Italian borrowers open up to private debt

Amedeo Goria
05 October 2017

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Alternative lending is gaining momentum in Italy, with current leverage financing levels representing an opportunity for the country's private equity industry. Amedeo Goria reports

The private debt market is gathering momentum in Italy, in line with the wider trend witnessed across Europe. Deloitte's Alternative Lender Deal Tracker Q1 2017 highlights a surge across the Italian leveraged financing market from four transactions sealed in Q1 2014 up to 34 deals in Q1 2017. This positive trend is mirrored across Europe's five largest economies, with France, Germany and the UK totalling an average 390% increase and Spain witnessing an increase from one to 34 transactions within the same time-frame.

Italy's delayed uptake of private debt is due, in part, to a legacy attitude that saw lending activity almost exclusively the domain of banks. There are a number of reasons behind this, including the ban on non-Italian lenders directly providing debt to local borrowers. The government removed this ban in 2016 as a response to the shortage of credit coming from local lenders.

In addition to the beleaguered banking system, Italy saw a severe deterioration in the quality of banks' assets following the financial crisis in 2007-2008, which eventually opened opportunities in the sub- and non-performing assets market. However, despite this growing niche, the Italian lending market remained primarily characterised by bonds and similar securities issued by private companies, which have reached an aggregate of €11bn, including €3.6bn issued in 2016, according to Deloitte.

"Alternative lenders have started to compete with banks, offering more competitive solutions, such as longer terms and more tailor-made lending packages for more complex situations" – Daniele Candiani, Deloitte Corporate Finance

Recently, the industry was boosted by Fondo Italiano di Investimento (FII), the investment arm of the Italian government. FII set up a €500m private debt fund-of-funds in July 2014 to invest in domestic private debt funds. Following an initial €250m first close in September 2014, the firm had collected €380m as of June 2016. Most recently, the GP committed €85m to three Italian private debt vehicles: Ver Capital Credit Partners Italia V, Muzinich Italian Private Debt Fund and Quadrivio Private Debt, totalling nine vehicles in its portfolio and €265m of total capital committed.

"Spread margins over Euribor still lead companies to prefer banks as lenders in LBO financings," says Deloitte Corporate Finance partner Daniele Candiani. "Nonetheless, alternative lenders have started to compete with banks, offering more competitive solutions, such as longer terms and more tailor-made lending packages for more complex situations." In the wake of this growing trend, Candiani joined Deloitte in early September 2017, with the aim of developing the firm's Italian debt advisory practice with a focus on acquisition and leveraged finance.

Balanced approach
The Italian financing market on the whole remains relatively well balanced, with 51.1% of the respondents to the Deloitte survey declaring an average percentage of equity per deal of 41-60%. Transactions with equity-to-debt ratios below 40% have also decreased in volume, while the number of deals with equity of more than 60% increased by 11.9% according to the survey.

"With regards to structures, most often we see deals with exclusive backing of term loan B," says Candiani. "Although term loan A is still used in some transactions in which the sponsors seek funding from domestic banks, it usually does not exceed 20-25% of the total loan volume." In the past six months, around 90% of leveraged deals were executed with a senior debt-to-EBITDA ratio of up to 4-4.5x and total leverage of around 5x EBITDA, he says.

The Italian leveraged finance market is therefore beginning to resemble more complex western European markets, though it still remains more lender-friendly. The average spread on Euribor for deal financing stands at 200-300 basis points for 68.9% of total volume, according to Deloitte's survey. Meanwhile, 24.2% of financing has an average spread on Euribor of more than 300 basis points, which represents an 11.6% increase from the previous semester.

Senior debt is the most popular financing option representing 74.2% of current gearing, while shareholder loans are the second most popular option with 12.9%. Therefore, banks continue to play a prominent role in the market.

"Italy shows good investment opportunities and still enjoys more protective structures for lenders, compared with France, Germany and the UK," says Candiani. "Against this backdrop, and given the existing pipeline, the next six months are expected to confirm volumes and values reached in the same period in 2017."