Inside Italy’s bad-debt heartlands
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Inside Italy’s bad-debt heartlands

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.


It could cost anything between €30 billion and €100 billion to clean up Italian banks, according to Berenberg. The Italian government cannot afford bailouts, either financially or politically, and certainly not on that scale. Private investors would have to weigh up recapitalizing a sector that has lost about half its value in the last year. The NPL valuation at 33c in July’s rescue of MPS only triggered another sell-off.

Are investors and the ECB worrying too much? Have the banks, perhaps, made adequate provision and the extent of the collateral is a source of additional confidence? Do they only need time to work through the problem? Or should the bad-debt ratio be even higher, if the banks were to properly calculate it? 

One investor specializing in Italian NPLs deems generous even the much-quoted figure for private-equity bids of Italian bad debt (about 20c on the euro). That is leaving aside the question of whether the independent NPL servicing infrastructure is adequate for sales on a large enough scale to return the system back to full working order – and whether the banks could find the capital to fund write-offs at such a level.

The headline NPL figure is about €350 billion, which the Bank of Italy’s classification for provisioning turns into about €200 billion when looking only at so-called ‘sofferenze’ (also known as bad loans, where the collection process is going through the courts). Of that, €90 billion is unprovisioned, while collateral covers about €120 billion. 

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Giovanni Sabatini,

“Exposure to further losses is very limited, given the extent of the collateral,” says Giovanni Sabatini, general manager of the Italian Banking Association (ABI). “The problem is that before the recent reforms, the time needed to repossess was up to seven years. Now the legislative toolkit for addressing the NPL issue is complete. The only element missing is time; the shorter the time, the bigger the problem.”

Even taking into account a private-equity discount for the time it takes to realize returns, few in Italy seem to believe, when they speak openly, that the banks have bad debt marked on average at around 40c because they think that is what it is worth, rather than a compromise between a level that satisfies the regulator and one that allows a level of capital, and perhaps dividends, to satisfy investors. 

That approach may not be specific to Italy, but it is more acute as the biggest NPL bucket is between €5 million and €25 million. The bulk is not a handful of big corporate loans, nor rows of identikit residential mortgages. Instead there are thousands of loans to opaquely managed family businesses, backed by anything from a factory, to machinery, to shares of the firm or the homes of the owners. 

This makes valuation and sales much harder than in Spain, for example, where residential mortgages make up a bigger proportion of NPLs. Partly thanks to a bad bank set up in 2012, asset-quality issues in Spain are fading into the past, according to Scope ratings. Not so in Italy.

“What’s the real value of Italian banks’ loan portfolios?” says Stefano Visalli, Oxy Capital’s founder and managing partner. “The reality is that banks don’t know, because nobody knows.” 

The fear

This is not all the banks' fault. The legal infrastructure for liquidations in Italy is like a small hole in a water tank, as one analyst describes it: NPLs drip out, but if there’s a flood, the tank fills up. 

So even when banks have finally recognized that a firm or the development is no longer viable, it might only add to the growing backlog of cases on the dusty desk of a provincial judge in an airless office, lodged between a divorce and a shoplifting. It is quicker to enforce a contract in countries like Egypt and Pakistan than Italy, according to the World Bank.


The fear now, both among investors and the ECB, is that Italian banks are still being far too optimistic about the worth and liquidity of their collateral. After all, collateral in a dirty old industrial site, perhaps a former ceramic tiles factory, could be a liability more than an asset, even once the bank gets its hands on it. 

“Credit decisions before the crisis were made far too much on the basis of collateral values rather than projected cash-flow generation,” says Stefano Malagoli, managing partner at Kaleidos Corporate Finance, which partly focuses on restructuring. 

That is largely due to a lack of transparency in accounts, says another Milan-based restructuring specialist. 

As bad debts slowly churn through the legal system, recovery rates in liquidations have been steadily falling for the last four years, according to Bank of Italy figures (they averaged about 40% between 2011 and 2014).

“While Italian banks continue to cling to the belief that their coverage ratios are adequate due to the value of the collateral underlying the loans, we do not believe this to be the case,” Berenberg analysts commented in a report this summer. 

