The untouchables

The international credit crunch has been playing out in several countries against a backdrop of ;political ;nomination campaigns and elections. Think of the US primaries and the recent elections in France and Spain. Italy is poised to vote in general elections in mid-April, but the credit crisis has yet to bite.

The consensus among economists and bankers is that the subprime crisis will have little effect on the Italian credit system. The governor of the Bank of Italy considers the impact of the crisis as “fully sustainable”. Only 40 Italian banks have notified exposure to subprime and Alt-A loans, which does not exceed e4.9bn (£3.93bn), equal to less than 3 per cent of regulatory capital.

Nevertheless, in common with the other major European economies, Italy will struggle to escape entirely unscathed from the surrounding financial turbulence, as banks scrutinise carefully their fundraising and lending activities. Such scrutiny will be conducted for the first time by an Italian banking sector that has undergone significant consolidation and the newly formed groups look set to approach the crisis of confidence among international lenders in a more coordinated way than might have been the case in the previously highly fragmented sector.

The pace of securitisations has also slowed dramatically and this has been a major source of working capital for many of Italy’s large and medium-sized businesses, which are forecasted to increase their credit demand by around 9.5 per cent this year as raw materials and fuel costs spiral. This credit need may be met in part by traditional on-demand facilities that have also been a stalwart of Italian business finance. There are also some signs of mezzanine finance sprouting up to fill the gap in coverage between debt and equity.

If the tightening of credit availability is not solved by alternative finance, we may see the failures of basically sound businesses that fall victim to poorly organised financing, leading to opportunities for investment in distressed assets or for turnarounds facilitated by recent reforms of Italian insolvency law.

The fall in value of stocks listed on the Milan Borsa, which are often pledged by their owners as security for financing, is causing banks to evaluate their exposure to such risks. Forced sales, such as that by Royal Bank of Scotland of almost all of Italian holding company Hopa’s 3.7 per cent stake in Telecom Italia, pledged to the bank as security for financing granted to the holding company, could well become a feature of corporate lending if the market fails to rally.

The potential credit squeeze may stimulate Italian business to look increasingly to international industrial players in their sectors for equity to fund growth, creating new business relationships in joint ventures or with new minority investors. These also offer enhanced management skills, technical prowess or global opportunities as Italian companies, in the face of a decline in domestic demand, seek to expand into new markets despite the euro’s record high levels against most currencies.

Private equity, both domestic and international, is playing its part in the steady flow of investment into Italy. While mega-deals, which are always elusive in Italy, may be even harder to hunt down in current market conditions, mid-market deals, sometimes involving listed targets, have grown to quite respectable levels. This is shown by Audley Capital Management’s acquisition of 67 per cent of software specialist TAS Tecnologia Avanzata dei Sistemi, followed by a mandatory takeover offer, and the take-private of Ducati launched in February this year by Investindustrial and BS Investimenti for e390m (£312.96m), which awaits antitrust clearances.

On the fundraising side, the Italian mid-market (covering e100m-e1bn (£80.25m-£802.45m)), where more than e2.1bn (£1.69bn) was raised, showed one of the strongest gains across the whole of Europe in 2007; and this year Italian fundraising looks set to break new records, with three major players – Investitori Associati, Investindustrial and Clessidra – all seeking, or having already raised, e1bn (£802.45m) or more.

There are some signs that the significant resources already collected by private equity funds are being tapped for Italian deals. In the first two months of 2008 there were 24 private equity deals, all in the mid-market. One trend is the taking of minority interests by private equity funds as a foothold in the sector or business with a view to exit alongside the founders in due course – see for example Investitori’s acquisition of a 50 per cent interest in fashion group Aspesi.

As ever, it is a complex picture, but despite uncertainties in the financial markets, that jewel in Italy’s crown – the swathe of profitable mid-market enterprises – continues to glitter, attracting international investors prepared to leap the hurdle of the strong euro, while Italian businesses look abroad for new markets. It looks as though Italy’s resistance to the credit crunch may even survive the country’s next government, whichever political party is elected. nLeah Dunlop is managing partner at Lovells Italy