New rules for Italian debt create opening for alternatives

In the wake of its economic recovery, the Italian government has recently introduced several regulatory reforms to open up the country's debt market to alternative lenders. The measures aim to extend the concept of lending to non-bank actors by creating a more favourable tax regime and making the economic environment more creditor-friendly.

Talking to unquote", Marco Paruzzolo, a senior associate lawyer from the London office of Italian law firm Chiomenti Studio Legale, says: "To date, the Italian banking market is still fairly closed and banks struggle to lend at pre-crisis levels. This is due to both several country-specific concerns, including the large stock of non-performing loans, and regulatory burdens affecting the banking system on a European level."

With particular regard to Italy, Paruzzolo says: "The government has accelerated the reforms of the lending market, also because the banking sector was supposed to undergo a period of consolidation, which is probably taking longer than expected. This situation, combined with the general economic uncertainty, urged the country to ease the access to credit alternatives."

The reforms
Italy's reform of the debt market started with the minibond law in 2012. The measure enabled non-listed SMEs to raise capital through the issuance of small-size bonds ranging in the €2.5-50m bracket. Subsequently, the Ministry of Economy and Finance approved a decree in June 2014, updated in March 2015, that "boosted the bond market through several inducements, including the law's relaxation on outgoing withholding tax on interest payments and stamp duty tax," says Paruzzolo.

The reforms opened the Italian market to alternative credit instruments, an entirely new option for entrepreneurs. "This has been well received by operators and we have seen several bond deals happening," says Paruzzolo.

Nevertheless, the reforms left a grey area with regards to international lenders wanting to invest in the country and, according to reports at the time, investors were still looking for clearer rules. To tackle the situation, the government released a decree, dated February 2016, clarifying the conditions under which European alternative investment funds (AIF), located in whitelisted jurisdictions, are allowed to lend directly into the country.

According to this last decree, "direct lending will be permitted according to a number of conditions. The most important is that European AIFs need to be authorised by their home EU-member country," says Paruzzolo. The other conditions include the requirement to be a closed-ended fund with a modus operandi comparable to Italian AIFs, as well as to be subjected to Italian provisions with regard to transparency and administrative sanctions' enforcement, unquote" understands.

"The recent reforms have enhanced the need for certainty in the country and a number of steps have been implemented in order to speed up enforcement and insolvency proceedings," says Paruzzolo. "Those are interesting developments for both domestic and international investors."

Despite the recent reforms, investors seem to expect the Bank of Italy to implement secondary legislation and enhance lending activity in the country. "Nowadays, lenders need the authorisation from the Bank of Italy to operate. The process takes up to 60 days, and it can still represent a hurdle in some situations," says Paruzzolo. The issue has been tabled for debate among Italian authorities, and players are expecting further developments.

Outsider's view
Alan Macdonald, an associate at Debevoise & Plimpton, says: "Our clients active in Italy are very excited about these reforms, and are watching them closely to understand what opportunities may be available."

Furthermore, for international investors, the reforms create a new loan product for the Italian market that is appealing because, compared to the bond product, the loan tends to be simpler to implement and it has a better security package. "It also allows for much easier deal maintenance, which means during the life of the transaction it is easier for companies and creditors to deal with each other," says Macdonald. "With the addition of all this legislative reform, it feels that Italy is moving towards a tipping point and it is now more open to the market."

However, Macdonald highlights some concerns from the perspective of international investors, for example, with regards to the security structure. "There still are concerns about the difficulty of enforcing security in Italy. It often involves going through a court process, which can lead to a delay and costs and can be quite unpredictable. But there are amendments and changes to Italian law that are making the environment less borrower-friendly and more creditor-friendly," he says.

Although the reforms are aimed at tackling the lack of bank credit, banks have not been idly standing by. "[Across the major European countries], lenders undertook some counter-measures to take advantage of the new regulatory environment and teamed up with alternative capital providers," explains Paruzzolo. "Some banks are organising themselves to provide several services to foreign direct lenders, which do not have the capability to operate in Italy, as well as to report to the Bank of Italy's rating platform Central Credit Register."

At the same time, the reforms also represent also a compelling opportunity for the private equity industry, according to both Paruzzolo and Macdonald, who point out that European buyout houses are increasingly interested in Italian deals.

"UK-based private equity firms are very interested in the Italian market and their interest grows as those new ways of investing in Italy are opening up," says Macdonald. "As new products become available, alternative lenders have more options to invest in Italy. At the same time, more sophisticated players are becoming involved in the Italian market, so more sophisticated deals are being done."

From borrower-friendly to creditor-friendly
Despite all of the positivity, international investors are still waiting to see what the new regulation will look like and what ongoing compliance requirements the Bank of Italy may impose on market participants. "It looks like the market is gearing up to provide services to alternative capital investors and allow them to comply with the regulatory requirements," says Macdonald.

"From an international perspective, there is still the general perception that Italy is a borrower-friendly jurisdiction and that its insolvency regime does not favour creditors," says Macdonald. "For instance, lenders have a limited ability to influence insolvency proceedings once a business goes bankrupt. At the same time, transactions and players are becoming more sophisticated in the way they are structured in order to mitigate those risks."

While Italian authorities have taken important steps in bringing the country's lending rules more in line with its European neighbours, creating cause for optimism for both domestic and international players, there is still progress to be made before the market for alternative lenders is fully open. And given the lengthy time periods previous reforms have taken to be implemented, a wait-and-see approach remains the best option for all parties concerned.

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