Debt Finance 2024 Comparisons

In 2023 the Italian loan market experienced a certain amount of slowdown due, in particular, to increased interest rates, particularly during the first semester of 2023, which concerned, in particular, LBO financings and real estate finance deals.

In line with previous years, the large acquisition financings sector registered a decrease, while mid-size acquisition finance has remained very active.

The number of corporate finance transactions remained steady in 2023, thanks to the public guarantees issued by the Italian export credit agency (Servizi Assicurativi del Commercio Estero, or SACE), which is fully owned by the Ministry of Economy and Finance, to support Italian companies in the context of recent international crises.

A notable recent trend in the Italian debt finance market is the increasing importance of the sustainability aspects of economic activities and assets. Credit institutions are increasingly offering green and sustainability-linked loans and bond instruments.

The main players in the Italian debt finance market are, traditionally, local banks (both large and mid-sized), while Italian branches of international banks are often seen in larger deals. The year 2023 was characterised by a reduction in transactions backed by private equity players, mainly due to the increase in the cost of financing as well as to a misalignment between sellers’ expectations (in terms of pricing) and buyers, who bear instead the higher costs of financing.

Despite this, 2024 has already registered encouraging numbers for new deals by private equity funds. In fact, interest rates appear to have already reached their peak and easier access to the leverage market could facilitate the resumption of private equity acquisitions.

Even if banks (both local and foreign) still have a major role in the debt finance market, 2023 also saw a further decrease in the granting of new loans by such players (especially where these banks faced a degree of risk), while the market share held by private debt funds (both Italian and international) increased.

After the significant growth of the “mini-bond” market as alternative lending in 2022, in the first half of 2023 this market also experienced a decrease due to higher interest rates and market weakness (for instance, the number of Italian issuing companies dropped from 268 to 165).

The recovery of such alternative lending structures in the second half of 2023 has made market analysts optimistic for 2024, especially for those companies that do not have easy access to the traditional banking credit channels.

As a consequence of the war in Ukraine, the Italian legislature introduced extraordinary measures to support, among other things, the financing needs of mid-cap and large Italian enterprises negatively impacted by the war. As it had already done in response to the COVID-19 pandemic, it implemented a new form of state-backed guarantee for lenders against the risk of default: the financing guarantee (“Garanzia Supportitalia”) provided by SACE, which was entitled to issue guarantees at subsidised terms, counter-guaranteed by the State, on loans provided by banks, national and international financial institutions and other entities authorised to issue loans in Italy. However, this guarantee was intended for a limited period only and expired on 31 December 2023.

The drafting of transaction documents has also been impacted by the war in Ukraine, for example with reference to the “sanctions” provisions, preventing lenders from advancing funds to borrowers subject to sanctions or that are resident in sanctioned countries. In this respect, market practice is starting to include the occupied territories of Ukraine in the list of sanctioned countries, which implies, accordingly, certain restrictions in lending activity and additional reporting obligations by the borrowers.

In 2023, the debt finance market also saw an increase in the requirement for hedging agreements as an effect of the volatility of interest rates. It was common in the past for hedging arrangements to be provided merely as an option to the borrower, while recent transaction documents have often required an undertaking by borrowers to enter into a hedging agreement in respect of interest rate fluctuations, often for an amount not lower than 50% and up to 80% of the loan. 

In Italy the main types of debt finance transactions are:

• Corporate finance deals – traditionally the Italian banking system has been inclined to support the liquidity needs of Italian companies through the granting of corporate loans, either secured or unsecured, for general corporate purposes or aimed at supporting capex.
• Acquisition finance deals – transformational acquisitions are largely financed by debt finance transactions, whether or not backed by a financial sponsor and include standard private equity LBO financings or corporate acquisition financings.
• Real estate finance deals – despite the difficulties since 2020 due to the COVID-19 pandemic and the reduced profitability related to increased interest rates, the real estate market remains attractive (especially for foreign investors), with a particular focus on logistics assets.
• Project finance deals – despite the reduced feed-in tariff scheme, the market remains very active in Italy for both public and private projects, in part due to the strong presence of entities such as the European Investment Bank and Italian development finance institutions.
• Asset-based finance – such financing, which can also include any combination of factoring, invoice discounting, leasing and inventory finance, is strictly related to the lender valuation of the borrower’s assets in terms of quality and cash value.
• Securitisations – the flexibility of such lending structure contributes to a large use of securitisation schemes, not only for structural disposals of non-performing loan portfolios held by banks or financial intermediaries but also to support smaller investments involving real estate and registered assets.
• Debt securities – the Italian debt securities market has expanded thanks to a number of laws introduced by the Italian legislature to make the Italian bond market more competitive by allowing, in addition to large issues by multinational companies and financial institutions and high-yield bonds, access to bond-financing for non-listed companies and SME, such as the introduction of the mini-bonds instrument.

The form of bank loan facilities largely depends on the nature of the borrowers, and the purpose and the duration of the transaction.

Focusing exclusively on corporate borrowers, commercial facilities are usually short term and are aimed at supporting companies’ working capital, such as revolving facilities and credit lines backed by the assignment of receivables arising from commercial agreements and/or invoices issued by companies, which receive by banks the corresponding amount as a discounted price for the assignment or, as the case may be, cash advances.

