In 2023 the Italian loan market, like other European loan markets, has experienced a limited slowdown mainly due to increase in interest rates, which is only partly connected to the war in Ukraine but mostly reflects a more general trend in European economies. This has had an impact, in particular, on real estate finance deals, as increased interest rates reduce the profitability of leveraged deals.

The mid-size acquisition finance sector has remained very active, while there has been reduced activity in the large acquisition sector. 

There has also been a sizeable wave of bridge loans, which will most likely be refinanced upon decrease of the interest rates.

Lastly, project finance remains a very hot topic, in line with global trends fostering energy transition.

The military aggression by Russia against Ukraine caused disruption at the beginning of 2022, not only for companies active in that region, but for the whole Italian economy, especially in the light of gas supply issues with Russia.

However, the loan market was not excessively impacted; this was partly thanks to actions by the Italian government, including:

• at a political level, the execution of agreements with other states for the supply of oil and gas to replace that of Russia; and
• increased push for guarantees provided by SACE and the Central Guarantee Fund.

The high-yield market continues to grow at a steady pace. 

However, it is still a secondary source of financing.

One reason for this is the cost connected to implementing a structure of the type typically used for these transactions, where the private placement documentation is governed by New York law. 

This increases the transaction costs and requires a significant minimum issue amount to be efficient.

In order to increase the competitiveness of the Italian lending market, a number of developments have been introduced by the Italian legislator in the last ten years, including:

• new players have been given access to the lending market by including them among the entities licensed to carry out lending activities in Italy;
• non-listed companies have been given access to bond financings; and
• the tax regime has been made more favourable by extending the application of certain tax benefits.

This gave rise to an alternative market to the banking one (especially in the acquisition finance sector).

To date, new players have been mostly active in mid-sized deals. They often provide a mezzanine/subordinated tranche to fill the gap between the maximum leverage ratio allowed by senior (bank) lenders and the financing needs of private equity sponsors.

Due to principle of reserve of activity see below) an alternative structure used by all foreign funds for the purchase of receivables (which is also reserved activity; see below) in Italy is the establishment of an Italian SPV, incorporated under Italian Securitisation Law (Law No 130/1999), which issues notes subscribed to by the investor(s).

The funding structure of an Italian law securitisation transaction is very flexible; it entails an investment made through the subscription of asset backed securities (which can be also be issued in different tranches or classes) and may also involve, under certain requisites, the granting of loans.

As an alternative to direct lending, a possible structure (which is being used more and more frequently) is the subscription by investors of bonds issued by Italian companies.

Historically, the issuance of bonds by Italian companies was subject to many legal requirements.

Since Law Decree No 83 of 2012, which first introduced the “mini bond” instrument in the Italian legal framework, the situation has dramatically improved. 

Originally, the new instrument was intended to mainly be used to boost the growth of companies which did not have access to the traditional banking credit, however the development of specialised players has made this instrument very popular in the Italian market.

In line with the growing global demand for sustainable finance, there has been an increase in ESG or sustainability-linked financing transactions in Italy in recent years.

ESG metrics are, in particular, taking a major role both in the financial risk valuations and in the remuneration of the risk capital: a discount on the margin levels is granted to those companies which meet some ESG target metrics. 

In the Italian legal system, as opposed to other legal systems, the principle of reserve of financing activity applies. This principle is established in Article 106, paragraph 1, of Legislative Decree No 385/93 (the “Consolidated Banking Law”), which reserves the exercise of financing activity in any form, in addition to banks, to authorised financial intermediaries registered with a special register held with the Bank of Italy. A breach of this provision will also be punished under Italian criminal law. 

However, in recent years, changes to the regulatory and tax framework have been implemented to allow financing alternatives to the traditional bank financing model, so that insurers, Italian securitisation vehicles (ie, companies established pursuant to the Italian Securitisation Law) and alternative investment funds may also engage in direct lending to Italian borrowers. 

Pursuant to Article 106, paragraph 3 of the Consolidated Banking Law, the Minister for the Economy and Finance, having consulted with Bank of Italy, shall specify the content of the lending activities, as well as the circumstances in which they are deemed to be carried out vis-à-vis the public.

In this regard, the Decree of the Ministry of Economy and Finance No 53 of 2 April 2015 (Regulation containing rules for financial intermediaries in the implementation of Article 106, paragraph 3, 112, paragraph 3, and Article 114 of Legislative Decree No 385 of 1 September 1993, as well as Article 7 ter, paragraph 1 bis, of Law No 130 of 30 April 1999) (the “Decree”) is relevant.

The Decree has implemented an extremely broad notion of lending activities.

