Italy's restructuring deals turning debt market around

Following financial and economic crises, the volume of distressed assets held on Italian banks' balance sheets has tripled since 2008, reaching up to 16.9% of the total amount of debt issued during the last fiscal year. According to Duke & Kay's presentation at the Debtwire Italian Restructuring Forum 2016, Italy is the only country among Europe's five largest economies that saw non-performing loan (NPL) volume rise in the aftermath of the financial crisis.

According to the presentation, Italy's distressed exposures reached an aggregate value of €341bn in 2015, consisting of €200bn worth of NPLs and €141bn in sub-performing loans, known among Italian bankers as "incagli".

Unlike non-performing debt, sub-performing loans are exposures to borrowers experiencing temporary payment difficulties and which the lenders consider resolvable in a reasonable period of time. This latter type of asset began to attract the interest of private equity managers as a new aspect of portfolio diversification and an opportunity for double-digit returns.

According to Mario Lisanti, a partner at Norton Rose Fulbright, "The reform of direct lending and loan origination by credit funds was approved by parliament in April of this year and is now to be supplemented by second-level rules to be issued by Banca d'Italia. Once the new regulatory regime is in full force and effect, credit funds will be able to originate and make direct loans to Italian borrowers, including those facing financial stress or subject to pre-insolvency or insolvency proceedings."

Last chance saloon
In October 2015, Oxy Capital and turnaround specialist Attestor Capital backed the third round of debt restructuring for Italian air conditioning unit manufacturer Gruppo Ferroli through a €16.4m injection. The transaction is understood to be the first restructuring deal involving private equity in Italy and opened up the Italian market to debtor-in-possession (DIP) financing transactions, where the owner of a company retains the power to operate an asset a creditor has a lien against.

In 2015, the 3,000-employee business with €400m of revenues saw its net debt rise to €350m, and in April that year, the company's founder and chair, Dante Ferroli, passed away. In the span of a few months, the business completed its third refinancing round, which saw the GPs enter through a waterfall-payment agreement with Gruppo Ferroli's creditors including Unicredit, Intesa Sanpaolo, BPM and MPS. The deal saw the lending GPs secure the creditor's loans and gain exposure to the company's potential increase in value alongside the banks, but without removing the bad loans from the banks' books.

Despite expressing a willingness to continue operating in Italy, Oxy Capital Italia and Attestor Capital did not allocate a hard amount of equity specifically to address the bulk of distressed assets across the Italian market.

Once the new regulatory regime is in full force and effect, credit funds will be able to originate and make direct loans to Italian borrowers, including those facing financial stress or subject to pre-insolvency or insolvency proceedings" – Mario Lisanti, Norton Rose Fulbright

However, more recently KKR Credit launched a Europe-dedicated restructuring platform, Pillarstone, with Italian underperforming assets as its initial target. In June 2015, Pillarstone acquired six credit and equity positions from Intesa Sanpaolo and Unicredit with an aggregate nominal value of €1bn, marking the fund's first deal.

The special purpose vehicle (SPV) provides long-term capital and operational know-how as a means to help lenders stabilise their distressed exposure through the issuance of senior bonds, while preventing banks from losing their upside by establishing a waterfall structure. Nonetheless, Italy's law 130 does not allow an SPV to take equity positions; therefore, Pillarstone issues super-senior loans instead.

The structure designed by Pillarstone essentially enables banks to write down the credits on their books through receiving a less risky senior security for each credit, as part of the recapitalisation of the company, but does not remove the loans from the lenders' balance sheets.

Recently, Pillarstone has expanded its reach with a partnership with Banca Carige, entering the listed shipping business Permuda, and launching a new Greek-focused platform through a binding agreement with Alpha Bank and Eurobond.

Bright Idea
Meanwhile, Italian GP Idea Capital Funds teamed up with Bayside Capital – the distressed-situations-dedicated branch of HIG Capital – to take a different approach to the issue. The two firms launched a new joint vehicle, Corporate Credit Recovery Fund I (CCR I), in June 2016, under the umbrella of advisory firm CBA Studio Legale e Tributario, led by Angelo Rocco Bonissoni.

CCR I and Pillarstone target the same type of assets and compete in the same market. The difference is that while Pillarstone's "veicolo 130" issues security notes that maintain their liability on banks' balance sheets, CCR I works as a private debt fund and buys the banks' loans in exchange for LP-type stakes in the fund. "This structure represents a novelty introduced to the Italian market and tips its hat to the DIP-financing structure operating in the UK market," explains Stefano Focaccia, head of special situations at BNL/BNP Paribas.

The vehicle held a first close on €260m in July 2016. "It works through the coordination of two compartments, one for transferred credits and one for new money," explains Giuseppe Mirante, managing director at Bayside Capital. At the time of publication, the credit fund held nine loans in eight companies, acquired from seven Italian lenders: Unicredit, BNL/BNP Paribas, Banca Popolare di Vicenza, MPS, BPM and Bivervabanca.

Via the new-money compartment, Bayside provides fresh capital to support the turnaround plan for companies in the credit fund's portfolio. Bayside committed 50% of the €80m total equity currently raised by the new-money fund, while Idea Capital and other institutional investors and family offices provided the remaining commitments.

"The fund's transfer-in-kind process sees banks swap their credits at book value for an equivalent stake (units) in the fund," says Mirante. "In that way, lenders derecognise the bad loans from their books and the fund becomes lender to the companies. The credits in the fund are pooled, which means the banks are not exposed to single-credit risk, but a pooled risk. This structure allows banks to obtain relief from Basel III capital requirements."

With fund managers starting to look for different ways to enter this promising market and generate strong returns in Italy, other countries are expected to eventually be of interest – namely Greece, Portugal and Ireland.

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• Topics
• Debt
• Southern Europe
• Italy
• Debt-for-equity