Giuseppe Conte was appointed as prime minister of Italy's coalition government on 1 June 2018 supported by the anti-establishment Five Star Movement ("M5S") (led by Luigi Di Maio which won 32 per cent of the vote in the 2018 election) and the right-wing League (led by Matteo Salvini which won 18 per cent of the vote). Italy's economy has been shrinking since the coalition took power due to, what has been described by Bloomberg as, "self-inflicted damage to the economy" from huge debt, low growth and unemployment. The continued recession means that it is unlikely that Italy will reach the growth goals set by the coalition and that projects such as the citizens wage and pension reforms (which both parties supported during the election), will be unrealisable due to a shortage of funds.

There are concerns that this heightened political risk (both domestically and with the EU), combined with depressed business confidence and weakened investment due to the uncertain economy could lead to a reverse in the recent improvements that have been made with Italy's non-performing loan ("NPL") market which scored a record high in 2018 with EUR 70bn worth of transactions. This resulted in distressed debt volumes on the balance sheets of Italian banks decreasing from EUR 264bn in January 2018 to EUR 222bn in June 2018.

The cleaning up of bad loans is seen by both regulators and investors as crucial for the recovery of the Italian banking sector. Bloomberg commented on 4 February 2019 that Italian debt is "Europe's most dangerous stock of public borrowing" with EUR 1.5tn on the books of Italian banks and EUR 425bn being held by other large European banks. This has led to a preference among Italian banks to sell their portfolios to hedge funds and other market operators, to increase the number of parties involved in Italian NPL deals.


We appreciate the assistance of Claudio Corba Colombo and Benedetta Mazzotti at De Berti Jacchia Franchini Forlani with the following discussion on Italian law, regulation and practice.


Two trends have dominated the Italian market: “jumbo securitisation” carried out by Italian giants such as Monte dei Paschi and Intesa Sanpaolo, and securitisation transactions benefitting from the State securitisation guarantee scheme (Garanzia Cartolarizzazione Sofferenze, "GACS").

Since its introduction to the market in February 2016, GACS has been used by many Italian institutions to reduce their NPL portfolios. GACS has been used recently by Banco BPM for its EUR 5.1bn Project ExodusUBI Banca has used it in the disposal of EUR 2.75bn of bad loans, whilst BPER Banca used it for the EUR 1.9bn Aqui securitisation deal which closed in November 2018. Overall, GACS has helped the Italian banking system dispose of around EUR 33bn (gross book value) of NPL portfolios, over 60% of the total reduction of NPLs in Italy in the last three years.

The European Commission approved the extension of GACS until 7 March 2019 (following an earlier extension until September 2018). It has also been reported that the Italian Government is likely to try to extend GACS' application to include a broader spectrum of distressed debt, including unlikely-to-pay ("UTP") loans (i.e. loans whose borrowers are not yet in default).

Recent transactions in the UTP Italian market have been larger than those seen in the past. While previous deals have mainly involved either single name receivables or portfolios comprised only of receivables originated by a few different borrowers, ongoing transactions include larger portfolios. A recent deal to reach the EUR 3bn threshold is Project Sandokan 2, promoted by UniCredit, which involves PIMCOGWM Group and Aurora Recovery Capital (as servicer), which is expected to close within the coming months.

Other types of transactions that are prevalent in Italy include multi-originators’ deals (i.e. transactions involving portfolios originated by a variety of smaller banks “packed” together) and secondary transactions involving the sale of NPL portfolios previously off-loaded by Italian banks.

The European Central Bank’s role will be enhanced in the expansion in scope and volume of the Italian NPL market; with its banking watchdog having “invited” European (and most importantly Italian) credit institutions to set aside specific balance sheet reserves to cover the value of the NPLs held on their books or to write them off in 7 years.

It should be noted that this comes in the context of a stagnating economy, leading to political turmoil, higher borrowing costs and fiscal tensions. The wary forecasts of the Bank of Italy and the International Monetary Fund predicted in January 0.6 per cent of growth in Italy this year (less than half of that forecast for the Eurozone). Recent reports suggest that Italy's growth could be as little as 0.2 per cent (compared to a Eurozone estimate of 1.3 per cent) and EC Vice President Valdis Dombrovski stated that "of all 28 EU economies, the slowdown in Italy has been more pronounced…we see that this damage which was created to the economy by uncertainty on the government's fiscal plans has now really resulted in slower economic growth". Against this backdrop, investors must look carefully to the risks of possible downgrades and debt sustainability.



A long-awaited reform of Italian insolvency legislation is imminent following the publication on 14 February 2019 of the comprehensive new Insolvency Code that will come into force in August 2020. These reforms follow the principles set out at the EU level, most notably the recommendation of the European Commission on business failure and insolvency (2014/135/EU) and EU Regulation 2015/848 on insolvency proceedings.

Click here to read a summary of some of the main features of the new Italian Insolvency Code. 