Article 2 of the Decree (Granting of financing activities in any form) provides as follows:

“1. The activity of granting loans in any form means the granting of credit, including the issuance of guarantees and credit agreements for the issuance of guarantees towards third parties. This activity includes, inter alia, any type of financing granted in the form of:

(a) financial leasing;

(b) purchase of receivables for a consideration;

(c) consumer credit as defined in Article 121 of the Consolidated Banking Law;

(d) lending secured by a mortgage;

(e) lending secured by a pledge;

(f) issuance of personal guarantees, bankers’ drafts, documentary credits, acceptances, bank endorsement, undertaking to grant credit, as well as any other form of guarantees and commitments to issue guarantees."

In relation to the authorisation necessary to grant financing and to perform other banking activities, the Bank of Italy shall assess the existence of certain conditions to ensure the sound and prudent management.

In particular, the following requirements must be fulfilled:

• incorporation in the form of a joint stock company;
• a registered office and headquarters in Italy;
• minimum share capital of EUR10 million (or higher if required due to the activities envisaged in the relevant programme of activities);
• submission of the deed of incorporation together with the by-laws and a programme of initial activities;
• shareholders meeting certain requirements provided by law; and
• directors meeting certain eligibility criteria provided by law.

The exercise of financing activity in Italy, in any form, is reserved for banks and authorised financial intermediaries registered with a special register held with the Bank of Italy.

Additionally, the EU passporting regime entitles a bank that is regulated in one EU member state to carry out banking activities recognised under the EU passporting regime in other EU member states.

The passporting regime does not cover unregulated lenders or investment firms that wish to undertake lending activities in Italy on a cross-border basis. 

There are no restrictions on foreign lenders benefiting from security or guarantees governed by Italian law.

However, if the financing is not subject to imposta sostitutiva (so-called substitute tax), which is dealt with at 4.2 Other Taxes, Duties, Charges or Tax Considerations, substantial registration taxes, depending on the nature of the security and the features of the facility agreement, may apply.

Italy has no foreign exchange controls. 

Restrictions may apply with respect to transactions involving specific countries (eg, countries with respect to which international sanctions apply), but in principle there are no restrictions on currency transfers.

Banks are required to report any transaction exceeding thresholds provided for by law due to money laundering and terrorism financing concerns.

There are no general restrictions on the use of proceeds from loans or debt securities for an Italian borrower, other than financial assistance limitation (see 5.4 Restrictions on the Target) and the financing of criminal activities.

Agent Concept 

The agent concept exists under Italian law. 

In particular, a mandato is an agreement under which a party undertakes to execute one or more legal acts on behalf of another party. If the mandato is with rappresentanza those acts will be executed in the name of the other party (as if that party were executing the deed itself).

Trust Concept 

Even if Italy ratified the Hague Convention on the Law Applicable to Trusts and on their Recognition 1985 (the Hague Trusts Convention) through Law No 364/1989, according to which foreign trusts are recognised in Italy and can be regulated by the law chosen by the settlor, Italian law does not discipline trusts.

Italian Law and Practice

Under Italian law, security must be granted to, and perfected in favour of, each creditor individually.

In syndicated loans, secured creditors appoint an agent on the basis of mandato con rappresentanza.

The agent is entitled to exercise the secured creditors’ rights and to enforce the security on the basis of the intercreditor arrangements. However, each secured creditor should intervene in the judicial enforcement.

As an exception to the foregoing, Article 2414-bis of the Italian Civil Code (relating to the issuance of bonds by joint stock companies) provides that all kinds of security and guarantees which assist bonds can be granted not only in favour of all bondholders, but also to a representative of the bondholders, which will be entitled to exercise in their name and on their behalf all rights relating to such security/guarantee, including enforcement.

Parallel debt arrangements are generally not recognised in Italy.

Perfection requirements change depending on whether the transfer is by transfer of contract (cessione di contratto) or by assignment of receivables (cessione del credito). 

A transfer of contract requires the consent of all parties, including the assigned debtor and guarantor. This can be obtained before assignment, by including an express consent in the relevant loan agreement or guarantee, as applicable.

On the contrary, the assignment of receivables does not require the consent of the assigned debtor and guarantor, unless the loan agreement or the guarantee, as applicable, expressly prohibits the assignment of the receivables arising therefrom.

Assignment of receivables can be implemented under:

• Italian Civil Code provisions on the transfer of receivables;
• Article 58 of the Consolidated Banking Law, which allows the purchase of receivables portfolios by banks; and
• the Securitisation Law, which allows the purchase of receivables portfolios or single names by SPVs (see 1.5 Banking and Finance Techniques).

In each case, receivables are transferred along with any relevant security or guarantee. 

A transfer under the Italian Civil Code requires notification to the assigned debtors and the execution of certain formalities with respect to certain security (such as annotation of the transfer on the land registry for a mortgage). 

Under the Consolidated Banking Law and the Securitisation Law, no notification to the assigned debtor is needed for the transfer of the relevant receivables and related security and guarantees to be effective.

Debt buy-back is not common in financing transactions. 

As a general rule under Italian law, when the capacity as lender and borrower falls onto the same person, the underlying debt is extinguished together with ancillary rights (including security). Therefore, there is a risk of a court either: 

• reclassifying the loan purchase as a prepayment, which may be in breach of prepayment provisions contained in the loan agreement; or
• subjecting the loan purchase to the pro rata sharing provisions in the loan agreement. 