Italian non-financial corporates are the most indebted and least profitable in western Europe, the report said, and low economic growth will see them struggle to get out of this debt trap, which could mean more corporate loan losses. 

A bank like Banco Popolare, one of Emil Ceramica’s lenders, might trumpet its high proportion of secured loans when quizzed on a NPL ratio that is second only to MPS among the top five lenders, at around 25%. But even the biggest banks have barely begun the process of putting together any kind of detailed, up-to-date database of their corporate non-performing exposures, including the collateral. 

As a senior figure overhauling his bank’s NPL management says, this means going through the portfolio, firm by firm, often just to ask basic questions: where and what is the collateral, and what state is it in? Sometimes it needs to go back even further: can the bank actually access the documentation and is it signed? Or was it originated by a bank you took over many years earlier and filed somewhere by a forgotten employee in hard copy? 

This haziness in the data quality, especially around collateral, is one of the things Harish Kumar, London-based adviser at Alvarez & Marsal, mentions first, when asked about the dearth of NPL sales in Italy. 

“The banks aren’t used to this. Managing the collateral was not the focus before, but now often the only value in the loan is collateral,” he says.

As the securities need to be rated, gaining sufficient data quality is also rumoured to be why Banca Popolare di Bari is taking so long to sell the country’s first securitization using the government’s new guarantee for senior tranches (it announced an €800 million deal in March).

Credit partnerships seek elusive turnaround

Rather than just buying NPLs at a discount, some funds have sought to partner with Italy’s banks as a means to solve the provisioning gap in outright sales. 

Instead of a bleak bet on liquidation proceeds, the aim is to oversee a turnaround and share in a recovery. Injections of super-senior capital can allow settlements with impatient trade creditors, redundancy payments and new capital spending. Returns are worked out in waterfall arrangements between the parties, with value perhaps crystallized in a sale.

One company to have agreed to a similar deal is Ferroli, part of the hard-hit boiler-manufacturing cluster near Verona. 

Its production had halted, with suppliers pushing it close to bankruptcy. But Oxy Capital – set up by the former head of McKinsey’s Mediterranean banking practice, Stefano Visalli – saw a company with a good position in a consolidating market and the potential to cut costs. 

“We look at companies where you can dramatically change the underlying value if you manage it well or badly,” says Visalli.

What these deals need, however, is the agreement of a group of banks and owners – often not easy until they are desperate, when the firm is probably no longer worth saving. 

Getting agreement earlier is tough, not just due to the owners’ attachment to the firm, but also banks’ differing agendas (their types of loan, relationships with the borrower, collateral and views on the collateral, and different provisioning levels). Given that challenge, it is hard to see these funds as a big part of the answer to the crisis. 

Visalli says he has looked at more than 60 companies, with Ferroli the only public deal.

Yet the best-known of these platforms, Pillarstone, has managed to build a large portfolio. KKR Credit launched the platform last year after Intesa Sanpaolo and UniCredit transferred a €1 billion portfolio, reportedly including amusement parks operator Alfa Park and paper firms Burgo and Lediburg. In April, it took on another €250 million in loans to Genoese shipping firm Premuda, while in August it announced the purchase of Sirti, active in the Italian telecoms, transport and energy sectors. 

In July, another US private equity firm, HIG Capital, launched a €260 million platform putting in new money and old loans to eight smaller companies, from seven local banks, and working alongside Italian fund manager Idea. 

“We look at companies that don’t have structural problems, where there’s a product that’s worth saving, but they have too much debt, perhaps due to a leveraged transaction,” says Raffaele Legnani, HIG’s Italy head. 

It would be easier to attract buyers for loans in the secondary market if funds could more easily take a view on a specific group of assets, perhaps hotels or office property in a specific city. That means it is particularly important for banks to be able to easily aggregate loans according to their characteristics – including the time and place of origination.

Given funds’ needs to calculate returns over time, one central factor in how much the loans might fetch in the secondary market is the number of years it might take to recover collateral through court-ordered repossessions. 