  Banking licence

·     Requires either a banking licence or an Italian Branch (subject to authorisation by the Bank of Italy only in case of non-EU parent company)

·     June 2014: direct lending by insurance companies and securitisation companies

·     February 2016 (implemented December 2016): direct lending by  Italian and EU closed-ended Alternative Investment Funds


·     26% WHT unless double taxation treaty or Interest and Royalties Directive applies (domestic exemptions apply)

·     Interest derived from direct/indirect investment in government bonds and similar securities subject to a 12.5% substitute tax (domestic exemptions apply)

  Loan transfer/Security


Italian Bank Lender of Record “IBLOR” structures (NB risk of “look through” for WHT and banking licence purposes) 


Non-transparent IBLOR

·     Italian fronting bank receives credit support (cash-collateralised guarantees) from non-Italian “participants”

·     Banking licence “look-through” and high risk of WHT “look-through”

Transparent IBLOR

·     Italian fronting bank grants LMA participations to Buyers.  WHT is due but a gross-up basket may apply.

·     No banking licence “look-through but WHT “look-through”

  Trust/Parallel Debt

·     Trusts and parallel debt structures are not recognised/tested and Lenders must hold security

·     But security agent (mandatario con rappresentanza) can hold under Lender power of attorney



Buyer may be subordinated to other creditors if loan granted by Seller which was a shareholder or exercised “direction and coordination” (control) when Borrower was under-capitalised or when shareholder contribution was reasonable. Exceptions apply in the case of loans granted in the context of restructuring/compositions procedures.


Key changes to Italian Securitisation Law in December 2013 and June 2017:

·     Possible to transfer existing bank loan and related security package (including mortgages) to securitisation SPVs which fund the purchase of the loan through the issue of asset-backed notes purchased by ultimate non-bank investors

·     Avoids the intermediation of Italian banks/IBLOR structures

·     New Insolvency Code approved but not yet in force (discussed in more detail below). Amendments include replacement of bankruptcy procedure with simplified judicial liquidation process in respect of a company's assets to be completed within a strict time period.



In October 2018, a working group which included the LMA produced a standardised form of Schuldschein loan agreements. The LMA considered doing this in 2013 but met with resistance from the market.

A Schuldschein loan is a German debt instrument which is neither a security instrument nor a bond. It is not classified as a form of security in Germany but as a loan for the purposes of section 488 of the German Civil Code ("Bürgerliches Gesetzbuch" or "BGB"). Traditionally a 'Schuldschein' (effectively a promissory note) was provided as a certificate evidencing the disbursement of the loan and would be returned upon redemption of the loan. However, this is no longer market practice. Schuldschein loan agreements are generally around 30 to 40 pages long, or even shorter – in any event much shorter than standard loan agreements. This is mostly due to the document automatically incorporating provisions codified in the BGB and reflecting that it is traditionally a finance instrument for investment grade borrowers.

The change in sentiment between 2013 and 2018 towards producing a standardised form of Schuldschein loan documents was driven by a number of factors, not least the growing economic significance of Schuldschein loans, leading to increasing involvement of international market players. These international players favour a standard form of document to improve the efficiency of the Schuldschein market and to simplify the documentation process. The German market is also open to the standardisation of documents as it protects the essence of Schuldscheins and reduces the risk of their terms being muddied through the inclusion of foreign legal concepts. It is not only the number of foreign lenders that has increased in recent years in the Schuldschein market, but also the number of foreign issuers. Although underdeveloped in the UK, Schuldschein loans are increasingly issued by companies in France, Benelux and Scandinavia as well as the traditional jurisdictions of Austria, Switzerland and Germany.

With thanks to Michael Neises at Heuking with whom we have been liasing on the standardisation of the form of Schuldschein loan agreement.


The Loan Syndications and Trading Association (the "LSTA") recently reviewed an article entitled "Bankruptcy Hardball" co-authored by Jared A. Ellias (Associate Professor of Law at Hastings College of Law at the University of California) and Brown Rudnick partner Robert J. Stark.

The article suggests that opportunistic "hardball" tactics that have become commonplace in many restructurings are actually due to a series of Delaware court decisions. These decisions effectively result in what the LSTA deems a "radical change in corporate law" whereby "creditors would no longer have the protections from opportunism that helped protect the benefit of their bargain for the better part of two centuries".

Gheewalla, a Delaware Supreme Court case is one of the most important cases. This case limited the fiduciary duties that managers previously owed to creditors. The rationale for this was that, as the creditors are generally banks and institutional creditors, they can protect themselves and, therefore, do not need protection from judges and that fiduciary duties were unnecessary to protect creditors from control opportunism. Companies have increasingly been able to enter into transactions that are often for the benefit of shareholders or management including:

  • moving collateral assets out of the reach of creditors;
  • attempting to structurally subordinate creditors through the issuance of additional debt or equity; and

causing bankruptcy-remote companies to file for bankruptcy.