To overcome this, a buy-back may, eg, be structured as a purchase of the debt by the borrower’s holding company.

A tender offer of a listed company is usually financed by way of a loan. 

The bidder may only make its notification to Consob (ie, the Italian authority in charge of financial markets) once it is in a position to fully fund the offer.

In particular, to ensure that the offer is fully funded and settled at closing, before the launch of the offer the bidder must give evidence to Consob that it has funds readily available for the payment of the offer price for all the shares object of the offer. 

To this end, before publication of the offer document, the bidder must either (i) deposit cash or readily disposable securities for an amount equal to the maximum value of the takeover (ie, the maximum amount that the bidder may be required to pay in case of full acceptance by the market of the takeover), or (ii) obtain a “cash confirmation” letter from a bank or other suitable financial institution that confirms availability of the funds for the same amount and which is irrevocable and unconditional.

Legislative Decree No 14 of 12 January 2019 (the "New Bankruptcy Law") came into effect on 15 July 2022. The New Bankruptcy Law provided for a reorganisation of the bankruptcy legislation, even if the content of some important provisions (eg, claw-back) remained unchanged. For this reason, references to the Bankruptcy Law have been updated in the legal documentation by making reference to the New Bankruptcy Law. 

Furthermore, a new kind of pledge entered into force in 2023: the non-possessory pledge (pegno non possessorio). Pursuant to Law Decree No 59 of 3 May 2016 (which was only implemented in 2023 following the enactment of certain implementing decrees by the Ministry of Economy and Finance and by the Revenue Agency), the entrepreneurs registered in the commercial register can create a non-possessory pledge to secure credits (owing by them or third parties), present or future, if determined or determinable and with the provision of the maximum guaranteed amount, relating to the exercise of their business. 

For the purpose of usury laws, both interest and other charges applicable in connection with a financing transaction shall be considered.

In broad terms, there are two different types of usury provided for by Italian law: 

Objective usury, meaning applying interest exceeding the usury threshold independently of the nature or financial condition of the borrower.

Law No 108/1996 (the “Usury Law”) sets out the relevant formula, providing that the threshold rate be calculated on the basis of the average annual percentage rate (TEGM) indicated in a decree to be published by the Ministry of Finance (MEF) on a quarterly basis.  

In turn, the TEGM published by the MEF is based on a survey of the economic conditions applied in the market in the previous quarter that the Bank of Italy carries out each quarter.

Subjective usury applies when both of the following conditions are met.

• “Disproportion”: the agreement provides for disproportionate interest amount with respect to principal and the average interest rates applied for transactions of the same type (even if the usury threshold is not exceeded). 
• “State of difficulty”: this does not mean a “state of need”, but rather refers to both economic difficulty, based on a global evaluation of the borrower’s assets, and financial difficulty, which is a temporary lack of liquidity.

Under Italian law, sanctions for usurious interest are twofold:

• civil sanctions: pursuant to Article 1815 of the Italian Civil Code, no interest shall be due and the borrower shall be entitled to claim the reimbursement of all interest amounts already paid to the lender; and
• criminal sanctions: pursuant to Article 644 of the Italian Criminal Code, criminal sanctions shall apply.

The concept of “supervening usury” refers to the case where interest is below the usury threshold at the start of the loan, but exceeds such thresholds at a later stage.

In this respect, the Italian Supreme Court has stated that compliance with the usury threshold is relevant only at the time of execution of the loan agreement, regardless of the time of payment.

The prospectus of a tender offer must state whether external financing is required, and if so, it must provide details of the identity of the creditors and the bidder’s assumptions to pay the debt service (including whether the bidder is relying on the target company’s financials). Similarly, any guarantees and security interests securing the bid must be disclosed and identified.

No withholding tax is chargeable on interest payable on loans made to resident lenders. A withholding tax (with rate of 26%) is chargeable on interest payable to a non-Italian resident lender (unless in case of lending through an Italian branch to which the loan is effectively connected). 

The withholding tax can be reduced under the relevant provisions of the double tax treaty applicable between Italy and the country of residence of the beneficial owner of the interest.

In addition, no withholding tax applies to interest paid on medium- or long-term loans if extended, inter alia, by credit institutions established in EU and institutional investors subject to regulatory supervision established in countries that allow an adequate exchange of information with Italy. 

Substantial registration taxes, depending on the nature of the security and the features of the facility agreement, may apply. 

However, a substitute regime (the substitute tax) may be applicable in order to reduce the indirect taxes ordinarily applicable to the loan and the security package (eg, registration and mortgage taxes).

Substitute tax (generally at the rate of 0.25%) applies, upon the option of the parties, if the loan:

• is granted, inter alia, by Italian banks (including Italian permanent establishments of EU and non-EU banks), EU banks, Italian securitisation companies and EU collective investment funds;
• is entered into within the territory of Italy; and
• has a duration exceeding 18 months.