The slow pace of repossessions, says Mediobanca analyst Riccardo Rovere, means investors will pay less on secured debt sales in recent defaults, as they are least advanced in the recovery process. Older liquidations are more likely to have been written down already, after the property failed to reach progressively lower minimum prices in first, second or third auctions.

But it is not just that repossession takes a long time – though that is a big problem. It is also that they vary so widely, depending on the court’s location.

'Lot of uncertainty'

Putting figures on the systemic problem in Italy is hard because of the big differences between Italian financial institutions’ capacity to manage and monitor NPLs internally, especially in corporate lending. 

Intesa Sanpaolo set up its Capital Light Bank for NPLs and foreclosed property in 2014. UniCredit, which both owns and has sold the biggest chunk of NPLs, also set up a non-core division not long after the eurozone crisis, segmenting a portfolio that is now around €60 billion to help sell the assets according to demand for specific loan types and sectors. 

Now new UniCredit CEO Jean-Pierre Mustier is intensifying those efforts, appointing TJ Lim as deputy chief risk officer in July to oversee an operation to accelerate work-outs and disposals and implement what Mustier tells Euromoney is a “much more structured” approach to NPL management. 

NPL divisions can be in a separate legal entity, says A&M’s Kumar, but there should at least be a team with sufficient systems and people – and a strategy. Smaller banks, however, are less likely to have resources to do this. 

“There’s a lot of uncertainty in terms of data in Italy, and buyers don’t trust the collection procedures,” says Andrea Clamer, head of the NPLs division at Banca IFIS. “Bigger banks are able to manage disposals, but not many of the small and medium-sized banks have sold portfolios. They tend not to have the necessary expertise to split a portfolio, to invite in players and organize an auction.” 

A hypothetical example could be a small or mid-tier bank’s participation in a group of 10 lenders to a half-finished real estate development in an undesirable part of Rome’s outskirts. It could be one of hundreds of similar NPLs at the bank: all managed by a team of perhaps just 20 people, with no budget for outside help and perhaps not even a photo of what the development looks like. 

“Banks’ NPL departments are clearly understaffed, under-skilled and underfunded,” says Visalli. “They should be putting in their best investments here – €350 billion is a large chunk of the future of the country.”

Even bigger second-tier banks are only getting round to setting up dedicated NPL divisions this year. Until the launch of a new credit management company for sofferenze in January this year, BPER’s NPL management was spread separately across departments in five subsidiaries focused on Emilia Romagna, its bank in Sardinia and leasing – each independently taking care of its bad debts. The approach to outsourcing management of smaller loans was equally scattergun; until July, it had not made a single portfolio sale, despite NPLs reaching almost 15% of its portfolio.


Belatedly, mid-tier Italian banks are now having to invest more in NPL management. For example, as part of their merger this year, Banco Popolare and BPM will set up a new 350 person-strong unit, reporting directly to new chief executive Giuseppe Castagna (now head of BPM). The unit, says Castagna, will help get data of sufficient quality to satisfy bank equity investors and the ECB, and help sell NPLs.

Castagna says: “We want to have a fully digitalized database to know very well not just the percentage of NPLs, but also how much is unsecured and secured; the loan’s vintage; whether the security is residential, commercial, or industrial; whether the property is completed and rented out; what stage of the repossession process it has completed... All these things are very important to understand how much they are worth.”

BPER CEO Vandelli adds that his bank’s recovery rate on bad debts is increasing in 2016 (though he doesn’t specify the rate) thanks to the launch of its credit management unit, with centralized teams for big and small loans, loans with real-estate backing and situations such as regional government guarantees. 

Efforts to industrialize its NPL outsourcing this year have spawned agreements with three servicers covering four portfolios. Vandelli hopes to follow a €450 million mixed NPL sale to Algebris Investments and Cerberus Capital Management in July with a similar deal by the end of the year.

He tells Euromoney: “We did the deal partly to learn how to develop a process. How can we build a portfolio that will have interest on the market? Which investors have an interest in big or small tickets, or real estate-backed loans? And what type of real estate are they looking for?”

