COVID-19 emergency: Italian Government measures to support liquidity through the banking system

The Italian government has adopted several measures aimed both at facilitating the access of business operators to bank financing and at securing lenders’ exposure in case of difficulty in recovering loans granted during the emergency.

The core of the above measures is included under Sections 56 and 57 of Law Decree No. 18 of March 17, 2020 (“Decreto Cura Italia”) and under Sections 1 and 13 of Law Decree No. 20 of April 8, 2020 (“Decreto Liquidità”), which amended and supplemented some provisions of the Decreto Cura Italia.

A. Decreto Cura Italia: Financial support for SMEs and guarantees for lenders

1. Forbearance on repayment obligations to banks

Section 56 of the Decreto Cura Italia sets forth several measures to grant Italian SMEs, freelancers (lavoratori autonomi), and VAT professionals (professionisti titolari di Partita IVA) affected by the Covid-19 epidemic forbearance on the repayment of existing debts (excluding NPLs).

To rely upon this system, a borrower submits a simple request to the bank, accompanied by self-certification attesting that they have suffered a temporary liquidity shortage as a result of the Covid-19 epidemic, in order to (a) avoid the revocation, until September 30, 2020, of bank overdraft credit facilities existing on March 17, 2020; (b) extend under the same conditions, and without any formalities, bullet loan agreements maturing before September 30, 2020; and (c) suspend installments, or lease payments, due on or before September 30, 2020, of loans and other financings payable in installments.

For their part, the lenders applying the above measures can access (free of charge and without any prior assessment) a special section of the Central SMEs Guarantee Fund[1] that can guarantee up to 33% of the amounts drawn or the extended/suspended installments.

2. State guarantee for CDP exposure to bank lending to large businesses

Section 57 of the Decreto Cura Italia sets forth other supporting measures for businesses other than SMEs whose turnover has shrunk due to the Covid-19 emergency. These take the form of new liquidity that will be generated by a guarantee provided by the State to Cassa Depositi e Prestiti S.p.A. (“CDP”) to help cover its exposure to lenders to businesses affected by the Covid-19 emergency. This State guarantee is unconditional and irrevocable and covers up to 80% of the CDP’s exposure to the banks.

Criteria, terms, and conditions for granting the above instruments and related procedures will be set forth in a dedicated decree from the Ministry of Economy and Finance, in agreement with the Ministry of Economic Development, which shall — inter alia — set up a fund with an initial budget of EUR500 mln for 2020 aimed at covering the above State counter-guarantee and shall also identify the sectors where companies must operate to be eligible for the above guarantee, without prejudice to other Central SMEs Guarantee Fund measures.

B. Decreto Liquidità: More potential beneficiaries and increased protection

Sections 1 and 13 of the Decreto Liquidità implement additional measures aimed at supporting liquidity for Italian companies (and other entities), namely:

  • supporting measures for large Italian companies (500+ employees) and, to a lesser extent, SMEs and Mid-Caps, consisting of the option for SACE S.p.A. (“SACE”) to issue special guarantees (that in turn are guaranteed by the Italian State) to cover financial exposure of those companies, subject to specific terms and conditions; and
  • supporting measures for SMEs and Mid-Caps (up to 499 employees), consisting of access to new bank credit on more favorable terms under the guarantee provided by the Central SMEs Guarantee Fund.

1. SACE guarantees for large companies, SMEs, and Mid-Caps

Pars. 1–12 of Section 1 set forth a special guarantee, subject to specific terms and conditions, to be issued by SACE as a measure to provide financial support to Italian companies whose business is affected by the Covid-19 emergency (including SMEs and Mid-Cap, as well as freelancers and VAT professionals who have maxed out their rights to the Central SMEs Guarantee Fund as set forth under Section 56 of the Decreto Cura Italia, described in Paragraph A.1 above[2]).

An SACE guarantee is irrevocable and first-demand, must comply with prudential oversight regulations, is aimed at covering loans with a maximum 6-year term granted after April 9, 2020, and will be issued until December 31, 2020. Any obligation of SACE under the above guarantee is automatically counter-guaranteed by first-demand, without recourse, unconditional, irrevocable State guarantees, which cover both the principal and any interest and ancillary charges, net of any commission for those same guarantees.