Long term general liquidity needs are normally supported by unsecured corporate bank loans, these typically having a maturity of 18 months or longer. Such bank loans are largely bilateral facilities.

The most common secured bank loans are mortgage loans. In this category, medium-long term mortgage facilities named “mutuo fondiario” pursuant to Articles 38 and following of the Italian Consolidated Banking Act are quite common and preferred by banks because of their favourable loan to value ratio (capped at 80%) and, from an insolvency law perspective, because the relevant mortgage is excluded from the ordinary claw-back rules once registered.

Syndicated Loans

Syndicated bank loans are common in the Italian loan market in connection with transactions that have a specific purpose. They are medium-long term facilities, and the relevant form depends on the given purpose and, accordingly, on the related security package. They are commonly used to finance larger acquisitions, where local lenders still tend to share the aggregate risk.

Bank Loans vs Debt Securities

In recent years, acceding to structured and syndicated bank loans has become quite difficult, especially for small and medium-sized enterprises. This has led to growing interest in and increasing use of debt securities. Despite this, borrowers still tend to prefer banks loans due to:

• the greater confidence and experience that borrowers have with such transactions (including the approval procedure adopted by banks) and the relevant documentation;
• more flexibility in managing any waiver or amendment to the finance documents (not necessarily in notarial form, as required for debt securities) and, accordingly, lower costs in this respect; and
• lower interest rates and generally more favourable pricing.

However, when assessing a debt finance transaction, it shall be taken into account that debt securities may be more advantageous as alternative to structured or syndicated bank loans for the following reasons:

• no limitations on alternative lenders, including the possible involvement as subscribers of non-licensed investors and financial intermediaries;
• time savings due to less strict credit approval procedures by non-bank lenders; and
• longer maturity dates (usually, on a bullet repayment scheme) and, except for pricing, terms and conditions that are quite favourable to borrowers (eg, lighter financial covenants).

Typically, the main transaction documents used in market standard deals when structuring a debt finance transaction include the following:

• the bank mandate letter or commitment letter, as the document instructing the lender to arrange for the financing or setting up of the lenders’ syndicate;
• the term sheet, as a preliminary document essential to set forth the main terms and conditions of the financing to be submitted for credit approval to the relevant lenders’ committee;
• the financing agreement, being a facility agreement in the case of loan transactions, or the terms and conditions of the bonds in the case of debt securities issuance;
• the transaction security documents, to specify the securities granted as security for the payment obligations arising in connection with the given debt transaction;
• the subordination agreement, to set forth the seniority positions and/or the security ranks between different creditors (see 6. Intercreditor Issuesfor specific limitations);
• the equity commitment agreement, which provides term and condition of financial support by possible sponsors;
• with express reference to securitisation transactions, the specific agreements that are intended, as the case may be, to manage the SPV (namely, the letter of undertakings) and the cash allocation, management and payment agreement, to set forth main terms and conditions of the different agents involved, such as the servicer, the mandator, the programme administrator and the computation agent;
• the fee letters;
• the hedging strategy letter and the relevant hedging agreements; and
• the intercreditor agreement (see 6. Intercreditor Issues for specific provisions and limitations).

The terms of a loan transaction that can be affected by the kind of investors involved include:

• the repayment profile (amortising as opposed to bullet) and maturity;
• the level of interest rates;
• the tax regime, should a foreign investor not be a qualifying lender or not resident for tax purposes in a country with a double taxation treaty; and
• the set of covenants, which are normally lighter for non-bank lenders.

Provisions specific to Italian law to be included in cross-border transactions concern the following:

• The tax regime, including a tax gross-up regime, in the event lenders do not benefit from any withholding tax exemption on interest amounts.
• The overall cost of the loan (including interest, fees and other costs) for an Italian borrower, cannot exceed the maximum limit as set out by Italian usury law and published quarterly by the Italian Ministry of Economy and Finance. If the limit is exceeded, the interest clause is null and void and no interest is due.
• The DAC6 provisions (in compliance with the EU rules enacted under the Council Directive of 25 May 2018 amending Directive 2011/16/EU), to set forth reporting undertakings to tax authorities in respect of certain information about cross-border arrangements that exhibit one or more specified characteristics referred to as “hallmarks”.
• The AML representations and warranties and undertakings and the US Foreign Account Tax Compliance Act clauses.
• The choice of governing law, it being understood that, unless there is a provision that sets forth the mandatory competence of Italian law in accordance with EU regulation No 593/2008, the parties are free to choose any foreign law other than Italian law.
• The settlement of disputes arising from the transaction documents, which can be remitted to the exclusive jurisdiction of an Italian or a foreign court, or to arbitration. Should an Italian court have jurisdiction, it is mandatory for the parties to agree to refer the matter to a mediation body registered in the register of mediation bodies held by the Italian Ministry of Justice before pursuing the case.