But, as Vandelli’s comments might suggest, Italian banks have a long way to go before they become experts in NPL management, which is what they need to be. Industry veterans say it is not as simple as transferring in sales staff to NPL divisions to avoid layoffs, a common temptation amid pressure to increase efficiency. 

Even if some insiders who know the credit history can be useful, NPL divisions need staff who know the legal system, who can negotiate with distressed borrowers and review business plans. 

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Harish Kumar,
Alvarez & Marsal

“The skill set and experience needed in managing bad debts are very different from underwriting,” says A&M’s Kumar.

Italy’s fragmented and diverse banking sector further hinders the standardization of documents and common classifications, according to Kumar, and makes it less likely they will act as a bloc to force vital management changes. 

Even when it concerns bigger banks – often fairly recent agglomerations of smaller lenders – investors complain of confused lines of responsibility that make it difficult to get the go-ahead for the sale or transfer of the loan or an acquisition of the borrower. 

“In Italy it’s relatively hard to close NPL transactions; there are a lot of delays,” says Kumar. “Investors are interested but mindful of the chances of success – they don’t want to waste their time.”

Discouraging buyers

All this can discourage foreign buyers from bothering to take a closer look at the mass of Italy’s NPLs, especially when there are so many other opportunities to buy NPL portfolios in other eurozone countries. What sales of Italian NPLs there have been over the last two years are more on the consumer side. There have been about twice as many sales of unsecured than secured loans – partly speaking, again, to the data and valuation reliability of corporate collateral. 

Banca IFIS is one of the biggest NPL purchasers in Italy, buying €2.3 billion in eight deals in the first half of 2016 alone – all focused on unsecured consumer credit. Clamer at IFIS says one factor is that banks have had less room for manoeuvre when it comes to writing off unsecured loans, especially in the consumer segment. “These kinds of credit tend to be more provisioned, so it’s easier for the financial institutions to sell them without impacting their profitability,” he says. 

Three quarters of Italian NPLs, however, are corporate borrowing, where the recovery could be a function not just of the worth and liquidity of the collateral, but also the wealth of the owners, or the various strategies and positions of other banks. “SME loans are much more difficult than consumer loans to value using statistical tools,” says Fabio Balbinot, CEO of NPL servicer Italfondiario.

Freeing up credit to allow the recovery of manufacturing corporates like Emil Ceramica is crucial to spurring growth of a kind that might revive the numerous smaller and domestic-orientated SMEs like Gardenia Orchidea – as well as households, the property market and banks. 

But manufacturing loans are not, in fact, the biggest chunk of NPLs, even in corporate lending. Sector-wide, there are about twice as many corporate NPLs in real estate and construction. Real estate and construction lending is about 40% of BPER’s book, dwarfing exposure to the ceramics sector, which is below 2%. 

“Demand, but also the expectation of price increases before the crisis, meant lending to real estate and construction was less proportionate to GDP growth than in other sectors,” says Mirko Sanna at Standard & Poor’s in Milan. “These were the two sectors to which banks lent most.” 

Weak governance in the real estate industry has aggravated bad debts, with property-related scandals a common feature of local press. One well-known example is Danilo Coppola, the developer previously behind one of Milan’s biggest real estate projects, Porta Vittoria. He has spent much of the post-crisis period fighting fraud accusations (he was also once a bidder for Antonveneta, now part of MPS). 

Poor banks in a rich region

It is not easy, though some Italians like to try, to portray the country’s banking crisis as another instance of a dysfunctional south dragging down the dynamic north. 

It takes longer to repossess in the south. But consider the relative position of Banca Popolare di Bari, in Italy’s heel. One of the biggest so-called popolari banks, its NPL ratio is high by international standards, but it has fared better than two similarly sized mutuals, Banca Popolare di Vicenza and Veneto Banca, whose ECB-mandated capital raisings had to be rescued earlier this year by the Atlante fund.

The latter two have NPL ratios well above even the Italian average at more than 20%. Like Banca Antonveneta, the Paduan lender behind much of Banca Monte dei Paschi di Siena’s troubles, they are based in Veneto, supposedly one of Italy’s most successful regions, in the north of the country.

