Diane Vanderson, Associate & Carl Winkworth, Partner at Richards Kibbe & Orbe LLP
Italy is the 4th largest economy in Europe, it has a highly skilled workforce and is politically stable. These factors along with regulatory changes and competitive pricing make it an attractive investment destination.
With investment opportunities in Europe that combine the right risk profile with the right price becoming increasingly rare, Italy has made the decision to remove some of the roadblocks that historically have made the country less accessible to the investment fund community.
Italy has identified the benefits of accessing the liquidity that the global investment fund community can provide, and has therefore set in motion a series of regulatory and tax reforms that will lay the foundation for the economic and financial reform needed to ensure sustainable growth.
On 24 June 2014, the Italian Government adopted Law Decree no. 9 that permits Italian companies to access non-bank debt financing. The Decree lifts certain regulatory restrictions which have traditionally prevented non-Italian banks and hedge funds from lending directly to Italian companies.
With the exception of micro-enterprises (enterprises which employ fewer than ten people and whose annual balance sheet does not exceed €2m), Italian securitisation SPVs (ISVs) and insurance companies are permitted to lend directly to Italian provided:
- banks and financial intermediaries are used during the origination process to select potential borrowers; and
- the bank or financial intermediary retains a “significant interest” in the financing transaction (i.e., not less than 5% of the loan if granted by an insurance Company, although the limit has yet not been set for ISVs). In addition, the notes issued by an ISV to fund the financing are only available to “Qualified Investors” (as defined in the Italian Finance Act). A “Qualified Investor” can include both Italian and foreign entities that are authorised and regulated to operate in financial markets (e.g., banks, investment firms, other authorised or regulated financial institutions, insurance companies, pension funds, and broker dealers) and other institutional investors whose principal activity is investment in financial instruments, including securitisation entities as well as large corporations.
The Decree introduced an exemption from withholding tax for interest paid by Italian borrowers on medium to long term loans (i.e., loans with a term of at least 18 months plus a day) to (i) financial institutions established in an EU Member State; (ii) insurance companies established and authorised under the law of an EU Member State; (iii) collective investment undertakings which do not make use of financial leverage (including tax transparent entities set up in EEA countries included in a list territories permitting adequate exchange of information with Italian tax authorities).
The market strongly expects that the Italian Government will enact specific regulations in the first half of 2015 to permit Italian borrowers greater access to additional sources of financing. Further, it is also expected that the “Qualified Investor” criteria will be expanded to include entities not currently included and would further reduce the barriers currently limiting inward investment into Italy by global investment funds.
The regulatory changes, which permit direct lending by non-Italian financial institutions and investment funds to Italian borrowers, are intended to improve the terms and availability of credit for Italian businesses in the medium term and will therefore open the loan market to non-bank lenders, encouraging the development of alternative financing structures for Italian borrowers. Already in 2015, KKR Asset Management has agreed to provide approximately €100 million in capital (through a combination of debt and equity) to Gruppo Argenta SpA, an Italian vending machine operator. The facility will repay existing lenders and fund the company’s growth plans. Additionally, the exemption from Italian withholding tax will facilitate cross-border syndication and secondary market transactions through the reduction of costs for non-bank lenders interested in lending in Italy.