It would be wrong to say that other countries outside the Anglo-Saxon circle are feeling smug at the credit-crunch crisis, fuelled in large part by what may seem, in hindsight, an unwise rush into sub-prime home loans, that has already claimed banking victims in the UK and the United States. But there is certainly a sense of relief in places such as Italy that local bankers have been considerably more cautious than those in New York or Newcastle upon Tyne.

At Simmons&Simmons Italy, one of the country’s leading legal firms, which has 120 to 130 lawyers in Rome, Milan and Padua and which specialises in work for clients in the financial sector, senior partner Filippo Pingue says: “We do not have doubts that the Italian banking system is really solid. The sub-prime issue has not involved Italian banks.”

The Italian banking sector has seen a fair degree of consolidation in the past three or four years, leaving two giants, Intesa Sanpaolo, and Unicredito, and a good handful of smaller operators, including Banca Monte dei Paschi di Siena, the oldest bank in the world, dating back to the 15th century, which recently acquired Banca Antonveneta in the north-east of Italy. “None of these banks had sub-prime loans among their assets,” Mr Pingue says. “But although the situation for Italian banks is very good, now, after what’s been happening, they are very cautious about where they invest their money. However, if we did not have a situation like Northern Rock, or Bear Stearns, I’m sure the Italian government would persuade another bank to take over the bank in difficulties.”

Simmons&Simmons Italy is certainly in a position to comment on the state of the Italian financial sector: its client list is a blue-chip line-up of names both domestic and international, including Intesa Sanpaolo, the biggest domestic banking group in Italy, with approximately 5,500 branches serving 12 million customers, UniCredit, now the second-largest bank in Europe after HSBC, and Cassa di Risparmio di Firenze, all from Italy, as well as JP Morgan, Nomura, West LB, Morgan Stanley and Deutsche Bank.

Substantial deals
The company has been involved in some substantial deals over the past couple of years, including advising Mediobanca, another Italian investment bank, and Nomura on the €1.8bn securitisation of healthcare receivables in the Lazio region and advising Capitalia, the former Banca di Roma, which merged with UniCredit last year, on updating its €20bn medium-term note (EMTN) programme.

In the past year, Mr Pingue says, the Italian bond market has been comparatively quiet, and “we have been more involved in restructuring of bond issues than the issuing of corporate bonds.” Among the operations Simmons&Simmons has been involved in are the continuing saga of the Italian food group Cirio, which collapsed in 2002 with more than €1bn of debt – the firm represent Law Debenture, trustee of the group’s bond issues, and Pingue sits on the creditors’ committee of Cirio, having been appointed by the Minister of Production Activities to supervise the activities of the group’s receivers. Other rescue missions of Simmons&Simmons and the distressed debt team lead by partner Nino Lombardo include restructuring the bond issues of a couple of middle-cap companies, one a port equipment manufacturer, Fantuzzi Reggiane, and the other being Italtractor. “They had bond issues of respectively €125 and €100m and we organised under a legal point of view a postponement in payments agreed by a bondholders’ meeting,” Mr Pingue says. As a result, “essentially Italtractor didn’t go bust and they have been able to reimburse the bondholders entirely. The same is going on for Fantuzzi Reggiane.”

Overall, Pingue says, “corporate bonds have not been historically a large market in Italy”. After the Cirio and Parmalat scandals earlier this decade, “Italian corporations have been a bit reluctant to issue corporate bonds.” The average issue size is around €50m – small stuff, Filippo Pingue says. The bonds are issued for specific reasons, such as acquisitions, refurbishment of production processes, or to support investments, and generally what happens, he says, is that a bank itself, looking to have a bit more of its portfolio in bonds rather than loans, “goes to the company and says. ‘Would you like to issue a bond, I will subscribe to the bonds’ – it’s not a public placement, more a relationship between the bank and its client. They are institutional deals.” Bond issues are also used by unlisted companies “just to put a toe into the international capital markets before an IPO.” Mr Pingue says.

For Simmons&Simmons, banking and corporate bond issues “are not really a profitable segment of the market, but since we want our top financial institutions clients to consider us as a one stop shop, we have decided to invest in the segment,” Filippo Pingue says.