“The northeast is the epicentre of the crisis in Italy’s banking system,” says John Andrew, long-time Milan-based investment banker at William Blair.

The crisis at Veneto and Vicenza – and similar woes at other northern and central banks – may be more down to management and governance than the local economy. Italian prosecutors are investigating allegations that both Veneto and Vicenza misled investors and regulators by lending to clients to buy bank shares under their former management. This is a serious problem for the franchise, as their core strength had been their widespread customer loyalty in one of Italy’s richest regions. 

In Veneto, the idea that this region was Italy’s Bavaria, and just as productive, may have encouraged an aloofness at the top of the banks, reflected, perhaps, in the greater power of the nominally separatist Northern League here (even if the party’s influence in government has diminished since the fall of former prime minister Silvio Berlusconi) compared with the areas around Milan or Turin. 

There is a culture in Veneto of “not wanting to be told what to do by Rome”, as Andrew puts it. A “we-know-best mentality”. Vicenza and Veneto similarly saw no need for exchange listings, unlike other similarly sized popolari elsewhere in Italy. 

Four much smaller regional banks – CariChieti, Carife, Banca Etruria and Banca Marche –that were bailed out late last year, having tried to plug NPL-induced capital gaps by tapping clients, are also based in north-central Italy.

Southern regions like Campania and Sicily do have some of Italy’s highest NPL ratios and often a greater dependence on a real estate market where prices have fallen further than in the north. But NPL ratios in some central regions are higher than their southern equivalents, with the highest being Marche, in the centre. NPLs are higher too in Veneto and Tuscany than in southern Puglia and Calabria. Naturally the richer regions make up a higher proportion of both national GDP and total loans.

While pre-crisis exuberance is definitively over, even today, banks’ over-optimism on loan valuations may still be particularly prevalent in real estate, says Visalli at Oxy Capital, as it is easier to freeze the debt and mothball property developments in the hope of a rebound in the market. Manufacturing needs greater continuity in spending, so a more urgent move to bankruptcy, he says. 

It is notable, indeed, that banks on average have a lower proportion of real estate and construction debt in the sofferenze category than in the lower-provisioned unlikely-to-pay category.

Real estate lending has a big impact on freeing up credit in manufacturing and other sectors too, as better liquidity in the real estate market is crucial to valuing the collateral banks hold in other sectors that are secured by property. More sales of real estate exposures to funds that would more actively manage it would therefore be one way to improve liquidity in the real estate underpinning much of manufacturing firms’ debt, argues Italfondiario’s Balbinot – though such sales have remained rare.

The immediate post-crisis fall in prices in Italy was less extreme than in Spain or Ireland. But real estate transactions in Italy plummeted between 2007 and 2012 and have stayed low ever since, with any exceptions more in residential pockets in cities like Milan than in provincial commercial property. High youth unemployment has furthermore starved the residential market of new buyers.

This makes collateral and NPL values in Italy even less certain and curtails the prices investors could pay, which itself hinders the development of an infrastructure, including NPL servicers, that could help bring an improvement in the overall situation. 

By far the biggest NPL servicer in Italy is owned by US private equity firm Fortress Investment Group, which bought doBank, UniCredit’s former servicing arm UCCMB, last year. Now Fortress is merging doBank with its existing Italian servicer, Italfondiario, creating a platform with around €90 billion under management, including €40 billion for UniCredit. The next biggest, run by Cerved and Prelios, only has around €10 billion under management. In Italy, Balbinot says, banks still tend to prefer to manage loans internally – in stark contrast to the US, UK, Germany and recently even Spain: “The servicers in markets like Italy develop around investors, so if loan sales don’t happen, servicers tend to shrink and go out of business.”

Real demon

Serious as these challenges are, in some respects they are merely the outer circles, while the real demon at the centre of Italy’s NPL nightmare is its judicial system – and how it protects entrenched interests, including company owners while hurting the banks, the economy and even the companies themselves.

Even in parts of the country with faster courts, the whole process from default to repossession can last 10 years, and probably much longer. At Gardenia Orchidea, for example, the oldest supplier debt goes back 15 years, indicating its problems, like many others, have not been sudden.