Where substitute tax does not apply, the securities are subject to indirect taxes varying from EUR200 (where the guarantor is securing its own obligations) to 0.5% (where third parties’ obligations are being secured) while mortgage tax is generally levied at 2%.

Registration taxes may not be payable if the security agreement is executed outside Italy (unless specific events, occur, eg, case of use, explicit reference or voluntary registration). However, certain securities must be registered in Italy for perfection purposes, eg, real estate mortgages, special privileges, pledges of quotas of limited liability companies (società a responsabilità limitata), pledges of intellectual property and mortgages on ships and aircraft. 

Unlike EU banks and EU collective investment funds, foreign lenders may not benefit from substitute tax, which is a special regime which can be opted for in order to reduce the indirect taxes ordinarily applicable to the loan and the security package.

In addition, in order for substitute tax to be applicable, the loan must be entered into in Italy.

Under Italian law, security can be taken mainly over:

• shares or quotas of a company;
• real estate property;
• equipment and machinery;
• IP;
• receivables arising from contracts;
• bank accounts; and
• moveable assets.

The methods of taking security over the above assets vary according to the type of asset concerned.

Shares or Quotas

To grant a pledge over shares in a joint stock company or quotas in a limited liability company, a deed of pledge is required. To perfect a pledge over shares, a director of the company whose shares are pledged must annotate the pledge on the share certificates and in the company’s shareholders’ ledger. The security may be perfected on the same day of execution of the pledge agreement.

To perfect a pledge over quotas, the relevant deed must be notarised and filed with the competent companies’ register (registro delle imprese); in addition, to the extent the constitutional documents of the company provide that the company maintains a shareholders’ ledger, the creation of the pledge shall be annotated by a director of the company in its shareholders’ ledger.

If the deed was executed before a foreign notary public, it must also be apostilled (where necessary) and deposited with an Italian notary public together with a sworn translation (if it is not drafted in Italian). The security is usually perfected within a week of filing the pledge agreement.

Inventory

In principle, a pledge over equipment and machinery (and raw materials) can be granted. However, in order for a pledge to be created, the pledged assets must be delivered to the lenders or to a third party designated as custodian by both the lenders and the grantor. The security may be perfected on the same day of execution of the security agreement.

Bank Accounts

This type of security qualifies as security over receivables (namely, over the balance on the relevant bank accounts). In the case of security over the balance on bank accounts, the depositary bank must make an annotation in its books. The security may be perfected on the same day of execution of the security agreement.

Receivables

Receivables that can form the subject of a security interest include:

• rental income;
• insurance proceeds; and
• receivables arising from share/asset purchase agreements.

Security over receivables can be granted in the form of an assignment by way of security or of a pledge. The perfection of the pledge requires the notification of the pledge to, or its acceptance by, the relevant debtor (with a document bearing a date certain at law). The debtor’s notification or acceptance is also necessary to perfect assignment by way of security. With regard to insurance receivables, a loss payee clause (clausola di vincolo) can be included in the insurance policy.

The security may be perfected on the same day of execution of the security agreement.

Intellectual Property Rights

Security over Italian patents, designs, trade mark registrations and trade mark applications typically take the form of a pledge. A deed of pledge is required for this purpose. The perfection of the pledge requires the filing of the deed of pledge with the institutions where the intellectual property rights are registered (such as the Italian Patents and Trademarks Office and the European Union Intellectual Property Office). The deed of pledge must be notarised and is usually executed in Italian before an Italian notary public. It is in principle possible to execute it before a foreign notary public but, in this case, the deed must also be apostilled (where necessary) and deposited with an Italian notary public together with a sworn translation (if it is not drafted in Italian). The security usually takes a few weeks to be perfected and the timescale depends on the relevant offices.

Real Estate Assets

A deed of mortgage is required to grant a mortgage over land/property. The deed of mortgage must be notarised and registered in Italy. Therefore, it is usually executed in Italian before an Italian notary public. The perfection of the mortgage requires registration with the competent land register (to be carried out by the Italian notary public). The security usually takes a few weeks to be perfected and timescale depends on the relevant offices.

Movable Assets

Common forms of security over movable property include:

• pledges;
• special mortgages on registered movable property, such as aircraft and vessels; and
• floating charges under Article 46 of the Consolidated Banking Law (see 5.2 Floating Charges and/or Similar Security Interests).

The security usually takes a few weeks to be perfected and timescale depends on the relevant courts.

While Italian law does not permit floating charges, there are two types of security under Italian law which have some of those characteristics.

Special Privilege

The special privilege deed must be signed before an Italian notary and can only be granted by the debtor to secure facilities with an overall maturity longer than 18 months granted to it by Italian or other EU banks. The special privilege may cover:

• (i) existing and future equipment, concessions and produced goods of the enterprise;
• (ii) raw materials, semi-manufactured goods, stock, finished goods, fruit, livestock and goods;
• (iii) goods purchased with the loan in respect of which the special privilege is intended to be granted; and
• (iv) present or future receivables arising from the sale of the assets and goods listed in (i) to (iii).

