Government decree paves way for direct lending in Italy

New rules will make it possible for international debt managers to originate loans for Italian companies and real estate investments, and result in cheaper deals for borrowers.

The Italian government has passed new lending rules that will make it easier for international debt managers to make direct loans to Italian companies and for real estate deals.

The decree passed by the Italian government and published in the county’s official law gazette removes significant uncertainty about whether or not international and domestic funds could originate and make new loans – or simply invest in existing loans. The changes are designed to stimulate more investment by international debt firms, and lower costs for Italian borrowers through increased competition.

“The decree is extremely helpful, since – for the first time – it sets out the requirements for non-Italian credit funds to originate and complete loan transactions as ‘original lenders’, like banks and financial intermediaries, do every day in Italy,” said Mario Lisanti, a partner at law firm Norton Rose Fulbright.

Under the terms of the new decree, European alternative investment funds will be entitled to originate and make direct loans in Italy, provided they comply with certain conditions. In order to make loans in Italy, the credit fund must be authorised to carry out direct lending in its home country; the fund needs to have a closed-ended structure which is also similar to the structure of Italian credit funds; and the fund must meet certain risk diversification or leverage limits.

Italy’s parliament has 60 days from the publication date to convert the decree into law, meaning the new rules are expected to be fully effective during the second quarter of 2016. Foreign debt managers must notify the Bank of Italy of their intention to commence direct lending in Italy, and can only start making loans 60 days after that point.

The new decree is part of an ongoing package of measures to make inward investment easier and stimulate the Italian economy under Matteo Renzi, the Italian prime minister. New lending by the domestic banks has been severely hampered by bad loans that are estimated by the IMF to exceed €300 billion and account for over 15 percent of total bank loans.

International firms, including Blackstone and KKR, have already established joint ventures with Italian banks including Intesa Sanpaolo and UniCredit to provide loans Italian companies. However, the new decree will open the market to a broader field direct lenders already active in Europe, or keen to establish operations that comply with the new Italian laws. By allowing firms to compete for loan transactions, as opposed to more costly bonds, borrowing should become easier and cheaper for Italian companies.

“Several major asset managers in the credit space are now able to focus on the Italian market by implementing a regional or country-specific strategy,” Lisanti said. “The new rules improve the legal framework on alternative lenders and make it easier for non-Italian credit funds meeting certain conditions to complete deals in Italy.”

A few alternative lenders have done deals in Italy, including Tikehau and GSO Capital Partners, which has executed three deals via its partnership with Italian bank Intesa SanPaolo. The latest reform is the completion of a long-running process to open up the Italian credit market to a variety of lenders beyond banks.