Given the banks’ reticence to push a firm into bankruptcy (partly because liquidation takes so long), a typical default can take more than three years to get to a formal court reorganization, perhaps after two or three debt extensions – and all the while suffering cuts to marketing, people and suppliers, probably forcing it to go further downmarket. 

The sluggishness of the whole process weighs on the eventual recovery rate (less than 30% in bankruptcies, according to Bank of Italy) because the underlying assets have suffered such long years of underinvestment. Only 5% of court reorganization processes succeed in Italy, according to an IMF report. This makes it hard for banks to have the confidence to give new working capital to tide over distressed firms to the next client payment, never mind giving them finance for investment that might help them rebound more decisively, like Emil Ceramica.


But what is most frustrating for creditors is how family owner-managers can use the legal system and its delays as a weapon to get banks to allow them to remain as shareholders or even management, while putting in minimal or no new money – partly as all sides know how little the banks will recover if they opt to push the firm into liquidation. 

Shareholders are reluctant to cede control in Italy, partly because, so often, the brand of the manufacturer and the company itself have the same name as the owners. It would be like moving out of an ancestral estate. It means a poorly performing company is more likely to make the same mistakes: perhaps an octogenarian founder pulling the strings and running the firm as if it were the golden era of the 1960s, rather than bringing in younger, more international and finance-orientated management. 

At Gardenia, perhaps tellingly, the door opposite Mazzanti indicates Massimo Bonezzi, the founder’s son, still president and finance director – though Mazzanti says this position is held by another long-standing employee, Giuseppe Ferrari (unrelated to the carmaker).

Regional banks, meanwhile, might find it especially hard to push for change as they can be more vulnerable to local political pressure to cut slack to employees and owners, who are sometimes local powerbrokers with influence on the board. For example, until a few years ago, one of BPER’s board members was Piero Ferrari – heir to the carmaker of that surname, based a few kilometres away. 

As part of a wider governance clean-up after 2011, BPER decided greater distance between Ferrari and other clients was in order. Yet links to the local industrial lobby persist, as in other Italian banks, and creditors’ ability to defend their interests is also harder in Italy as industry lobbies combine with left-wing sentiment against bank-engineered reorganizations, especially if they are likely to lead to job losses. Redundancies, after all, are even more politically sensitive in economically depressed times and places.

At both Emil Ceramica and Gardenia Orchidea – like so many other Italian SMEs – the original founders of both firms still hang on in the governance and shareholder structure, half a century on, despite their recent brushes with bankruptcy. 

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Emil Ceramica CEO Luca Majocchi

CEO Luca Majocchi is the only board member from outside Emil Ceramica’s founding families. After his arrival in 2012, Majocchi says he started by selling back stock and changing staff incentives, while insourcing profitable businesses and buying start-of-the-art machinery. 

Today Emil Ceramica’s turnover may still be a fraction of its pre-crisis levels. But Majocchi, formerly head of UniCredit’s operations in Italy, and a man with immense enthusiasm and energy, says the essential change was simply a basic refocus on profit rather than sale volumes. “We started to sell more of the more profitable products and less of those that were selling at a loss.” 

This focus on revenues and minimising the tax bill, rather than cash generation, he says, is common to many small and mid-sized family run firms in Italy, not just Emil Ceramica. “Entrepreneurs tend to be good at sales and production, but not many SMEs in Italy are good at financial management,” he says. “Usually family owned companies find it more difficult in a recession… No one knew what the cash-flow generation was when I entered the company.”

Aggressive tactics

Emil Ceramica was perhaps unusual in its owners’ ability and willingness to put in new money and give free rein to Majocchi. But aggressive tactics would have been unlikely to succeed, according to Majocchi. In smaller family owned firms, he says the exercise of power that might be possible in larger or listed companies has to be shunned in favour of building consensus. 

“It’s a pull more than a push. Otherwise they’ll fire you after a year,” he says.

Added to the threat of delays in liquidations, numerous formal barriers to creditors’ powers exist in Italy’s legal code, even when firms are facing liquidation. A&M’s Bianchi complains about a persistent lack of alignment with criminal law, making banks unlikely to make bold moves such as enforcing share pledges against companies facing bankruptcy for fear of being prosecuted later for aggravating the firm’s problems.