• Limitation language for the purposes of demonstrating sufficient corporate benefit and a maximum guaranteed amount in the guarantee provisions or security interest granted by an Italian company for payment obligations arising from the relevant debt transaction (see 5.2 Key Considerations for Security and Guarantees for further details).
• Financial assistance provisions, limiting the possibility of a target company providing loans or guarantees, or granting security interests, in the context of the acquisition of its own share capital.

The forms of security available in connection with debt financings can be classified according to the asset concerned, as outlined below.

Real Estate and Certain Registered Movable Assets

This category includes real estate assets (including soil and surface) and certain registered movable assets (such as cars, aircraft or ships) considered as immovable assets for security purposes.

The standard security granted over such assets is the mortgage. The mortgage deed must be notarised and then registered in the local land registry to be enforceable against third parties. Priority is based on the date and time of registration.

Subject to the condition precedent of the debtor defaulting, loans made available to an entrepreneur by a bank or another entity authorised to grant loans vis-à-vis the public in Italy may also be secured by transferring to the creditor (or to a company in the creditor’s group authorised to purchase, hold, manage and transfer rights in rem in immovable assets) the ownership of a property or of another immovable right of the entrepreneur or of a third party.

Tangible Movable and Unregistered Assets

A pledge is typically granted as security over such assets. It is created by way of a deed with a certain date at law and concerns present movable assets at all times identifiable; therefore, future assets must be separately pledged under a new security. However, a rotating mechanism enabling the substitution right of the pledged assets may be provided.

Except for the non-possessory pledge implemented by Law Decree 59/2016, the pledge requires delivery of possession of the charged assets to the pledgee or to a third party acting as custodian: without dispossession, the pledge is null and void.

As outlined above, the non-possessory pledge has recently been introduced to secure financing granted to a company in order to run its business. The non-possessory pledge can be granted over movable goods, including intangible goods or credits pertaining to the company’s course of business, such as future goods and credits. The pledged assets can be also transformed or sold; accordingly, the pledge will be automatically transferred onto the product resulting from the transformation or the consideration deriving from the sale or the substitute assets purchased with that consideration, as applicable, without giving rise to the creation of new security.

The non-possessory pledge becomes enforceable against third parties and, in the context of individual and bankruptcy proceedings, once registered in the relevant digital register held by the Italian Revenue Agency. It became operational in June 2023. Priority is based on the date of registration, which remains valid for ten years and it is renewable before expiry.

Certain Operating Movable Assets

Pursuant to Article 46 of the Italian Consolidated Banking Act, a “special privilege” may be granted as a floating security over the operating movable assets of a company. The company is free to deal with the assets in the course of its business. The special privilege is available only if:

• the lenders are Italian or EU banks;
• the facility agreement lasts at least 18 months;
• the assets are located in Italy; and
• the borrower/grantor is incorporated in Italy.

Following a recent change in law, this type of security can also secure debt securities issued by Italian companies for a term exceeding at least 18 months and where these are subscribed by qualified investors.

The relevant deed must be in notarial form and charged assets must be identified as much specifically as possible.

The security is perfected by way of registration with a court register, subject to ongoing renewal as the grantor acquires new eligible assets being subject to the security.

Claims and Receivables

Present and future receivables arising under an existing contract can be pledged or assigned by way of security. Both types of security are granted by way of a deed with a certain date at law. Notarial form is required when receivables arise out of a lease having residual duration of over three years and contracts with public authorities. The formalities for making the pledge/assignment enforceable against third-party creditors of the pledgor/assignor are either a notice of the assignment/pledge to the obligor or an express acknowledgment by the latter, in each case bearing a date certain at law.

Cash deposited into bank accounts can also be pledged. In order to make such pledge enforceable, it must be notified to the relevant depository bank or, alternatively, accepted by it. Perfection formalities must be renewed every time the account balance changes. It is not possible to exclude the possibility – including for claw-back purposes – that the pledge purported to be created over each increase in the balance of the relevant account is considered a new and different pledge for all intents and purposes.

Shares and Financial Instruments

This category includes shares (literally, shares or quota if referring, respectively, to the corporate capital of a joint stock company or to a limited liability company) and other financial instruments (such as bonds, fund units, derivatives instruments and any other instrument negotiated on a regulated market, multilateral trading facility or organised trading facility).

The typical security over such assets or, to the extent they are in dematerialised form, over the relevant securities account is the pledge. A pledge over financial instruments is granted by a non-notarial deed, but bearing a certain date at law. The deed of pledge over quotas, instead, requires notarisation and is perfected by way of registration with Company Registry. The physical certificates representing the shares and other financial instruments represented by certificates shall be endorsed in notarial form or annotated as pledged by a director of the issuing company. The creditor (directly or through a depository) must take possession of the pledged share certificates.

If the instruments are in dematerialised form, the pledge must be registered on the relevant register or securities account. Security over financial instruments is regulated by Legislative Decree 170/2004, which has simplified the relevant perfection and enforcement formalities set forth under the EU Directive 2002/47.

Intellectual Property (IP)

The typical security for IP is the pledge, which can be granted over IP rights related to patents, trade marks, copyrights and registered designs, other than the assignment by way of security of the receivables deriving from the intellectual property. The pledge must be in notarial form and registered with the Italian Office of Patents and Trademarks to be effective against third parties.

