Image: CDC
At its meeting on the 2nd of February, 2022, the Federal Council decided not to change the interest rates for COVID-19 loans at the end of March 2022 for the next 12 months, i.e. to keep them at 0%. For loans up to CHF 500,000, the interest rate will remain at 0%. For loans above 500,000 Swiss francs, the interest rate will remain at 0.5%, the same rate as before.
Distribution of dividends and repayment of capital contributions
First, a borrower may not distribute dividends or repay capital contributions. The primary purpose of this restriction is to secure the assets available for debt service. For this reason, this prohibition also applies to non-cash dividends and most likely also to the distribution of dividends that were resolved before the COVID loan was made to the borrower. It is highly likely that the borrower’s repurchase of its own shares will be treated as a dividend payment. Under Swiss corporate law, the enforcement of any guarantee or security provided by a Swiss company for the debts of its affiliates (other than its wholly-owned subsidiaries) would likely be treated as a dividend distribution. For this reason, borrowers of COVID loans may no longer provide such guarantees or security unless their enforcement is subject to prior repayment of the relevant loan. This will limit the ability of COVID-19 loan borrowers to participate in a group financing arrangement.
Refinancing of Private or Shareholder Loan
Borrowers may not refinance private or shareholder loans. The term “private loan” is not commonly used in Switzerland, but presumably refers to all non-public loans. For account overdrafts refinanced by the bank granting the COVID loan, the prohibition on refinancing private and shareholder loans does not apply. Since the COVID loan facilities were not available until March 26, 2020, this exception was made to prevent companies from having to pay their employees late. In addition, according to the COVID-plus loan model’s bonding agreement, loans from financial institutions are not considered “private loans.” According to a clarification from the Federal Department of Finance, loans from financial institutions are allowed to be repaid. The same should be true for prepayments based on an event of default, assuming that the credit relationship existed at the time the COVID loan was taken out.
Intra-group Loan Repayment
COVID borrowers may not repay intra-group loans. For example, the Swiss Federal Department of Finance has stated that an exception is payments based on pre-existing contractual obligations, such as scheduled amortizations. Second, repayments to Swiss affiliates (in particular the borrower’s parent company) are permitted if they are made solely to enable those affiliates to meet their existing interest obligations and, as of February 1, 2021, scheduled amortization obligations.
Transfer of Funds to a Non-Swiss Affiliate
Borrowers may not transfer funds provided by the program to an affiliate located outside of Switzerland. On this basis, it is reasonable to assume that loans, interest payments, and payments for goods and services to foreign affiliates are prohibited. To maintain operations, the Swiss Federal Department of Finance has issued a statement that ordinary interest payments and payments for goods and services are still permitted.
New capital investments
COVID loan funds may not be used for new fixed asset investments, unless they are replacement investments. In our opinion, a “new investment” is one that the borrower has not made prior to taking out a COVID loan. A borrower who has an ongoing construction project and is affected by COVID-19 should be able to pay for the ongoing construction project with the COVID loan funds. Otherwise, construction will have to be halted, which will affect the borrower’s creditors. It should also be noted that only the direct use of COVID loan funds for these new investments is prohibited.
Conclusion
All of these restrictions significantly hinder the growth of a company until the COVID loan is repaid. It would therefore be wise to pay off this credit fairly quickly as long as your situation allows. If you have any questions about refinancing your COVID loan or about your company’s financial capacity to take on a loan, make an appointment with our expert today using the contact form.