Non-possessory Pledge Over Movable Assets 

The non-possessory pledge may be established: 

• to secure financings, whether present or future, granted in order to run the business (a maximum secured amount must be set); 
• over unregistered movable assets (including receivables and other immaterial assets), whether existing or future and whether determined or determinable, also by making reference to one or more categories of products or to an overall value; or
• by entry on the aforesaid electronic register. 

From the date of registration, the pledge acquires its ranking and is enforceable against third parties and in insolvency proceedings. The entry lasts for ten years and is renewable before expiry. The pledged assets can be transformed or sold. The pledge is automatically transferred onto the product resulting from the transformation, the consideration arising from the sale or the substitute asset purchased with that consideration, as applicable, without giving rise to the creation of new security; this is, of course, very important to avoid claw-back risk.

Under Italian law, the entry into a transaction (including the granting of a guarantee or security interest) by an Italian company is subject to, inter alia, compliance with the rules on corporate benefits, corporate authorisation and certain other Italian mandatory provisions.

An Italian company may only take those actions which fall within the corporate purpose of the company as stated in the company’s articles of association. Furthermore, according to Italian law and principles, an Italian company, in order to be allowed to issue a guarantee, must have an actual corporate interest/benefit in the transaction. This benefit may be direct or indirect but it must be valuable and measurable using objective and rigorous criteria. The concept of a “corporate benefit” is not specifically defined in the applicable legislation and is determined by a factual analysis on a case-by-case basis. As a general rule, corporate benefit is to be assessed at the level of the relevant company on a stand-alone basis, although upon certain circumstances and subject to specific rules the interest of the group to which such company belongs may also be taken into consideration. 

While corporate benefit for a downstream guarantee/security interest (ie, a guarantee/security interest granted to secure financial obligations of direct or indirect subsidiaries of the relevant grantor) can usually be easily proved, the validity and effectiveness of an upstream or cross-stream guarantee/security interest (ie, guarantee/security interest granted to secure financial obligations of the direct or indirect parent or sister companies of the relevant grantor) depend on the existence of an actual and adequate benefit in exchange for the granted guarantee/security interest. In particular, the amount secured must be, in any event, reasonable taking into account the financial conditions and the turnover of the company granting the security. 

As a general rule, the absence of an actual and adequate benefit could render the transaction (including granting a security interest or a guarantee entered into) by an Italian company ultra vires and potentially be affected by a conflict of interest. Any security interest or guarantee granted by an Italian company, without a proper corporate interest, could be declared null and void if the lack of corporate benefit was known or presumed to be known by the third party and such third party acted intentionally against the interest of the Italian company.

Civil liabilities may be imposed on the directors of an Italian grantor should a court hold that they did not act in the best interest of the grantor and that the acts carried out do not fall within the corporate purpose of the company or were against mandatory provisions of Italian law. The lack of corporate benefit could also result in the imposition of civil liabilities on those companies or persons ultimately exercising control over an Italian grantor or having knowingly received an advantage or profit from such improper control.

Lastly, under Italian law, a maximum guaranteed cap should be agreed.

Upon certain conditions, the granting of guarantees may be considered as a restricted financial activity within the meaning of Article 106 of the Italian Banking Act, whose exercise is exclusively reserved to banks and authorised financial intermediaries. Non-compliance with the provisions of the Italian Banking Act may, among others, entail the relevant guarantees being considered null and void. In this respect, Italian Decree No 53 of 2 April 2015 issued by the Italian Ministry of Economy and Finance, implementing Article 106, paragraph 3, of the Italian Banking Act, states that the issuance of guarantees or security by a company for the obligations of another company which is part of the same group does not qualify as a restricted financial activity, whereby “group” includes controlling and controlled companies within the meaning of Article 2359 of the Italian Civil Code as well as companies which are under the control of the same entity. As a result of the above-described rules, subject to the guarantor and the guaranteed entity being part of the same group of companies, the granting of the guarantees would not amount to a restricted financial activity.

A security agreement and the related documents are null and void if they violate financial assistance rules (that is, when a company grants a loan or a security related to a loan to another party to purchase the company’s shares). However, the Italian Civil Code provides for the following exceptions, which allow financial assistance in certain circumstances.

Merger Leveraged Buyouts

Merger leveraged buyouts, where a company guarantees a loan granted to another company to purchase its shares on a merger between the two companies, are allowed under a specific procedure provided for in the Italian Civil Code.

Whitewashing

Financial assistance is allowed, in the case of a joint stock company (società per azioni), under a set procedure that requires:

• an extraordinary resolution of the general meeting;
• specific reports and statements by the directors; and
• compliance with a maximum threshold equal to the aggregate amount of the distributable profits and reserves of the target company.