Guarantees

Guarantees are also very common in the Italian lending market and are usually parent-company guarantees or bank guarantees. They are construed as first-demand guarantees without any exceptions or opposition by the relevant guarantor. To create a valid and enforceable guarantee, the maximum guaranteed amount must be capped.

The most important considerations under Italian law in respect of security and guarantees in debt finance transactions are outlined below.

Agent

Especially with reference to syndicated loans, it is possible and quite common to appoint an agent, by virtue of a mandate, to perform the lenders’ duties, obligations and responsibilities and to exercise, inter alia, their rights and powers, also as secured creditors, in connection with the transaction documents and, in any case, in accordance with intercreditor arrangements. However, such mandate cannot also cover judicial enforcement in the event of acceleration of the financing and subsequent enforcement. Accordingly, each creditor shall intervene personally in the enforcement.

Trusteeship

Even though Italy has recognised the concept of the trust though the ratification of the 1985 Hague Convention on the Law Applicable to Trusts and on their Recognition, under Legislative Decree 364/1989, trusteeship is generally not permitted in Italy. Therefore, security must be granted to, and perfected in favour of, each creditor individually.

Parallel Debt

As per trusteeship, parallel debt arrangements are not recognised in Italy.

Corporate Benefit

Under Italian law, guaranteeing or securing, by a company, payment obligations of other members of the same group requires the guarantor or security provider to receive a direct or indirect adequate corporate benefit. The existence of actual corporate benefit shall be carefully evaluated, on a case-by-case basis, by the directors of the guarantor or security provider. In fact, while there is no particular issue in respect of downstream guarantees (as the corporate benefit is often self-evident), the actual existence of corporate benefit in relation to upstream and cross-stream guarantees shall be assessed thoroughly and documented in the corporate minutes approving the guarantee or the security.

Moreover, due to corporate benefit reasons, the maximum amount recoverable by a guarantor for payment obligations of parent or sister companies shall be capped to an amount not exceeding a threshold, which may be determined by reference to, for instance, the net worth of the company resulting from the latest annual financial statements or the aggregate of financial resources directly or indirectly made available to that guarantor and its subsidiaries by other members of the group and the amounts borrowed by it under the financing agreement.

Financial Assistance

Generally, under Italian law, companies cannot grant loans, guarantees or security for debt incurred to acquire or subscribe its shares. However, subject to certain conditions and compliance with the procedure set forth in the Italian Civil Code, a few exceptions to these restrictions on financial assistance apply:

1. the “whitewash procedure” under Article 2358 of the Italian Civil Code;
2. loans or guarantees granted to employees of the company; and
3. merger of the target company in the context of leveraged buyouts.

However, any risk of voidness must be assessed on a case-by-case basis by looking at the transaction as a whole;

Guarantee fees

Under Italian law, the provision of a guarantee fee is not a requirement for the validity of the relevant guarantee or security interest.

Whenever there are several lenders and/or finance parties acting towards the same borrower in Italy – including, by way of example, senior bank lenders, mezzanine alternative lenders providers and/or junior shareholders’ loans – intercreditor arrangements are commonly set out between such parties;

• the seniority positions and/or the security rankings between different classes of lenders;
• the application order of proceeds of security enforcement;
• the enforcement procedure for the security; and
• the consultancy procedure decision and waiver-approval majority between different classes of lenders (included the appointment of agents).

Italian law sets priority rules and security interests in relation to competing security interests and acts of disposal. Basically, the prevailing security interest is determined according to a timing preference, based on the date of completion of the perfection formalities (and with respect to a registrable security, the registration) of such security.

Each class of creditors is legally entitled to individually accelerate the loan or debt security, and enforce the relevant security package, regardless of their legal ranking.

Nonetheless, priority rules may be amended contractually with the consent of all creditors (usually by an intercreditor agreement entered into by the latter) providing, for instance, that certain lenders may have prior right to enforce or that enforcement is subject to the prior consent of certain majority lenders, or that the proceeds of certain securities are applied in a different order to certain creditors and/or groups of creditors.

However, any contractual subordination provisions derogating priority rules set by Italian law are effective between the parties exclusively in connection with non-distressed financings, and they are not enforceable in an insolvency scenario and in-court restructuring proceedings involving a borrower incorporated in Italy.

Any breach of payment obligations under any debt transaction documents and/or the occurrence of certain specific events provided therein, enabling a secured lender to accelerate the debt, entitle such creditor to withdraw from the relevant agreement or, as the case may be, to terminate it and enforce the security package.

Generally, upon an unsuccessful written notice to the debtor (requiring, for instance, for payment within a certain term), a creditor must procure an enforceable title, that can be judicial or non-judicial (such as a deed of drawdown in notarial form), to start an enforcement proceeding.

Procedure

The main enforcement proceedings, which depend on the collateral and the secured assets, are attachment of movable assets, debtor’s claims against third parties, and real estate assets.

The enforcement is mainly carried out through a judicial procedure, but for certain collateral also through a private procedure. In particular, with reference to mortgages, 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. With reference to pledges, the relevant enforcement does not always require a judicial procedure. If the debtor does not fulfil its payment obligations within a certain term, upon request by the relevant creditor, the court bailiff can 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 for the assignation of the asset.