Although the SACE guarantees have been structured to be a very flexible instrument, the Decreto Liquidità sets forth several terms and conditions for their issuance, such as a cap on the maximum guaranteed amount[3] and, without prejudice to such cap, specific percentages of total exposure that can be covered.[4] Additional requirements are that borrowers must maintain certain levels of employment, to be agreed upon with trade unions in advance, and must not make any distributions of dividends or buybacks of shares, and that new financing must be used for personnel, capex, and opex.

Finally, Section 1, par. 13, of the Decreto Liquidità sets forth a potential State counter-guarantee for covering CDP’s (existing or potential) exposure deriving from the guarantees issued by the same to secure loan portfolios granted, in any form, by banks and other authorized Italian credit institutions to Italy-based companies that have suffered a reduction in turnover due to the Covid-19 emergency. It is not clear how this provision combines with Section 57 of the Decreto Cura Italia (described in Paragraph A.1 above): indeed, without replacing such provisions, the State counter-guarantees set forth under Section 1, par. 13, of the Decreto Liquidità seem to jeopardize those mentioned in the Decreto Cura Italia.

2. SMEs and Mid-Caps

Section 13 of the Decreto Liquidità allows SMEs and Mid-Caps to access new bank financing more easily and on more favorable terms thanks to the guarantee provided by the Central SMEs Guarantee Fund. The same guarantee can be extended to loans and credit lines “perfected and disbursed” (i) after January 31, 2020 and (ii) no later than 3 months after the date of the request, as well as providing new supporting benefits to additional categories of companies.

Some details: (a) maximum amount guaranteed is EUR5 mln; (b) guarantee may cover 80% to 100% of financing; (c) financing may be obtained by a borrower to refinance existing debt, provided only that new financing exceeds the debt to be refinanced by no less 10%; (d) it is also available to borrowers holding debts with the lender classified as UTP after January 31, 2020 (thereby excluding use of the new financing afforded by Section 13 to refinance bank debts that became UTP for reasons other than Covid-19); as well as to (e) companies that since December 31, 2019, have been admitted to pre-bankruptcy arrangements with creditors that entail business continuity, or that have entered into debt restructuring agreements, or submitted certified debt restructuring plans, provided that (1) their exposure as of April 9, 2020, would not have led to their classification as “impaired”; (2) they will not have any outstanding debt after applying the supporting measures; and (3) based on analysis of the debtor’s financial situation, the bank can reasonably expect that such exposure will be entirely repaid when due.

[1] This special section of the SMEs Guarantee Fund has been provided a budget of EUR1.73 bln.

[2] The total amount allocated by the Decreto Liquidità in this respect is equal to EUR200 bln, of which at least EUR30 bln to support SMEs, freelancers, and VAT professionals.

[3] The maximum guaranteed amount cannot be higher than the following amounts recorded in the approved FY2019 financial statements or, if those have not yet been approved, in a self-certification: (1) more than 25% of the company’s 2019 turnover; and (2) more than double the company’s 2019 personnel costs, provided that (a) that maximum guaranteed amount is determined by referring to both turnover and personnel costs in Italy and, for groups of companies, on a consolidated basis; and (b) if the company has several loans secured by SACE guarantees or other public guarantees, the loan amounts are combined.

[4] (1) 90% of the loan amount for companies with fewer than 5,000 employees in Italy and turnover of up to EUR1.5 bln; (2) 80% of the loan amount for companies with turnover of EUR1.5–5 bln or more than 5,000 employees in Italy; and (3) 70% of the loan amount for companies with turnover of more than EUR5 bln, provided that (a) guarantor and borrower bear any losses in equal and proportional percentages; (b) for non-bullet loans the above percentages apply to the outstanding amount; and (c) for groups of companies, this guarantee percentage is determined by referring to the group’s turnover and personnel costs on a consolidated basis.

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