Employees

Subject to certain conditions, the prohibition of financial assistance does not apply to loans or guarantees granted to employees of the company to promote the acquisition of its shares.

In addition to the legal restrictions and limitations described in 5.4 Restrictions on the Target, there may be other restrictions set out in the constitutional documents of the company or in its contractual commitments, which might prevent the company from granting guarantees or security for its and/or other borrowers’ financing or that might impose additional formalities on the relevant company.

Typically, a deed of release is entered into between the secured creditor and the debtor to confirm the release of a security over the debtor’s assets. Alternatively, a unilateral release may be executed by the secured creditor. 

In addition, certain formalities may be required. By way of example, in the case of mortgages (whether over real-estate assets or vessels), the release should be filed with the competent registry (for which purpose the parties will need to execute a notarial deed of release).

Italian law provides a timing preference (prior in tempore, potior in iure), based on the date of creation (and with respect to a registrable security, the registration) of the security.

Priority rules may be varied contractually with the consent of all secured creditors, however, any contractual subordination provision is effective between the parties to the relevant agreement but is not enforceable in an insolvency scenario and the in-court restructuring proceedings.

In the case of mortgagees, ranking exchange between mortgagees shall be transcribed with the real estate register in order to be enforceable.

Legal preference and/or subordination exist in an insolvency situation (see 7.2 Waterfall of Payments).

Under Italian law, claims that, by operation of law, can prime a lender’s security interest, are the ones of certain preferential creditors, including the claims of the Italian tax authorities and social security administrators, and claims for employee wages.

Mortgage

To enforce a real estate mortgage, the secured creditor must start a judicial procedure aimed at selling the relevant real estate through an auction. If the value of the real estate asset is equal to or lower than the amount of the claim, the creditor may require the asset to be assigned to it. 

Pledge

The enforcement of a pledge does not require a judicial procedure. 

If the debtor does not fulfil its payment obligations within five days of a request by the secured creditor, the creditor can immediately ask the court bailiff to sell the relevant asset through an auction, or without an auction if the asset has a market price. The secured creditor can also ask the judge to assign the relevant asset to it as a fulfilment of the debtor’s obligations. 

A pledge over bank accounts is enforced through a notification to the depositary bank stating that the pledgor no longer has the right to benefit from the amounts credited on the relevant bank account and a request to retain an amount necessary to fulfil the debtor’s obligations.

A pledge over receivables is enforced through a notification to the assigned debtors to pay the due amounts to the secured party.

Needless to say, enforcement of security (pledges or mortgages) forces the lender to notify the debtor of the enforcement and consequently exposes the lender to the possible opposition in court by the debtor that may delay enforcement for some time.

Exempt from such prior notice obligation is the enforcement of a financial collateral (garanzie finanziarie), which is, however, only available to banks and intermediaries subject to supervision and in relation to cash or financial instruments which have a market value.

A further very efficient security is the assignment of receivables by way of security because under such agreement the receivables become property of the lender as soon as they originate, and practically the lender “appropriates” the collateral from the outset and must only return any excess proceeds from the collection of the assigned receivables.

Another simplified enforcement procedure was introduced in 2016 for loans granted by banks and other authorised financial intermediaries registered under Article 106 of the Consolidated Banking Law that are secured by transfer of a real estate asset (patto marciano). The transfer is then only conditional on:

• payment default by the borrower; or
• notification of the transfer to:
1. the owner of the real estate asset; and
2. any other creditors with rights over the same real estate asset.

Choice of Law

The choice of a foreign law as the governing law of a contract is valid under Italian law, pursuant to Regulation (EC) No 593/2008 of the European Parliament and of the Council of 17 June 2008 on the law applicable to contractual obligations (Rome I), which applies to contractual obligations in civil and commercial matters irrespective of whether the law in question is that of a member state. 

However, the choice will not restrict the application of the “overriding mandatory provisions” (as defined in Rome I).

Choice of Jurisdiction

An Italian court will generally decline jurisdiction if the parties have submitted to the jurisdiction of a foreign court.

Immunity

Italian companies are generally not subject to sovereign immunity. 

In principle, a waiver of sovereign immunity is allowed under Italian law. However, the possibility for governmental or other public agencies to waive their sovereign immunity shall be verified on a case-by-case basis.

The transfer of certain assets (eg, public concessions) may require a prior administrative authorisation in the context of the enforcement of a security.

Judgments Given by EU Countries 

Article 36 of EU Regulation No 1215/2012 provides that a judgment issued by the court of a member state shall be recognised in the other member states “without any special procedure being required”. 

Judgments Given by Non-EU Countries 

The acknowledgment and enforcement of decisions issued by courts belonging to jurisdictions outside of the EU is generally governed by Law No 218/1995. The enforcement of a foreign decision in the Italian territory requires the filing of a petition before the Court of Appeal of the place where the enforcement shall then take place. Such proceedings usually last six months to one year, and the order authorising the enforcement of the foreign decision in Italy fully entitles the creditor to seek enforcement over the debtor’s assets.