Bank Accounts

The enforcement of a pledge over bank accounts is started 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.

Receivables

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

• Assignment of receivables: under such security the receivables become property of the lender as soon as they originate and, accordingly, the lender becomes owner of the collateral from the outset and must only return any excess proceeds from the collection of the assigned receivables.
• Special privilege: the enforcement is carried out through a judicial procedure aimed to sell the relevant assets by auction pursuant to article 46 of the Italian Consolidated Banking Act.

Assignation

In certain circumstances and according to certain provisions, the assets may be assigned to the enforcing creditors in lieu of the sale process.

This form of assignation is different from the transfer of the ownership of debtor’s asset to the secured creditor in performance of an agreement between the parties. Indeed, it is forbidden to agree the ownership of a debtor’s assets being transferred to the secured creditor where a debtor defaults, save a few exceptions provided for by the law.

In fact, the Italian Consolidated Banking Act recognises that banks and financial intermediaries registered as per Article 106 of the Italian Consolidated Banking Act have the right to transfer to the creditor the ownership of a debtor’s real estate property if (i) the debtor’s default protracted for more than nine months, (ii) an appraisal survey is carried out on the asset, and (iii) the difference between the asset proceeds and the outstanding debt is paid back to the debtor.

Legislative Decree 170/2004 has set out a simplified procedure that recognises that secured creditors have the right to appropriate or sell the secured asset (more precisely, cash or financial instruments which have a market value), returning to the debtor any excess proceeds.

Judgment by an EU Country

If the judgment is enforceable in an EU member state, such judgment shall be enforceable also in Italy without any declaration of enforceability being required. The relevant procedure for enforcement shall be governed by the Italian Code of Civil Procedure and shall be subject to the filing to the competent Italian court of (i) a copy of the judgment that satisfies the conditions necessary to establish its authenticity, and (ii) the certificate issued pursuant to Article 53 of EU Regulation 1215/2012, certifying that the judgment is enforceable and containing an extract of the judgment.

The recognition of a member state judgment could be refused by an Italian court:

• if such recognition or enforcement were manifestly contrary to public policy in Italy;
• where the judgment was given in default of appearance, if the defendant was not served with the document which instituted the proceedings or with an equivalent document in sufficient time and in such a way as to enable them to arrange for their defence;
• if the judgment were irreconcilable with a judgment given between the same parties in Italy;
• if the judgment were irreconcilable with an earlier judgment given in another EU country or in a third state involving the same cause of action and between the same parties, provided that the earlier judgment fulfils the conditions necessary for its recognition in Italy; and
• if the judgment were to conflict with the provisions of the EU Regulation 1215/2012 concerning jurisdiction in matters regarding insurance, consumer contracts, individual contracts of employment and/or matters reserved to exclusive jurisdiction.

Judgment by a non-EU Country

The recognition of a judgment rendered by a non-EU Country is subject to Law 218/1995 and could be refused by an Italian Court if the judgment does not comply with the following requirements:

• the court that issued the decision should have had the jurisdiction to decide on the case, in accordance with Italian laws;
• the first claim deed should have been correctly served on the defendant in accordance with the non-EU country laws, and the defendant’s defensive rights must be respected;
• the parties should have appeared before the court or the absence of one of them should have been declared in accordance with the non-EU country law;
• the judgment is final as to its effects pursuant to the non-EU country law;
• no conflicting domestic or non-EU country final judgment exists;
• no proceedings are pending before Italian court between the same parties and on the same dispute, which were initiated before the non-EU country proceedings; and
• there is no conflict and incompatibility with Italian public policy principle.

The enforcement in Italy of a recognised judgment rendered by a non-EU country court can be also challenged by the defendant with (i) an appeal against enforcement, challenging the right to proceed with enforcement or the existence of the creditor’s right to proceed with enforcement on the basis of circumstances occurred after the judgment; or (ii) an appeal against enforceable acts, challenging procedural errors.

Arbitral Award

An arbitral award obtained by a foreign court of arbitration is not directly applicable in Italy, but can be recognised and enforced by a decree issued by the competent Italian court of appeal, without the issues in the original litigation being reopened and upon condition that the relevant judgment fully complies with the 1958 New York Treaty, as implemented in Italy by Legislative Decree 62/1968 (ie, the litigation falls within the scope of the arbitration agreement and the arbitral award complies with Italian public policy).

In Italy, apart from traditional insolvency proceedings, there are several rescue and reorganisation procedures available that aim to rehabilitate financially distressed businesses while providing protection to creditors. The great flexibility of the restructuring tools available under Italian legislation (ie, the new Italian Code of Business Crisis and Insolvency (CCII) allows that restructuring and pre-bankruptcy settlement arrangements with creditors be tailored to firms’ individual needs. This includes the ability to implement extraordinary transactions and deviate from the absolute priority rule.

Below is a summary of the different restructuring procedures available in Italy and their impact on lenders’ rights to enforce loans, guarantees, or securities.

