Italian Restructuring Outlook
By Luca Petroni & Jacopo Barontini
Posted: 4th March 2015 09:17
A long period of crisis
In the last five years, Italy has undoubtedly gone through one of its most critical economic periods, and it is fair to say that the period of recession has been met with some greater pessimism than in other Eurozone countries. The general loss of business corporations’ competitiveness – triggered by the more restrictive monetary policies introduced solely as a result of joining the single European currency – was followed by major problems from the banking industry, in terms of risk assessment and resulting tightening of the flow of credit. Indeed, on the one hand, businesses – traditionally competitive in the field of international trade also thanks to game-changing currency devaluation policies – suddenly found themselves ill-prepared to deal with new and more difficult competition against other economies; this was also caused by a traditional under-capitalisation of Italian businesses which were, until then, over reliant on bank borrowing. On the other hand, meanwhile, the banks abruptly found themselves largely unready to deal with a large volume of non-performing loans.
The outcome of the Asset Quality Review
The recent Asset Quality Review demanded by international regulatory bodies highlighted just two banks which failed to pass the stress tests imposed on a European level. However, the prevailing market sentiment was that many banks have not adequately dealt with the issue of business credit default and this remains a problem which had not yet been resolved. For now, attempts by the banks to liquidate portfolios of non-performing loans have not been particularly effective, also in light of a certain reluctance to accept overly pessimistic valuations by potential buyers. Consequently, there is still a feeling on the market that the AQR process has not provided a snapshot of the real collection problems faced by Italian banks.
Recent expansionary economic measures and the impact of Quantitative Easing
Recent expansionary economic measures are expected to have a significant, new stimulating effect on the Italian economic recovery. There is no shortage of analysts who feel Italy could be among the countries to benefit most from the ECB’s Quantitative Easing. This is because its public debt/GDP ratio is one of the highest in the Eurozone (132%), but the public accounts show a primary surplus. For this reason, if the Bank of Italy purchases part of Italy’s public debt, it could continue to help reduce the interest spread. This is confirmed by the fact that the gap between the respective spreads on Italian and Spanish 10-year bonds against their German counterpart is already closing.
Furthermore, the Italian economy could also benefit – to a greater extent than other Eurozone countries – from an increase in expansionary investments by business corporations. After years of falling investments, largely because of a reduction in the flow of credit from the banks, capex could start to increase once more, especially in a business environment like Italy’s where there is a traditional reliance on bank borrowings from a significant number of small banks, as well as small/medium-sized enterprises who seek access to credit.
The positive impact of the reforms as a means of making Italian businesses more competitive
Again according to the analysts, the recent course of implementation of structural reforms by the Italian government could boost this process, with a general increase in business competitiveness, especially thanks to the recent measures currently being implemented to make the labour market more flexible. Greater political stability in Italy should also make Italian businesses more attractive to foreign investments, and some significant signs were already noted in the second half of 2014.
The situation in the Restructuring sector
Despite these positive signs, Italy remains a country where a significant volume of operational and financial restructuring operations is expected in the next coming years. The significant level of reliance on bank borrowing, the traditional under-capitalisation of businesses – partly caused by one of the world’s highest levels of household saving – and, above all, the limited structural measures taken by the banks to resolve business credit problems are all factors which lead to the conclusion that the market will still produce a significant volume of restructuring transactions. However, what analysts expect is greater standardisation of restructuring processes, brought about by a period several years during which banks and advisors have gained significant experience, also following completion of the process of reform driven by the changes introduced by the Italian Insolvency Act. On the whole, then, while there is no doubt that Italian business will benefit from a higher volume of lending and more accessible credit, the market still expects the volume of financial restructuring operations to remain broadly stable – and robust – over the next three to five years.
An alternative option: disposal of portfolios
At present, there is still some uncertainty over the market’s readiness to open up to alternative investors, willing to acquire the banks’ non-performing portfolios. The market has yet to experience the completion of at least one major transfer of non-performing portfolios by leading Italian banks, and this confirms the problems for the banks in justifying the related impact on their financial statements. If this obstacle is overcome in the coming years, the market could see a more “business-like” approach to managing exposure to debt, with undoubted benefits for the valuation of the related portfolios.
Luca began his career in the Deloitte in 1985. He is currently National Leader of Financial Advisory and Head of Restructuring Services. Luca has a strong experience in restructuring and advisory, having being involved in several restructurings, both company side and lenders’ side.
In the last few years he has served on several transactions, such as Cassa Depositi e Prestiti in the acquisition of Fintecna Group as part of the reorganisation of state holding, the reorganisation and restructuring of several businesses such as San Raffaele hospital in Milan, Cover Group, Intersider, Finaval and Riva Acciai. He was also in charge of the Deloitte Italian firm’s Asset Quality Review assistance activity for a major Italian banking group.
Jacopo joined Deloitte in 2001. In 2002, he moved to Deloitte Financial Advisory, in the Transaction Services Division, working on numerous acquisition and due diligence projects for private equity funds and industrial investors. In 2005, he became part of Atlantis Capital Special Situations, the first Italian private equity fund specialising in turnaround operations. Jacopo then moved back to Deloitte in 2007, in the Reorganisation practice, working mainly on Independent Business Review services and Debt Advisory operations. He is currently involved in numerous debt advisory and restructurings’ activities, as well as in creditors’ advisory mandates. In 2014, he was involved in the Deloitte Italian firm’s Asset Quality Review assistance activities for two major Italian banking groups.