Raising cash
Once the credit crunch is over, Mr Pingue expects the bonds market to expand in Italy, across companies of all sizes looking for ways to raise cash: “The big companies have always suffered from a lack of capitalisation. In terms of medium companies, there’s a lot to do in terms of acquisition financing, leverage finance, which will continue to be a solid and substantial market. And in relation to premium small-cap companies, they are very active, and the financial markets can support their growth.”

On the securitisation side, “the main assets in Italy for securitisation have been residential mortgages,” Mr Pingue says. “The law regarding securitisations was enacted in 1999, and as soon as it was passed the banks securitised their non-performing loans. After that they started securitising the residential performing loans and eventually it came the time of personal loans.”

The notorious slowness of Italian bureaucracy, particularly its slowness in paying money due, has also meant that VAT credits are another area where securitisation has been taking place, where “a bank buys the VAT receivables and put them on its own balance sheet, or using a credit default swap to reallocate risk,” Filippo Pingue says.

But the dominant area for securitisation, at least from 2003 to 2007, has been the securitisation of health care receivables. These are the receivables due to the suppliers of medical goods from the Italian regional health care system. Up to 60 or 70 percent of an Italian region’s budget is made of health care expenses, and the global health care expenses market in Italy is around €100bn. “But Health Care Units in Italy do not pay on time, and so suppliers sell on these debts to specialist vehicles,” Mr Pingue says. “You can understand that it is a big market. We at Simmons&Simmons as a firm have been the most active in this sector – we were the first, we opened up the market with our banking partners, both Italian and foreign banks,– Intesa San Paolo, UBS, Nomura, Mediobanca, JP Morgan, The deals were as big as €1.8bn, €600m, etc.”

After a change in the law in 2007, however, “this kind of securitisation has been made more difficult to structure,” Mr Pingue says. “But, of course, the market finds other ways, alternative ways and we continue to work in the health care field.”

More cautious
Even though Italian banks do not have the sub-prime loans problems hitting the financial markets in the United States, the current situation has still made securitising property assets a little more difficult, Mr Pingue says, as institutions become even more cautious: “We have been involved in three residential mortgage-backed securities (RMBS) transactions in the past four months, which is quite a good result, but the RMBS market now is going rather slowly.”

Commercial mortgage-backed securities, on the other hand, have never taken off in Italy, largely because the Bank of Italy, as regulator for the banking sector, has remained sceptical about the safety of such deals, Mr Pingue says. “You have a bank or a number of banks that make loans to a property company to buy something, then the banks would like to securitise their loans. But usually the commercial rent fees do not ensure the same stability for the repayment of the bonds.”

All the same, he says: “I believe that securitisation will continue to be a very good funding source for banks. From time to time the securitisation market is able to find new eligible assets – healthcare has been one, from 2003 to 2007, then it disappeared, but I believe we can have other assets that will be discovered by the market.  We advise a number of banks on the investment side – they call us, they ask our opinions, we work closely to find new assets out in the market. We are considered a point of reference for banks, especially foreign banks.”

One brand new vehicle for financial institutions in Italy is covered bonds, bonds backed by mortgage loans, or receivables from the public sector, which were made legal in Italy only last year, despite being popular in countries such as Germany. Covered bonds, which are issued by eligible banks, come with a double guarantee that is likely to make them more attractive to both institutional and retail investors, Mr Pingue says. As yet, however, despite comments from big banks such as UniCredit that they are likely to move into the covered bonds market this year, no Italian financial institution has yet issued such a bond. The banks, Mr Pingue says, “are studying the situation. I don’t expect covered bonds on the market before the end of the year.” When they do start to come on to the market, however, Mr Pingue expects that they will eventually be “quite a plain vanilla transaction, as they are in Germany for instance, or in other countries. People will come to see them as just another investment they ought to have in their portfolios.”

Sharing risk
Overall there is no one fund-raising structure that is most popular in Italy, Mr Pingue says, although the mezzanine structure for corporations is an increasing way of raising funds, mixing debt and shares. The reason for this is simple, he says: “The banks must accept the fact that they must share the risk with the entrepreneurs. We are involved in a number of mezzanine structure deals.”

Meanwhile, despite the turmoil across the Atlantic, Filippo Pingue remains optimistic about the future for the Italian financial markets, although he says: “We still don’t know if we are in a baby fall or a big-sized one. I felt at the end of last year we were in for a crash. Now I am a bit more optimistic. But in my opinion we have not touched the floor yet and we need to wait for this to happen overseas – and overseas means the US.”

For further information
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