Federico Sutti, managing partner at Dentons law firm in Milan, points to the effective veto of current shareholders in debt-for-equity swaps. In Chapter 11-style procedures, known as ‘concordato preventivo’, he agrees that it is too easy for owners to retain control and later regain ownership in reorganizations ostensibly designed to bring in new capital, by splitting the company and leasing a debt-free part to a related party, before going to court to leave the debt with the banks.

Compared with the last decade, there is clearly an intention today to reform the law in Italy and make it easier to work through the NPLs and improve their prices in the secondary market, whatever the chances of success. The government has instituted a series of changes over the last two years that should speed up repossessions and increase the influence of the creditors in bankruptcies. More of the process can now be carried out electronically, for example.

This may have contributed to a shift in the tone of negotiations as seen, perhaps, in last year’s debt-for-equity swap in a €2.4 billion bank debt restructuring of energy firm Sorgenia, previously part of the Benedetti family empire. 

“Five years before, the same situation would not have been possible,” says Igino Beverini, deputy head of Lazard’s Italy office. “It would have been: either accept the company’s plan and take a hit, or go for liquidation. The changing of the legal environment is allowing different outcomes now.”

Italy NPL Galleria-Marble-250

Versace-branded tiles from
Gardenia Orchidea attracted
buyers from oil-rich states
now suffering downturns

Perhaps the single biggest change in the law, made earlier this year, is to allow out-of-court repossession: after 18 months of non-payment, with the exception of households and micro-businesses, the lender becomes the owner of the collateral with no, or very little, judicial intervention. Allowing bids below the starting price in auctions from mid 2015 has also improved the liquidity of collateral, increasing the proportion of sales from 17 to 25 out of a 100 auctions, according to Italfondiario’s Balbinot. 

“Bankruptcy and collateral enforcement reform is rebalancing the negotiating powers between borrowers and lenders in Italy,” says Sabatini at the ABI. He adds that the corporates themselves are coming round to the advantages of being better able to recoup credit they have extended as suppliers. Indeed, Gardenia owes twice as much to suppliers (around €30 million) as it owes to the banks. 

“The attitude has changed; entrepreneurs have recognized the importance of more certainty in business relationships on the credit side,” says Sabatini.

Nevertheless, solving Italy’s bad-debt problem will need more than tweaks to a few rules; the problems in the judicial systems and at the banks and companies run deep. The reforms are “not a magic wand” to make NPLs vanish, Sabatini admits. For a start, unless companies voluntarily agree to it, out-of-court repossession is only for new loans, so only has an indirect effect on the stock in the extent to which it eases up the pressure on court time.

No one Euromoney spoke to can point to a prominent example where a bank had made use of last year’s change in the law to allow creditors to put forward their own plans in concordato preventivo files, for example. Sutti says that is probably in part because legislators stipulated at the last minute competing plans could only be put forward if the debtors’ plan would pay back less than 20% of unsecured credit. 

“The reforms are moving in the right direction, but they’re not enough to speed up the legal process at the pace we’d like,” says Banco Popolare general manager Maurizio Faroni.

One problem is that the urgency and the need to show progress have meant the government has had a scattergun approach to reform, often acting via decree, further adding to the complexity of the system – already one of its biggest challenges. 

Legal complexity is a main factor why debt in Tirreno Power, for example, has remained illiquid since last year’s $1 billion restructuring, the largest in 2015, according to Pietro Braicovich at Leonardo & Co, one of the advisers.

An expert body linked to the ministry of justice, known as the Rordorf Commission, proposed an entirely new framework to solve this complexity, replacing a law that has been built on and added to since the 1940s. As regional variance between court efficiency is partly due to a lack of specialization outside big cities like Milan, the commission even suggested setting up a dedicated enterprise court for each region. But the proposals have come up against opposition in the public sector, according to a lawyer close to the process. After some movement in the spring, it appears to be going nowhere – much like the crates of Versace tiles sitting outside Gardenia Orchidea. 

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