Negotiated Crisis Composition

Negotiated crisis composition (CNC) is one of the tools made available by the CCII, the use of which assumes that a company (in financial difficulties or even insolvent) has reasonable possibilities to approve and implement a realistic restructuring plan that may ensure the continuity of the business (ie, this tool is not available if the company aims at discontinuing operations, albeit in a context different from a judicial liquidation). CNC is an out of court procedure, which requires the appointment, by the competent Chamber of Commerce and upon the company’s request, of an expert, chosen from a pool of bankruptcy practitioners enrolled in a special register with the relevant Chamber of Commerce.

It is a procedure aimed at reaching agreements with creditors, who are obliged to participate in the negotiations in good faith. The agreements do not have to comply with any special requirements, such as the need to observe the absolute priority rule.

A company in CNC may be authorised by the court to obtain financing from shareholders or third parties, enjoying super-priority ranking, provided that the court is persuaded that such financing is both instrumental to the continuation of the business, and is not detrimental to the company’s creditors.

All acts – including the making of payments and entry into contracts or guarantees – performed after the appointment of the expert and in compliance with the rules applicable to CNC cannot be the object of claw-back actions under the CCII, should the company later be subject to a judicial liquidation (or to another insolvency procedure triggering the application of claw back pursuant to CCII).

The Certified Reorganisation Plan

The certified reorganisation plan is an out-of-court procedure for the composition of business crisis or insolvency, consisting of a plan to restructure the relevant company’s indebtedness and supporting the rebalancing of its financial position. The plan must be certified by an independent third-party expert meeting certain requirements set out in the CCII. The independent expert will also certify the accuracy of the relevant accounting data. The company retains significant discretion and flexibility in determining the content of a reorganisation plan and the agreements on which it is based, provided its aim remains the (at least partial) preservation of the company as a going concern.

Transactions, payments, grants of security and guarantees made by a company under the umbrella of a certified reorganisation plan and expressly set out therein are exempt from: (i) ordinary claw-back actions and claw-back actions in the context of Judicial Liquidation and (ii) the application of certain criminal law provisions on simple and preferential bankruptcy.

Debt Restructuring Agreements

A debt restructuring agreement (ADR) consists of an agreement entered into between (i) the indebted enterprise meeting the size requirements applicable to judicial liquidation, and (ii) creditors representing at least 60% of its indebtedness. Creditors entering into the debt restructuring agreement are not entitled to pari passu treatment; however, non-adhering creditors must be fully repaid within (i) 120 days of homologation by the court of the agreement for claims due and payable on or prior to the homologation date, or (ii) 120 days of the relevant due date in the case of claims not due and payable on or prior to the homologation date. This rule is subject to limitations in the case of extended “effectiveness agreements”, wherein the will of a qualified majority of creditors belonging to a homogeneous class may bind the minority. In such cases, the treatment imposed on creditors subject to the decision of the majority within their respective class may not be less favourable than what they would receive in the event of judicial liquidation.

A company may be authorised be by the court to obtain financing from shareholders or third parties, enjoying super-priority ranking, provided that the court is persuaded that such financing is both instrumental to the continuation of the business, and is not detrimental to the company’s creditors.

Transactions, payments, grants of security and guarantees made by a company under the umbrella of a homologated debt restructuring agreement and expressly set out therein (or legally carried out after the filing of the relevant petition) are exempt from (i) ordinary claw-back actions and claw-back actions in the context of judicial liquidation, and (ii) the application of certain criminal law provisions on simple and preferential bankruptcy.

Restructuring Plans Subject to Homologation

Restructuring plans subject to homologation (PRO) are available to enterprises that are commercial entrepreneurs or companies other than small enterprises and that are insolvent or are facing a state of crisis. It is a fully in-court and court-supervised procedure whose purpose is to maintain the enterprise as a going concern.

The plan is founded upon agreements with creditors, which are not constrained by any limitations (such as the need to adhere to the absolute priority rule). However, the plan can only be approved (homologated) if it garners unanimous support from the classes of creditors, which are constructed based on homogeneous legal positions and economic interests. The rules of the composition agreement govern this aspect.

Transactions, payments, grants of security and guarantees made by a company under the umbrella of a PRO and expressly set out therein (or legally carried out after the filing of the relevant petition) are exempt from (i) ordinary claw-back actions and claw-back actions in the context of judicial liquidation, and (ii) the application of certain criminal law provisions on simple and preferential bankruptcy.

The Composition With Creditors Procedure

The composition with creditors procedure is a fully court-supervised procedure available to enterprises facing a situation of either crisis or insolvency that are commercial entrepreneurs or commercial companies other than “small enterprises”. Pending the proceeding, the company maintains control of the business, but it is subject to supervision by the judicial commissioner and prior authorisation by the courts in relation to several transactions. Moreover, starting from the date on which the petition for admission to the process is published in the Companies Register, the debtor cannot make any payments in respect of claims that have arisen prior to the date of such publication. The debtor may apply for a stay of action to the competent court, including when filing a simplified pre-application, among other things. The maximum period of a stay is four months, although this may be extended – subject to certain conditions – for up to 12 months. Moreover, during this period, judicial liquidation proceedings may not be initiated.

