Inside Italy’s bad-debt heartlands

Dominic O’Neill
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Italian banks have allowed non-performing loans to swell to such numbers that they are now a central concern for the European and global financial system. Delving into Italy’s bad-debt suggests the problem might be even worse than public figures show. Can the country turn it all round – even if it has the time to do so?

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There are barely any signs of life at the sprawling industrial grounds of Gardenia Orchidea in Fiorano, just one of the many thousands of defaulted firms clogging up Italy’s banks and courts. 

A tired-looking reception building is empty, leaving Euromoney to tramp in the sun to an unglamorous office block next to a row of warehouses and a dusty 1960s-style ceramics factory. Crates of gaudy branded ceramic tiles are piled up on the concrete outside, with their plastic wrapping flapping in the dry wind, hoping for a sale even at knockdown prices.

It looks like the final death of Italy’s post-war economic dream: a company, like so many of its compatriots, caught between aging owners unable or unwilling to put in more equity and change financial management; banks often with no choice but to humour them; and an economic downturn now sapping even emerging-market buyers with a taste for Versace-style black and gold floors. 

The depressed atmosphere could hardly be a sharper contrast to the scene just down the road at Emil Ceramica, a bigger ceramics firm that managed to haul itself out of a series of post-crisis debt restructurings late last year – just as a botched investment in new production pushed Gardenia towards bankruptcy. 


At Emil Ceramica, despite the summer holidays, contractors are rushing to refurbish buildings before international visitors arrive for the big autumn trade fair in nearby Bologna. Cranes are assembling a new frontage, and freshly laid lawns are being watered: the finishing touches on a revamp for the mid-2010s, updating not just the design of the facilities and the product, but also financial management. 

Their experiences illustrate some of the challenges in Italy’s mountain of non-performing loans. At Emil Ceramica, as profits rose last year, CFO of the past two years Gian Luca Bruni was able to prepay a year’s instalment on its biggest secured loan (now around €43 million) and get out of the strictures of a third restructuring agreement five years before its projected end. "Now I’m having to fight off all the banks offering to lend us money," he says. 

Gardenia, by contrast, will be lucky this autumn to get its long-suffering trade creditors to agree to an Italian equivalent of Chapter 11 – usually just another delay to liquidation. The process could leave lenders Banca Popolare dell’Emilia Romagna (BPER), UniCredit and Monte dei Paschi di Siena (MPS) with only a fraction of the roughly €15 million they are owed. "Italy’s big problem is that shareholders are so reluctant to put in equity," sighs Andrea Mazzanti, Gardenia’s friendly but overwhelmed chief restructuring officer.

The ceramic tiles district in Emilia Romagna, north-central Italy, grew up in the 1960s, thanks to the presence of raw materials south of Modena. It is one of many similarly suffering business clusters across Italy: fridges around Ancona; Tuscan leather; or gold jewellery near Vicenza. 

Boiler manufacturing near Verona is another such cluster, where even big firms with large export bases and thousands of employees have racked up back payments since the crisis. Debt problems forced the Riello family to sell their eponymous heating business to US firm United Technology late last year. The same month, the rival Ferroli family agreed to hand their firm to distressed debt specialists Oxy Capital. 

The economic downturn over the past decade has crippled the several hundred firms of the Emilian ceramics cluster too – all adding to local unemployment and impacting on the close-knit local supply chain and financial system. Emil Ceramica is one of many local firms waiting for payment from Gardenia Orchidea. Like elsewhere in Italy, a regional bank has a disproportionately high exposure: in this case Modena-based BPER, Italy’s sixth biggest lender.

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BPER’s CEO Alessandro Vandelli

"Ceramics is a very strong, export-orientated sector," counters BPER’s CEO Alessandro Vandelli. "It was able to face the crisis better than other industries." 

But it is not unusual that the more troubled firm, Gardenia, is closer to the average small and medium-sized enterprise’s size: with a smaller export base, making it more dependent on Italy’s downbeat residential market. Most SMEs in Italy, after all, are not usually small because they are young and innovative. It has often been because of social and political disincentives to getting bigger, as well as fiscal concerns, as journalist Bill Emmett discussed in his 2012 book Good Italy, Bad Italy. 

"Small is not beautiful in a globalized world," is how Adriano Bianchi, head of restructuring specialists Alvarez & Marsal in Italy, sums up the troubles facing the bulk of domestic-orientated bank borrowers in the Italian corporate sector. 

In ceramics, as in other sectors, it has been easier for larger and more export-orientated companies like Emil Ceramica to access new capital and turn around. Four years ago, its owners were able to exit a joint venture in the US and bring in a new CEO who has managed to reinvest and reorient to a hipper and higher end of the market. 

Its story could give banks hope: but for the knowledge that its achievements are so very rare for companies in its situation, after years of forbearance. Emil Ceramica’s auditors told its CFO late last year that it was the first firm they had seen that had managed to exit restructuring after two previous restructurings, and five years ahead of schedule.

Biggest problem

The contrast between Emil Ceramica and Gardenia Orchidea shows how difficult it is for banks and investors to predict the value of Italy’s NPLs – now about 18% of the system, and mostly SMEs – even when the loans are to firms in similar industries and geographies, and when there is some chance of a turnaround. 

Today Italian loan valuation is arguably the biggest problem facing Europe’s increasingly shaky financial system. A bearish view might see hundreds of thousands of dead loans to zombie companies run by half-dead owners, collateralized by less-than-worthless industrial sites or would-be real estate developments long since used as makeshift football pitches by the local unemployed youth.