Arbitral Award 

Italy is party to the 1958 New York Convention, which sets the conditions under which arbitral awards can be recognised and enforced within the contracting states.

An Italian court will declare the effectiveness of arbitral awards inaudita altera parte provided that: (i) the litigation falls within the scope of the arbitration agreement pursuant to Italian law; and (ii) the contents of the arbitral award comply with Italian public policy. 

The counterparty is entitled to challenge such decision before the competent Court of Appeal within 30 days from its notification.

As discussed at 3.5 Agent and Trust Concepts, there are doubts as to the effectiveness or validity of a security interest expressed to be created under Italian law in favour of an entity acting as trustee or collateral agent for the creditors to be secured and holding the security interest in such capacity. 

Any document that is not in Italian must be accompanied by an official sworn translation for it to be admissible by an Italian court or authority.

The judicial liquidation proceeding (liquidazione giudiziale) triggers a standstill on enforcement actions for the entire duration of the proceedings, with some exceptions, such as:

• enforcement actions on mortgaged assets according to mortgage credit rules (credito fondiario) as set out in the Consolidated Banking Law;
• in very limited cases and under certain circumstances, creditors secured by a lien (pegno) or a privilege (privilegio); and
• enforcement of financial collateral arrangements pursuant to Legislative Decree No 170 of 21 May 2004 (implementation of Directive 2002/47/EC on financial guarantee contracts).

The restructuring proceedings (other than the certified recovery plan, on which see below) enable the debtor to file for an in-court standstill preventing enforcement actions that must be approved by the court on a case-by-case basis.

Some restructuring proceedings prevent lenders from accelerating their loans as a consequence of the simple opening of the proceedings (eg, composition with creditors).

In an insolvency procedure, claims are paid in the following order.

Pre-deductible Claims

These are statutory claims (such as tax or other government claims, or claims for professional services) and claims that arise during or for the purpose of the insolvency procedure. Creditors with pre-deductible claims are paid entirely (or pro rata, if the assets of the insolvent company are not sufficient to pay them all).

Preferential Claims

These include:

• claims with a general or special legal privilege (such as tax claims) over all or some of the assets of the insolvent company;
• creditors with a special privilege over a real estate asset rank before creditors with a mortgage over the same asset, while a special privilege over a movable asset ranks after a claim secured by a pledge over the same asset;
• the order of priority of privileged claims is set by law; and
• secured claims. 

If privileged or secured creditors are not fully satisfied through the proceeds of sale of the assets, the unpaid portions rank as unsecured claims.

Unsecured Creditors

If a security interest has not been validly perfected, the creditor will rank as an unsecured creditor.

The duration of insolvency processes varies depending on the different factors of each case.

In 2022, the New Bankruptcy Law came into force. This New Bankruptcy Law was enacted with the aim of creating an organic system for the management of any crisis and insolvencies replacing the fragmented system based on the previous bankruptcy law (Royal Decree 267/1942).

The following is a brief overview of the rescue or reorganisation procedures other than insolvency (liquidazione giudiziale) available under the New Bankruptcy Law. 

The New Bankruptcy Law makes available to a company several proceedings to restructure its indebtedness and overcome the crisis or insolvency, among which the most relevant are:

• negotiated corporate crisis resolution proceedings (composizione negoziata della crisi d’impresa);
• the certified recovery plan (piano attestato di risanamento);
• the debt restructuring agreements (accordo di ristrutturazione dei debiti);
• simplified composition for the liquidation of assets (concordato semplificato per la liquidazione del patrimonio); and
• settlement with creditors (concordato preventivo).

The proceedings range from consensual instruments to arrangements based on creditors majority-vote and may be conducted out of court (piano attestato di risanamento), or in full or in part in court. 

Under these proceedings:

• the debtor may apply for an in-court standstill preventing creditors from taking enforcement actions (other than in case of piano attestato di risanamento); and
• payments made and guarantees granted by the debtor during the proceedings and/or in execution of the relevant restructuring plan are exempt from claw-back and certain insolvency-related crimes.

It is actually the exemption from claw-back that makes such instruments very attractive for lenders when a debtor is in financial difficulty.

In addition to the consequences described at 7.1 Impact of Insolvency Processes with respect to the suspension of enforcement proceedings, lenders should be aware of the following.

Claw-Back

Some acts, transactions and security interests may be subject to claw-back actions (revocatoria) by the receivership if such acts have been perfected during the so-called suspect period (from six months to one year depending on the circumstances), with very few exceptions. 

In particular, payments of debts which are due and payable may be clawed back if made in the six-month period preceding the declaration of bankruptcy.

Prepayments (pagamenti anticipati) are ex lege ineffective if such acts have been made during the two-year period preceding the declaration of bankruptcy. 

In particular, prepayments can be revoked during such two-year period irrespective of whether the recipient was aware of the state of insolvency of the debtor.