A company may be authorised be by the court to obtain financing from shareholders or third parties, enjoying super-priority ranking, provided that the court is persuaded that such financing is both instrumental to the continuation of the business, and is not detrimental to the company’s creditors.

Transactions, payments, grants of security and guarantees made by a company under the umbrella of a composition plan and expressly set out therein (or legally carried out after the filing of the relevant petition) are exempt from (i) ordinary claw-back actions and claw-back actions in the context of judicial liquidation, and (ii) the application of certain criminal law provisions on simple and preferential bankruptcy.

The simplified composition with creditors procedure for the liquidation of assets is a tool that can be used at the end of the negotiated crisis composition tool (please see above), as an alternative to the instruments governed by the CCII, where the company does not reach an agreement, notwithstanding good faith negotiations with its creditors, as certified by the expert appointed in the procedure. The procedure derogates from certain provisions applicable to ordinary composition with creditors proceedings for liquidation purposes. The main difference is that there is no voting by creditors: after filing of the application for this restructuring tool, if the court deems that the proposal is admissible, it will schedule a hearing for homologation. Creditors can file challenges against the homologation.

Transactions, payments, grants of security and guarantees made by a company under the umbrella of a composition with creditors procedure for the liquidation and expressly set out therein (or legally carried out after the filing of the relevant petition) are exempt from (i) ordinary claw-back actions and claw-back actions in the context of judicial liquidation, and (ii) the application of certain criminal law provisions on simple and preferential bankruptcy.

In Italy, the main bankruptcy law considerations relating to debt financing include the following:

• Lenders’ rights to enforce a loan, guarantee or security in insolvency – Italian insolvency law governs the rights of lenders to enforce their claims in the event of the borrower’s insolvency. Creditors holding security interests, such as mortgages or pledges, may have priority in recovering their claims from the proceeds of the secured assets, unless a contrary agreement is reached between the parties.
• Claw-back risks – Italian insolvency law includes provisions aimed at avoiding preferential or fraudulent transfers made by the debtor before insolvency proceedings. These provisions allow certain transactions to be challenged and potentially nullified, ensuring fair treatment among creditors. As noted above, the acts in accordance with the reorganisation plans described above are exempt from claw-back risk.
• Equitable subordination – Italian insolvency law recognises the principle of equitable subordination, which allows certain creditors or claims to be subordinated to others based on the circumstances of the debt financing or the conduct of the creditor, unless otherwise agreed, as outlined above. This principle helps ensure fairness in the distribution of assets among creditors.
• Order of payment – Italian insolvency law establishes the order in which creditors are paid from the available assets of the insolvent debtor. Secured creditors typically have priority over unsecured creditors, with certain exceptions and statutory priorities. Within each category, there may be further subordination based on contractual arrangements or specific provisions of the law. These rules may be amended on a consensual basis, as described above.

Stamp Taxes

Financing agreements generally fall within the scope of the provision of services exempt from VAT and are therefore subject in Italy to registration tax at a fixed amount of EUR200. If a financing agreement falls outside the scope of this VAT exemption, either on a subjective basis (ie, the lender does not hold a VAT position) or an objective (eg, non-interest bearing loans) basis, registration tax shall apply at a 3% rate on the loan amount.

It should be noted that indirect taxation may be burdensome with respect to the security package related to a financing agreement, considering the following typical features

• For mortgages:
1. a registration tax of either a fixed amount of EUR200 in the case of a guarantee provided by the debtor, or 0.5% in all other cases, where such guarantee is not required by law; or
2. a mortgage tax of 2% upon registration, calculated on the value of the guaranteed credit, including interest and accessories.
• For a pledge on shareholdings: a registration tax either of either a fixed amount of EUR200 in the case of a guarantee provided by the debtor, or 0.5% in all other cases, where such guarantee is not required by law.
• For the assignment of receivables: a registration tax of either a fixed amount of EUR200 in the case of a guarantee provided by the debtor, or 0.5% in all other cases, where such guarantee is not required by law.

It should be noted that in the case of credits deriving from unregistered financing (for example because made through exchange of correspondence) it is relevant to consider the risk of enunciation, which in some cases (eg, where the financing is not considered subject to the mentioned VAT exemption) involves the application of a proportional registration tax of 3%.

An election for a favourable tax regime consisting of a 0.25% substitute tax in lieu of registration tax, stamp duty, mortgage and cadastral taxes and taxes on government concessions, can be applied if all the following conditions are met:

• the loan is stipulated by banks or financial intermediaries or takes the form of structured financing operations such as bonds or similar securities;
• duration of the loan for a medium-long term, intended as a term exceeding 18 months;
• timely election for the substitute tax regime, duly exercised.

Withholding Tax

Payments of interest income are generally subject to a 26% withholding tax on the gross amount of the interest.

However, interest on loans, if paid to businesses resident in Italy, is generally not subject to withholding tax since it qualifies as business income and will consequently be made subject to tax directly in the hands of the recipient (ie, subject to corporate income tax at 24% in the hands of corporations and other entities, or else individual income tax from 23% to 43% in the hands of individually held businesses).

