and practical implications, which must be assessed at the structuring stage to ensure alignment with the parties' commercial objectives and regulatory constraints.

Other instruments (such as PIK loans, second-lien loans, HoldCo loans, convertible notes, or NAV-based facilities, etc.) may also be used depending on the context, illustrating that the range of structuring possibilities in private debt is virtually unlimited.

3. Interest-Related Considerations

Interest provisions in private debt transactions are not just commercial terms. They are key structuring tools that directly affect lender returns, borrower flexibility, and legal enforceability. In the Swiss context, particular care must be given to the design of interest mechanics, especially when dealing with unconventional payment structures, distressed borrowers, or international parties unfamiliar with Swiss constraints. The following Sections outline key considerations and practical guidance for structuring interest provisions in Swiss private debt transactions.

3.1 Usury and Default Interest

While Swiss law does not impose a fixed statutory cap on contractual interest rates, it does prohibit arrangements that are considered usurious. Under Article 157 of the Swiss Criminal Code, usury requires two cumulative elements: (i) a significant disproportion between the consideration and the performance (for example, an unusually high interest rate compared to prevailing market conditions) and (ii) the lender's exploitation of the borrower's position of weakness, such as financial distress, dependency, or inexperience.

In commercial practice, usury is rarely invoked unless interest rates exceed 15% per annum, although this is not a hard threshold and, under certain circumstances, rates of up to approximately 20% may still be considered admissible, particularly where the borrower is sophisticated and no position of weakness has been exploited.

However, default interest (i.e. the interest charged after an event of default or delay in payment) deserves closer attention. If cumulative with ordinary interest and set at a punitive level (e.g. ordinary interest of 10% plus default interest of 12%), the clause may be requalified as a penalty under Article 160 of the Swiss Code of Obligations ("CO") and may be reduced by a judge. Best practice is to clearly distinguish ordinary interest from default interest, to justify the rate (e.g. risk profile, illiquidity), and to avoid compounding both types simultaneously unless the economic rationale is well documented.

3.2 Make-Whole Provisions and Prepayment Protection

Private lenders, especially credit funds and alternative investors, often underwrite loans with a target return in mind over a fixed maturity. Voluntary prepayment, refinancing, change of control, or acceleration following an event of default, may jeopardise that return and create a reinvestment risk. To mitigate this, lenders commonly require prepayment protection clauses, most often structured as make-whole provisions.

A make-whole clause typically obliges the borrower to pay a minimum amount of interest, even if the loan is repaid early. The make-whole amount typically equals the net present value of all (or a contractually defined portion of) the interest that would have accrued until maturity (or until the end of a specified no-call period), which may be discounted at an agreed rate (often risk-free or benchmark).

Alternatively, more straightforward prepayment fees may apply (e.g. 3% in year 1, 2% in year 2, etc.), often structured as "no-call" periods followed by step-down periods. These are easier to negotiate and enforce, especially with sponsors or borrowers unfamiliar with make-whole mechanics.

Under Swiss law, absent clear judicial precedent, make-whole provisions and prepayment fees are generally enforceable, although courts may reduce their amount if deemed excessive or punitive (Article 163(3) CO). To mitigate this risk, such clauses are often structured as an alternative performance obligation (i.e. a fee payable in case of early repayment rather than a penalty), and the contractual rationale (economic compensation for lost interest income) should be expressly stated.

3.3 Interest Reserve

In deals involving limited or delayed cash flow, such as real estate developments, restructurings, or early-stage corporate financings, it is common to structure an interest reserve. This typically involves setting up a dedicated account, funded upfront either by the borrower or from the loan proceeds, from which interest payments are made during a defined period (e.g. the first 12 to 24 months of the facility).

An interest reserve serves several purposes: (i) it reduces the risk of short-term default during the early stages of the loan; (ii) it avoids unnecessary recourse to enforcement or default mechanisms triggered by mere liquidity mismatches; and (iii) it improves cash flow predictability for both parties.

From a structuring perspective, the interest reserve account should ideally be held with the lender or, if held by the borrower, be pledged in favour of the lender and made subject to controlled disbursement mechanisms. The amount should be calibrated conservatively (e.g. covering 6 to 24 months of interest, depending on risk), and drawdowns should be documented through a simple mechanism (e.g. automatic debit instructions).

3.4 Capitalised and PIK Interest

Under Swiss law, the automatic capitalisation of interest is generally unenforceable. While Article 105(3) CO generally prohibits interest from accruing on unpaid default interest, Article 314(3) CO extends this principle by prohibiting parties from agreeing in advance that interest will itself accrue interest. Such arrangements may only be valid if (i) the accrued interest is incorporated into the principal through a novation expressly agreed after the interest has fallen due, or (ii) the loan operates as a current account or another arrangement expressly recognised by commercial usage (typically limited to banking relationships).

Payment-in-kind ("PIK") interest, which refers to interest settled in kind rather than in cash (for example, through the issuance of additional debt instruments, equity, or other consideration), may be acceptable under Swiss law. Because the interest is deemed effectively paid rather than capitalised, this mechanism generally falls outside the scope of Article 314(3) CO, provided that the in-kind payment validly discharges the underlying interest obligation.

In practice, Swiss law-governed facilities rarely include automatic capitalisation clauses. Transactions requiring deferred or non-cash interest are typically structured either under foreign law (most often English or New York law) or through a PIK mechanism, which achieves the intended economic effect without contravening Swiss law. However, capitalised interest may still be implemented under Swiss law if structured through a periodic novation.

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