In Switzerland, the number of company bankruptcies is at a record level – and the consequences of the tariff hammer are yet to come

Nerves are frayed at many Swiss companies. Those operating in the export sector are particularly under pressure. They are suffering from the weak global economy and the great uncertainty triggered by the wars in Ukraine and the Middle East, as well as the numerous customs and trade disputes.

Given this backdrop, some clients are choosing to hold back on investments. As a result, many companies' order books are becoming alarmingly empty. And because there's a lack of work, companies are increasingly forced to resort to restructuring measures.

The situation is particularly tense in the mechanical engineering, electrical engineering, and metalworking industries: "Numerous companies are preparing downsizing and relocation plans. Layoffs are inevitable," the industry association Swissmem announced last week. Its sister organization Swissmechanic, which primarily represents the interests of smaller industrial companies, simultaneously stated: "Margin erosion has now continued for eleven quarters and is increasingly impacting investment and employment."

As painful as investment freezes, layoffs, or relocations are for those affected, such measures at least demonstrate that companies still have some room for maneuver. However, many businesses in Switzerland have already slipped into such a hopeless situation that their only option is liquidation.

By 2024, the number of corporate insolvencies had already climbed by 15 percent to a record high of almost 11,500 cases. The current year is expected to be even higher. After almost 9,000 bankruptcies occurred between January and August, the Swiss creditors' association Creditreform expects a total of around 15,000 cases.

Claude Federer, Managing Director of Creditreform, attributes the sharp increase primarily to a change in the law that came into effect at the beginning of this year. It now also allows tax authorities to collect outstanding debts through bankruptcy proceedings. Because this didn't happen in the past, some companies were able to stay afloat, at least for a while. "Otherwise, they would have been forced to file their balance sheets long ago," says Federer.

Lukas Glanzmann, a partner at the law firm Baker McKenzie and adjunct professor of business law at the University of St. Gallen, also sees the legislative reform as the cause of many insolvencies. In his opinion, however, several overlapping negative effects have been pushing companies into distress for some time. For example, there are still companies that were artificially kept alive during the pandemic thanks to government COVID-19 loans but are now no longer able to refinance themselves.

According to Glanzmann, the increased financing costs have also become a problem for many other companies. This has been compounded by the tense economic situation and, most recently, the tariff hammer.

Glanzmann also points out that the effects of the 39 percent American punitive tariff will likely only lead to increased insolvencies in a few months. "It's still too early for that," says the legal expert.

Regarding the industry affiliation of the cash-strapped companies, Baker McKenzie hasn't identified any particular patterns. Glanzmann says companies across the board are affected.

Karsten Lafrenz, who focuses on restructuring and turnarounds at the consulting firm Alix Partners, has had the same experience. In addition to the mechanical engineering industry and the automotive supplier segment, they also receive inquiries from consumer goods manufacturers and chemical companies. According to Lafrenz, high energy prices in Switzerland are another factor causing significant problems for many companies.

Claude Federer of Creditreform notes that currently, one in five company bankruptcy announcements is attributable to the construction sector. However, construction will have already reached a similarly high share by 2024, and the sector's problems are consistent with experiences from previous economic downturns. When investments decline, the construction industry is particularly affected.

What makes things even more difficult, especially for the construction-related industry with its many installers, is that the barriers to entry for new providers are low. For a limited liability company, a starting capital of just CHF 20,000 is sufficient. Companies that provide services to companies, such as strategy consultants, recruiters, or advertising agencies, can also be established with little effort. "A laptop and a telephone are usually sufficient equipment," says Federer.

Competition in this business segment, which is home to many one-person businesses, is correspondingly fierce. According to Creditreform, bankruptcies have also increased sharply in this segment.

Ideally, businesspeople wouldn't let their company go under. Once a company is declared bankrupt, it's too late. "The company is then dead. Nothing useful can be done with it anymore," says Lukas Glanzmann.

Many companies that still have some substance would benefit from a debt restructuring moratorium. The debt restructuring moratorium, the Swiss equivalent of the American Chapter Eleven model, allows companies to continue operating under the supervision of a government-appointed trustee.

The management and the board of directors will remain in office. At the same time, interest payments will not be due during the proceedings, and employees who are terminated without notice can be transferred directly to the regional employment centers. This will preserve liquidity.

At the same time, restructuring through a debt restructuring moratorium is only possible for companies that still have sufficient liquid assets. Wages of existing employees, for example, must continue to be paid.

Despite the high number of bankruptcies in Switzerland, the number of debt restructuring deferrals remains low. Glanzmann says there are only around 100 each year.

Most companies prefer to keep going until they've spent their last penny. They're acting, says the law professor, on the principle of hope—that they'll somehow manage to get back on track.

Meanwhile, Karsten Lafrenz of Alix believes it's legitimate that many entrepreneurs don't want to let their optimism be dampened, even in times of crisis. Anyone who doesn't believe in the future can't run a company, he says.

Nevertheless, Lafrenz believes that companies should definitely have a Plan B ready in case the hoped-for improvement doesn't materialize. He also sees the supervisory boards as having a responsibility in this regard.

Supervisory boards, says the consultant, are often composed of experienced individuals who have already experienced one or another crisis. The opposite is sometimes true on executive boards. Some of today's managers in Switzerland, Lafrenz points out, are too young to have ever experienced a persistent economic downturn. "For years, things were only going up for them."