Corporate Benefit

Any loan taken, security or guarantee granted by a company must be justified by a specific corporate benefit for the company or its group. In the absence of a corporate benefit, the relevant contracts may be declared null and void.

Project finance is a very active market in Italy, notably in the renewables sector, in line with the global trend of fostering energy transition.

Due to the current reduced state support for the feed-in tariff scheme, an emerging trend is the development, and relevant demand, for the financing of renewable energy plants on the basis of pure merchant risk, along with the possibility of providing long-term power purchase agreements.

In the past 20 years, there have been many Public Private Partnership (PPP) transactions, in particular in transportation (motorways) and hospitals.

PPP transactions are particularly relevant given that the measures of the so-called PNRR (National Recovery and Resilience Plan) are fully operational and a strong commitment from the public administration is required for the project capability.

Following the enactment of new Public Contracts Code (Legislative Decree 31 March 2023, No 36), some changes have also been introduced in relation to the regulation of PPPs.

Although the previous Public Contracts Code had the merit of introducing the organic discipline of the PPP, a process began to innovate this legal arrangement, making it more relevant within the new Public Contracts Code.

The Code was the output of the works of a special Committee of mixed composition (Councillors of State, lawyers, technicians, university professors) for the purpose of simplifying and accelerating procedures, in order to streamline procedures and ensure full compliance with European principles.

Generally, project agreements are governed by Italian law, but it is possible for the parties (i) to apply a foreign law by express choice made under the relevant contract and (ii) to opt for international arbitration to settle disputes. 

In any case, the "overriding" mandatory provisions of Italian law may not be derogated from, upon penalty of disapplication by the Italian courts.

Project agreements entered into with Italian public entities shall, on the contrary, be governed by Italian law and disputes shall be submitted to Italian courts.

Article 16 of the general law provisions of the Italian Civil Code states that a foreigner is allowed to enjoy the civil rights granted to citizens subject to reciprocity and subject to provisions contained in particular laws. This provision also applies to foreign legal persons.

As a consequence, foreign entities may own or otherwise have real property Italy only if their country of origin offers the same opportunity to Italian entities. 

However, it is to be noted that the following individuals are, inter alia, treated on par with Italian citizens and are therefore exempted from the verification of reciprocity:

• citizens (natural or legal persons) of EU member states, as well as citizens of EEA countries (Iceland, Liechtenstein and Norway); and
• citizens (natural or legal persons) of those countries with which Italy has concluded bilateral agreements on the promotion and protection of investments (bilateral investment treaties).

Issues to be considered when structuring a project financing deal include, inter alia, the following.

Legal Form of the Project Company

SPVs are normally incorporated in the form of a joint stock company (società per azioni) or limited liability company (società a responsabilità limitata). 

In PPP contracts, the concession agreement is often executed between the grantor and a temporary association of companies (associazione temporanea di imprese) (ATI) following a tender procedure. Under the Public Contracts Code, the ATI which has been awarded the concession must incorporate the project company (the SPV), which will the replace the ATI in the concession agreement.

Restrictions on Foreign Investment

The foreign direct investments regime in Italy, the so-called Golden Power regime, allows the Italian government to scrutinise transactions that concern “strategic” industrial sectors, and grants it the power to apply conditions to such transactions or even veto them in the case of threat to the national economy or security. The regime was introduced in 2012 and has been reinforced and expanded.

This applies also to the energy sector.

Cons for borrowers

Cons for borrowers include:

• complex financial documentation, which involves many parties and long negotiations;
• strict subordination undertakings, distribution blocks and cash sweep covenants; and
• covenants and reserved discretions granted to the lenders under the financial documentation.

In the vast majority of cases, project financing in Italy is implemented by means of a non-recourse/limited recourse banking loan facility.

More recently, the capital markets have become an alternative to standard project financing, through project bonds or so-called mini-bonds. However, such instruments are not used as frequently as loans, due to the flexibility that a limited syndicate of creditors gives to the sponsor when having to amend or waive a specific term of the financing.

Usually, the main parties involved in a project financing are the following.

• The SPV that owns the main assets relating to the project (authorisations, permits, real estate rights, etc). The SPV acts as borrower under the facility agreement.
• The lenders.
• The sponsors/shareholder(s) of the SPV, which are usually required to make equity contributions. The shareholder(s) usually grant a first ranking pledge over the shares/quotas representing the entire corporate capital of the borrower.
• The counterparties of the borrower under the project contracts (engineering, procurement and construction (EPC), and operation and maintenance (O&M) contractors).

The Italian state has title to minerals and other natural resources under Article 822 and following sections of the Italian Civil Code.

The state can grant a licence/concession to private operators for the exploitation of natural resources such as mines and gas fields. Foreign companies can acquire rights to the concession for the exploitation of the state-owned asset. There are some exceptions under special laws and these matters should be subject to specific due diligence on a case-by-case basis.

Environmental regulations are largely issued by regional authorities and will therefore be case-specific, based on the location of the project.