The year 2004 represented a breakthrough for the Italian market in terms of restructuring regulations. The dramatic changes to the insolvency laws amid the turmoil of the Parmalat restructuring situation represents the preliminary opening for a shift in culture that should, over the longer term, result in a restructuring environment more like those of the UK or the US.
Changes of this magnitude will require companies and their legal and financial advisers to take a combined and new approach to manage the gap between situations of underperformance and full-blown distress, and engineer the appropriate solution.
The restructuring framework
The debate on the need to reform the bankruptcy system started even before the Parmalat case exploded. It was set in motion by the fact that fully satisfactory rehabilitations and operational protection were not reached in the Cirio and Giacomelli cases.
The new insolvency law, the so-called ‘Marzano Law’, was issued on 23 December 2003 in the turmoil of Parmalat, in order to accelerate and facilitate the financial and operational restructuring of large insolvent enterprises. The law has been amended several times, most recently to allow troubled airline Volare to access the procedure.
Until the Marzano Law, no insolvency procedure was meant to facilitate a ‘going concern’ reorganisation. The so-called ‘Supervised Administration’ implies a simple two-year maximum ‘moratorium’ on the collection of pre-petition debts, while the ‘Extraordinary Administration of Large Companies’, or ‘Prodi bis’, was originally intended to facilitate the reorganisation of large companies while ensuring the continued operation of the business. However, it proved to be very bureaucratic and inflexible. In most cases it resulted in the liquidation of the relevant company.
Indeed, until the Marzano Law, the bankruptcy regime was governed by rules and laws from as far back as 1942. It resulted in court-driven and extremely bureaucratic procedures that, although inspired to ensure total protection for the creditors, in reality resulted in value-destruction procedures.
The Marzano Law attempts to address the main concerns related to the existing system.
The need for speed
The accelerated timetable establishes the appointment of the ‘Extraordinary Commissioner’ upon the opening of the procedure. This allows the full 180 – or the extended 270 – days to elaborate the restructuring plan, as opposed to the 90 days allowed by the Prodi bis, which only starts after four months from the commencement of the procedure.
Treatment of creditors
The Marzano Law sets forth groundbreaking changes on the creditors’ positions and treatment. The purpose of existing insolvency laws was to place all creditors according to their order of priority. The Marzano Law allows the Special Commissioner to create different creditor classes and, accordingly, to elaborate different restructuring plans.
Moving away from bureaucracy
The other main difference between the Prodi bis and the Marzano Law relates to the role of the court. Under the Prodi bis, the court is responsible for the assessment and determination of the insolvency of the company; under the Marzano Law, though, the court declares the commencement of the insolvency some time after the company has been admitted to the Extraordinary Administration by the Italian Industry Minister.
The out-of-court alternative
Away from the Parmalat limelight, there were the out-of-court restructurings of Italtractor and Fantuzzi, pushed by a general shift in European culture towards more consensual and negotiated restructurings. The two cases present clear similarities: both companies had issued bonds that could not be repaid at maturity from cashflow and, in the wake of Cirio and Parmalat, they could not find local or international providers for a refinancing. Both companies renegotiated the terms and extended the duration of the bonds and the bank debt, although in both cases the restructuring of the bonds was pushed into the boundaries of a public offering circular by the Italian market authorities.
In both the Fantuzzi and Italtractor situations, the companies reached significant levels of distress before company executives embraced a full financial restructuring. Only the cooperation and support of local banks and negotiations with bondholders (the latter especially in the Fantuzzi case) ensured that insolvency was avoided. However, such late intervention achieved a renegotiation and rescheduling of the level of debt to address the current situation of the companies; but it may not necessarily represent the real solution to the problem in the long run.
Lessons and trends for the future
The application of the Marzano Law, as well as the experience of the recent out-of-court restructurings, demonstrates how the Italian market has realised the importance of fast restructuring and turnaround. It also shows that the first step towards a successful restructuring for a company is represented by an honest and proactive approach to the problem.
The approach of creditors, especially local lenders, seems to be shifting from a reactive and passive role to a more active approach. Nevertheless, many international institut-ional investors, especially bondholders, remain frustrated by the limited role they have had in transactions to date when compared with UK and US-style committee-driven restructurings, where they are more deeply involved in determining the outcome of a restructuring.
However, the next stage of evolution in Italy’s restructuring regulations should result in a more consensual and interactive approach. The implementation of the banking directive Basel II, and the related tightening of rules concerning the treatment and coverage of non-performing loans (NPLs), could result in local banks disposing of their NPLs to institutional distressed investors, thereby accelerating the secondary market debt trading trend. This in turn could lead to the next wave of refinancing and become the catalyst for wider change in the system.
Stephen Aulsebrook is co-chairman and Federica Sambiase is amanger in the corporate restructuring group at Close Brothers Corporate Finance