Date: March 11, 2016
Chiara Chiosi, Senior Associate, CBA Studio Legale e Tributario
Can economic recession, industrial crisis and insolvencies turn into an opportunity?
All investors know that economic crisis may represent a business opportunity (because of many factors such as lower prices, lower interest rates, fewer competitors, etc.).
In recent months, however, the question has become more and more popular in Italy to the extent that words such as “non-performing loans, distressed assets, bad bank, insolvency procedure reform, etc.” are quoted every day in Italian newspapers.
The main reason is that financial advisors have valued the Italian non-/under performing loan market around 350 billion Euro: a huge potential deal!
Due to the economic crisis and other factors, the nonperforming loan portfolio of Italian banks has significantly increased in the last years. These assets are capital intensive and are ultimately restraining the growth of banks and companies, as well as of the economies in which they both operate. For sure, the banks are interested in reducing their exposure and credit risk and cleaning up their balance sheets.
On the other side, national and international qualified investors such as a hedge, private equity, and turnaround funds, as well as independent servicers, are demonstrating an actual interest in acquiring and managing such distressed assets and NPL, and look at them as a matter of remunerative investment.
Behind part of these distressed assets, many industrially sane entities require financial restructuring to relaunch their business and/or increase the value of their assets.
The main issue under discussion between the parties for closing NPL and distressed assets disposal transactions remains the pricing and the related impact on the banks’ balance sheets.
Once there is an agreement on the economics, the difficult part of the job is the further recovery and/or restructuring of such NPL and distressed assets.
Notwithstanding the complexity inherent in this kind of transactions, a certain number of deals have been envisaged so far in Italy in accordance with the following two main structures.
The AMC acquires from the lenders a selected portfolio of non-core and under-performing assets (including corporate loans, real estate and shipping), against the issuance of asset-backed securities (ABS); the objective is to obtain control of these assets through debt-equity swaps and new equity in order to restructure them. The AMC manages such exposures, by improving the performance and value of the businesses (which underpin the exposures) and supporting the industrial relaunch of the assigned borrowers in financial distress.
In the first scenario, the banks sell a specific NPL portfolio to certain private investors, in the context of a standard securitization transaction.
In the other case, the NPLs (either secured or not) are sold, in accordance with standardized procedures and documentation, via a private multi-originator dubbed NPL platform set up by a securitization vehicle and managed by an arranger and a special servicer. The interested banks may join the platform, irrespective of the number of NPLs they have, and sell them even in small quantities.
Against the acquisition of the NPLs, the securitization vehicle issues junior notes and senior notes backed by the NPL; third party qualified investors subscribe to the junior notes, and the banks selling the NPL subscribe to the senior notes.
How to foster the process?
Recent changes in the Italian legal framework fostered the disposal by Italian banks of their NPL and distressed asset portfolios, in order to support the industrially sane companies and enhance the Country’s economic growth.
The MEF guarantee
A mechanism aimed to facilitate the disposal of such NPL portfolios by Italian banks has been recently provided by the Italian Government law decree no. 18/2016 (the Banks' Law Decree) that came into force on 16 February 2016. Such decree has to be converted into law by the Italian Parliament within 60 days, either confirming or amending the original text adopted by the Government; thereafter, the MEF will have a further 60-day term to enact the additional guidelines and implementing rules.
According to the Banks' Law Decree, for 18 months (which may be extended for an additional period, subject to the prior approval of the European Commission), the relevant Italian banks may request the Italian Ministry of Finance (MEF), or other state-owned company designated by MEF to secure upon certain terms and conditions the senior notes issued in the context of securitization transactions carried out by Italian banks and backed by NPL portfolios.
The judicial enforcement procedures and insolvency regime reform
On the other side, certain measures that may facilitate the restructuring and/or recovery of NPLs and distressed assets have been implemented.
The reform of the judicial enforcement procedures and more generally of the insolvency regime commenced in 2006; it was resumed from time to time, and ultimately re-launched in June 2015 by the enactment of the law decree no. 83/2015 (converted into the law no. 132/2015).
As to the judicial enforcement, the goal is to facilitate the process and have a fair evaluation of the debtor’s assets. In this respect, the determination of the base value of the real estate assets to be sold at auction according to market value (and no longer based on the cadastral value, which is typically lower) and the greater access to information on assets and the sale auctions, represent a relevant step forward.
With regard to the insolvency matters, the reform has pursued a more active creditors’ role in the management of the crisis by granting to the latter, in the context of a creditors' composition ("concordato preventivo"), the right to submit competing bids for the acquisition of the debtor’s business or assets within a competitive process, and to submit alternative composition proposals aimed to continue the business if the debtor's proposal does not provide for payment of at least 30% of the total unsecured indebtedness. On the other side, it has set out the “cram down” of out of court debt restructuring and stand-still agreements with financial creditors (i.e. the enforceability of the agreement against certain classes of financial creditors who have participated in the negotiation but not entered into the agreements), in order to prevent obstructive actions by not qualified creditors’ majorities.
But the reform process is still ongoing and will be subject to other changes. On 11 February 2016 the Italian Government passed a bill of law - to be discussed and approved by the Italian Parliament and further implemented by the Government in the following months - that is aimed at substantially reforming the Italian insolvency regime. The most relevant features and principles of this bill are:
The debate among the relevant players is vivid but the intention is common: to make the restructuring or recovery process easier.
As to debt restructuring, does it mean concentration of the creditors’ positions in one single point of interest vis-à-vis the debtor? It may be… Then the hypothesis, envisaged in today’s discussions, of a “creditor drag along right” would not look odd \as long as it is aimed to transfer, upon the decision of the majority of the banks, the relevant NPL and distressed assets to a dedicated professional turnaround player.
Anyway, all these new measures, provisions and bills call for the intervention by qualified professional investors capable to use such instruments - in place (but also in the interest) of the disposing banks - and for an efficient management, possibly by way of equity conversion, of all the relevant non performing and distressed asset positions.
In certain circumstances, such investors should be ready to become “partners” of the debtor in its financial restructuring process; in others, typically the securitization transactions, they will be “simply” better off playing a role that the banks do not and cannot play. In both cases, they have an opportunity to invest.