Co-published Covered bonds guide: Switzerland
A market of two halves
Benedikt Maurenbrecher, Dieter Grünblatt and Stefan Kramer of Homburger on Swiss law’s two different yet complementary concepts of covered bonds
satisfy the following criteria: (i) the issuer or the guarantor of the debt instrument is a prudentially regulated credit institute (that is, a bank); (ii) the debt instruments are secured by a cover pool of mortgage loans (property as collateral) or public-sector debt to which investors have a preferential claim in the event of default; and (iii) the bank has a continuing obligation to provide a sufficient amount of assets to the cover pool in order to be able to satisfy the claims of the covered bond investors, and compliance with this obligation is subject to supervision by a public authority or independent third party. In Switzerland, there are two different legal concepts which correspond to this definition. On the one hand, in 1931, the Swiss legislator created the Swiss Pfandbrief system by enacting the Federal Pfandbrief Act (Pfandbriefgesetz, or PfG), complemented by a respective ordinance (Pfandbriefverordnung,
A
Structure of Swiss Pfandbriefe
Pfandbrief holder Cash
Right of lien on loan receivable
Pfandbrief institutes Loan
Right of lien on mortgage
Member bank Mortgage loan
Right of lien on property
Mortgagee Property
ccording to the European Covered Bond Council’s definition, covered bonds are secured debt instruments which
or PfV). The PfG provides for explicit regulations regarding all key elements of the Pfandbrief system, such as the institutions authorised to issue instruments under the PfG, the structure and valuation of the cover pool, and certain insolvency-related issues. Therefore, the instruments issued in accordance with the PfG – the Swiss Pfandbriefe – could be qualified as statutory covered bonds. The term Pfandbriefe is, however, widely recognised and protected by law and it is rather unusual to use the term covered bonds when describing the Swiss Pfandbriefe. On the other hand, the concept of
freedom of contract allows an issuer to structure a covered bond programme based on contractual agreements with investors and other persons or institutions to be involved in the transactions. Instruments issued under such contractual agreements qualify as structured covered bonds. The avenue of structured covered bonds has only recently been explored in Switzerland, when first UBS (in 2009) and then Credit Suisse (in 2010) established their respective covered bond programmes. The co-existence of Pfandbriefe and
structured covered bonds is underscored by the fact that they tend to serve different investor bases. Pfandbriefe must be denominated in Swiss francs and are subject to Swiss withholding tax. They therefore mainly attract Swiss retail and institutional investors. Meanwhile, structured covered bonds are issued out of non-Swiss branches of the two big Swiss banks (UBS and Credit Suisse) and are not subject to withholding tax. Furthermore, due to the appeal to an institutional investor base outside Switzerland, structured covered bonds are denominated predominantly in euros and US dollars. Today, Pfandbriefe still dominate the Swiss
(covered) bond market with an aggregate size of SFr72.7 billion ($76.8 billion) or 26% (end of 2012) of the nominal amount outstanding of all listed domestic bonds. The issuing volume for Swiss Pfandbriefe is somewhat restricted, however, since the
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capital adequacy provisions in the PfG provide that, in addition to the maintenance of the cover pool, Swiss Pfandbriefe must be underpinned by equity of PBB and PBZ in excess of 2% of their respective total Pfandbrief issuance volume. Nevertheless, Pfandbriefe are the second largest and second most liquid segment of the Swiss franc bond market, after Swiss government bonds (Eidgenossen). Structured covered bonds are catching up quickly in light of the Swiss big banks having more than SFr20 billion outstanding at the end of 2012, mainly in the form of jumbo issuances into the European market.
Legal setup of Swiss Pfandbriefe According to the PfG, only two institutions are authorised to issue Pfandbriefe in Switzerland: the Pfandbriefzentrale der schweizerischen Kantonalbanken (PBZ), a vehicle issuing Pfandbriefe for the Swiss cantonal banks and the Pfandbriefbank schweizerischer Hypothekarinstitute (PBB), a vehicle issuing Pfandbriefe for all other Swiss banks. Both institutions are special banks and as such, supervised by the Swiss Financial Market Supervisory Authority, FINMA. The issuance of Swiss Pfandbriefe aims at financing the mortgage business of the member banks. PBZ and PBB use the proceeds from the issuance of Pfandbriefe to grant loans to their member banks, which allow the latter to enter into long-term mortgage loan agreements with real estate owners. Swiss Pfandbriefe are largely standardised
debt products. They are a commodity, denominated only in Swiss francs, normally have a long-term duration of between three and 22 years, and always have a fixed coupon. Swiss Pfandbriefe are issued either as public bonds or as private placements. All publicly-issued Swiss Pfandbriefe are listed at the SIX Swiss Exchange. From the beginning, Swiss Pfandbriefe
have obtained a triple A rating. The Swiss National Bank accepts Pfandbriefe as collateral for its repo facility. The key feature of the Swiss Pfandbriefe is
the collateral: the direct and unconditional obligation of the Pfandbrief issuer to pay principal and interest is collateralised by a two-tiered system of security over claims, which is ultimately secured by first ranking mortgage certificates on Swiss real estate. Firstly, claims under a Pfandbrief are
directly secured by a statutory lien over the loans extended by the Pfandbrief issuer to the member banks out of the proceeds of the Pfandbrief issuances. The lien will be created with the entry of the cover assets in the
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