Moreover, for debt financings, it is worth considering that a 26% withholding tax would apply even if the recipient is a business tax resident in Italy if they are made through issuance of bonds not falling in at least one of the following categories:

• bonds issued by the State and governmental bodies, banks, and companies listed on a regulated market;
• bonds issued by non-listed companies provided that the bonds are listed on an EU regulated market or on a multilateral trading facility; and
• bonds exclusively subscribed and held by qualified investors.

If the recipient of an interest payment is not resident for tax purposes in Italy, the mentioned domestic 26% withholding tax can be reduced according to the provisions of a double taxation treaty entered into by Italy and the country of residence of the beneficial owner of the considered interest, as the case may be. Furthermore, in the case of intra-EU payments of interest, if the conditions set forth by Directive 2003/49/EC are satisfied, no withholding tax would apply in Italy.

Qualifying Lender

According to the Italian tax and legal framework, the definition of a qualifying lender in the case of an Italian resident borrower shall ordinarily include:

• a bank or financial institution duly authorised to carry out banking or lending activity in Italy, resident for tax purposes in Italy;
• a permanent establishment in Italy of a bank or financial institution duly authorised to carry out lending activity in Italy pursuant to the Italian banking and financial laws, for which any payment received under the relevant finance documents is treated as business income;
• a securitisation company incorporated under Legislative Decree 130/1999;
• an undertaking for collective investment that is resident in Italy for tax purposes and set up in Italy in accordance with Legislative Decree 58/1998, duly authorised or licensed to carry out lending activity under the said Legislative Decree 58/1998;
• any party of a facility or lending agreement entitled to receive payments without the deduction of a withholding tax in Italy by virtue of an applicable double taxation treaty; and
• any entity that is entitled under Article 26, paragraph 5-bis of Presidential Decree 600/1973 to receive payments of interest and other income accrued on medium long-term loans without the application of any deduction on account of taxes.

Interest Barrier Rules

According to Italian tax law, for non-financial entities, starting from tax period 2019, the deduction of interest expenses for corporate income tax purposes is limited based on specific criteria. In particular, it is provided that interest expenses can be deducted for corporate income tax purposes within the limit of the sum (the “base threshold”) of (i) interest income and similar items of income accounted for in the considered financial year, plus (ii) the surplus of interest income and similar items of income duly carried forward from previous financial years.

Interest costs exceeding the Base Threshold can be deducted within a limit equal to 30% of the accounting EBITDA adjusted (the “EBITDA tax capacity”) according to the deduction’s limitations set forth by corporate income tax laws (eg, items of income that are not deductible for corporate income tax purposes cannot be considered in the computation of the EBITDA tax capacity).

Moreover, the EBITDA Tax Capacity that is accrued but not used in a given tax period can be carried forward up to five tax periods following the one in which it has been accrued.

The interest expenses that exceed the base threshold and the EBITDA tax capacity (both that accrued in the considered tax period and the one carried forward, if any) can be carried forward to be deducted in the following tax periods, according to the aforementioned rules.

For financial intermediaries the aforementioned interest barriers rules do not apply. In particular, interest expenses incurred by insurance companies and parent companies of insurance groups, as well as by fund management companies (“SGRs”) and securities brokerage companies (“SIMs”), can be deducted for corporate income tax purposes within the limits of 96% of their gross amount.

Interest expenses can be fully deducted for corporate income tax purposes in the hands of financial intermediaries different from insurance companies, parent companies of insurance groups, SGRs and SIMs.

Form a regulatory perspective, debt financing is an activity reserved to Italian banks, foreign banks with a registered office in the EU and duly authorised to carry out banking activities in their jurisdiction, non-EU banks (subject to the Bank of Italy’s prior authorisation) and foreign EU financial intermediaries where these are controlled by EU banks with registered office in the same jurisdiction.

In addition, in recent years, legal developments have also authorised the following subjects:

• securitisation vehicles pursuant to the Italian Securitisation Law (Legislative Decree 130/1999 – this alternative structure, based on the subscription of asset-backed securities by investors which, in their turn, grant loans under certain conditions, is particularly attractive to foreign investors and, accordingly, quite common, especially for foreign funds;
• Italian insurance companies; and
• Italian and European alternative investment funds.

Although signing by counterparts is still not a valid form of signing documents governed by Italian law, signing and closing procedures have changed in the wake of the COVID-19 restrictions: remote signings and e-signing systems being increasingly preferred to physical ones. Among the main e-signing solutions provided by Italian Law (Legislative Decree 82/2005) and European legislation (Regulation (EU) 910/2014), the more secure e-signature is the “qualified electronic signature” (QES), which is generally equivalent to a handwritten signature. It includes the e-signature systems adopted by certain professionals to submit documents to public services, such as, the e-signatures of lawyers on judicial acts to be filed with courts through the internet.

To the extent that is not subject to specific formalities under Italian law, a transaction document becomes effective and enforceable between the parties through the simple signature by each of them and enforceable against third parties to the extent it bears a certain date at law. The certified date can be provided, among other means:

• by delivering a certified electronic mail, in regard to which it should be noted that the latter is available only for Italian entities with a certified electronic address; or
• by an online certified certain date service, which affixes the certain date through a time printing system with full legal value.