The Wall Street Journal reports that recent filings in the US Bankruptcy Court in San Francisco suggest that PG&E may restrict trading in both its debt and equity. This is in part to safeguard against any tax-law restrictions that may arise in respect of change of ownership which is particularly relevant as it is not yet clear what form the Chapter 11 restructuring will take (i.e. there may be a debt-for-equity swap). At the second day hearing on 27 February 2019, the judge noted that he would consider this on 27 March.


On 14 December 2018, it was announced that the company voluntary arrangements ("CVAs") of two of its financial holding companies, Steinhoff Europe AG ("SEAG") and Steinhoff Finance Holding GmbH ("SFHG"), had been approved further to Steinhoff's announcement regarding the CVAs on 30 November 2018. Approximately 94 per cent of the creditors who voted approved the CVA for SEAG, and approximately 99 per cent of the creditors who voted approved the CVA for SFHG. Louis du Preez, Steinhoff's Commercial Director and Chief Executive Officer Designate said that "the agreements reached today…are key to bringing in a new period of financial stability for the group and enabling management to focus on maximizing the potential of the group's various businesses".

A spanner was thrown into the proposed restructuring on 10 January 2019, with reports that LSW GmbH, a creditor that abstained from the CVA vote, was challenging the restructuring. Furthermore, it came to light that Andreas Seifert, an Austrian businessman with links to LSW GmbH, who was a former partner of Steinhoff, claimed he was due EUR 291m. This will delay the restructuring which was planned to commence at the end of January. This case is progressing through the High Court of England with case number CR-2018-010352 and it is rumoured that both sides have asked for the substantive hearing to be expedited and heard on 25 March 2019.

Furthermore, it was announced on 21 February 2019 that a petition had been received by a group of shareholders for inquiry proceedings before the Enterprise Chamber of the Amsterdam Court of Appeal.

The CVA documents for SEAG and SFHG are available here.



On 20 December 2018, Noble completed its USD 3.5bn restructuring. Following the debt-for-equity restructuring, Reuters reports that Noble is now "a smaller and unlisted Asia-focused coal-trading business". This followed the 14 December 2018 approval provided by a Bermuda court for a restructuring which Noble deemed in an August circular as its "Plan B". The preferred approach of a consensual restructuring (avoiding the business being affected by a formal insolvency scenario) was thwarted at the start of December with Singaporean regulators ruling that Noble could not be relisted as a new company and that there were "significant uncertainties" regarding the financial position of this 'New Noble'. Bloomberg reports that Singaporean officials are continuing to review Noble and its officers for any legal breaches. Noble Group Limited - In Liquidation ('Old Noble') was formally ordered to be wound-up by the Supreme Court of Bermuda on 8 February 2019.



British department store Debenhams received a boost on 20 February 2019, with claims that lenders are prepared to grant it more credit in an effort to prevent Mike Ashley, owner of Sports Direct, from purchasing it at a low price (as was the case with House of Fraser last year). This follows GBP 40m of additional funding from some of its lenders (including Alcentra, Angelo Gordon & Co. and Silver Point Capital) on 12 February 2019. The company is working on restructuring its debt, which includes GBP 320m in loans and GBP 200m in bonds, which are due to restructure next year. It aims to refinance by the end of the second quarter and it is expected that this will include a debt-for-equity swap.



Bloomberg reported on 11 February 2019 that Greece's Alpha Bank is preparing two NPL sales that could wipe as much as EUR 3.5bn of bad debt from its balance sheet. The two portfolios which Alpha Bank is planning to sell are rumoured to be known as (i) Neptune (EUR 1.5bn of loans secured against assets of SME companies); and (ii) Orion (EUR 2bn of securitised residential mortgages). It is expected that these sales will be offered in the later half of 2019.



It was reported on 11 February 2019 that two large Chinese borrowers had missed payment deadlines in February. China Minsheng Investment Group Corp. missed a bond repayment and Wintime Energy Co., which was China's second-largest bond defaulter in 2018, didn't honour its restructured debt repayment plan. This could signal a deeper underlying problem in China, with a record Yuan 119.6bn of defaults on local Chinese debt in 2018 and suggests that the governments' efforts to deal with this are not benefitting all firms. The Chinese government also has a history of inconsistency in regards to bailouts which can add to the uncertainty.




Brown Rudnick restructuring partner Ben Klinger has analysed the recent number of high profile distressed cases and restructurings where a running theme has been significant pension deficits. These include British Home Stores, Monarch Airlines and Toys 'R' Us, to name but a few. It is important to remember that in distressed and restructuring scenarios, pension schemes can constitute major creditors of a company which may present challenges to implementing any wider restructuring of the company's capital structure.

Click here to read the full article.


Iden Asl has joined Brown Rudnick LLP as a Partner in the Special Situations and Trading Team. Prior to joining Brown Rudnick, Iden was a partner at Mandel, Katz & Brosnan.  His practice focuses on secondary loan trading markets, where he advises funds and financial institutions on issues relating to the purchase and sale of par and distressed loans, claims and assets.

Iden Asl, Partner
T: +44 207 851 6029 |


Louisa Watt

P: +44.20.7851.6141

F: +44.20.7851.6100