(Bloomberg) -- When Italy’s government extended guarantees on state-backed loans during and after the pandemic, little thought was given to potential delinquencies. Now that’s coming back to bite.
In the rush to support companies in urgent need of liquidity, no common framework was established on how the €300 billion ($324 billion) worth of loans should be restructured, according to distressed debt investors and advisers active in the local market and surveyed by Bloomberg News. So far only a fraction of the loans have turned sour, but their existence in Italy’s debt pile could create an extra layer of complexity if default levels rise.
“It’s a difficult topic,” said Paolo Manganelli, a Milan-based partner at Ashurst LLP, who helped found Associazione Krino, a legal grouping that’s trying to come up with guidelines to fill the legislative void. “There are enormous complexities in restructuring these loans, and at this point they are almost everywhere.”
Each European Union member-state issued its own public-guarantee plan during the pandemic, but no government backed as much debt as in Italy. Under the framework — called Garanzia Italia — companies could apply for a financing loan from a bank, which then requested a guarantee through the export-credit agency SACE SpA or state bank Mediocredito Centrale SpA. Guarantees were offered to companies across the credit spectrum, providing a lifeline to some junk-rated firms on the brink of collapse.
Since then, the rise in interest rates has left some companies unable to service their debts. Default rates on Italian non-financial corporate loans climbed to 6.2% at the end of last year, from 4.5% just before the pandemic, according to credit risk management and analysis firm Cerved.
To be sure, guarantees had been enforced on less than 2% a year as of the end of 2023, according to people familiar with the matter, who asked not to be named. Italian Finance Minister Giancarlo Giorgetti said on Tuesday that the government doesn’t see critical issues with enforcement of state guarantees, which are “contained and under control.”
Sampdoria Workaround
But market participants say that part of the problem is that there’s no clarity on when state guarantees should be enforced. Then, once the state-backed guarantor steps in, they often work to different timings from other creditors and have to go through different approval processes. On top of that, there’s uncertainty around the level of seniority of the guaranteed loans and whether it’s possible to carry out a partial write-off.
In debt restructurings that don’t involve a haircut, creditors are usually offered shares or other equity-like instruments as a sweetener. But SACE and Mediocredito Centrale can’t typically hold equity, meaning a more complex solution has to be found.
Italian football club Unione Calcio Sampdoria SpA, for example, reached a deal with SACE to delay debt maturities by at least a decade on its about €50 million of state-backed loans. The unusually-long extension meant the parties could avoid having to work out how to implement writedowns on the debt. There was also an unusual catch for Sampdoria: SACE requested for the football club to commit to initiatives to support local youth and disadvantaged groups in a so-called debt-for-ESG swap.
The negotiation approaches also differ from one guarantor to the other. While SACE has a very active role at the negotiating table, for smaller firms that took out loans guaranteed by Mediocredito Centrale, there is no direct dialog and when creditors want to make inquiries about a restructuring, they do so via an automated portal at the state-run lender, market participants said.
Another area where creditors are running into problems is transferability. So far only a handful of single exposures to state-backed loans have changed hands, with no bank attempting to transfer a package of bad debt, as there are question marks over how to fairly price it.
“We see a big sphere of opportunity which will grow as we get more certainties in regards to the timing and modes of enforcing the guarantees,” said Roberto Rondelli, head of special situations at Europa Investimenti SpA — part of Arrow Global — which has bought some of the exposures.
Can Kicking
With interest rates likely to remain elevated, more companies that took out state-backed loans are likely to need help with repayments.
Some firms, like toy maker Giochi Preziosi SpA, have been delaying the problem by repeatedly asking creditors for covenant waivers and resets on their loans. Over the last few months the company has had to step up talks with bank lenders about its €255 million debt stack because a big chunk has come due.
The government of Giorgia Meloni has begun discussions on how to make the process more efficient, including nominating entities to manage guaranteed loans that have turned sour, some of the people familiar with the matter said.
Associazione Krino is nearing publication of a set of guidelines based on discussions with various parties working in the Italian restructuring market, including public guarantors.
“They will be a series of practical suggestions which don’t substitute any regulation,” said Manganelli. “They will be best practices to treat these sort of loans in each different restructuring proceeding, but we see already that there has been a lot of attention and curiosity around what will come out.”
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