Italy
Common forms of guarantees
Guarantees can take a number of forms.
A particular distinction worth remembering is between a personal guarantee (fideiussione) and an autonomous first demand guarantee.
- A personal guarantee (fideiussione) is a strictly regulated form of guarantee. Some of its main features are that:
- it remains valid only if the underlying guaranteed obligation is valid;
- the guarantor is entitled to object to a payment request by invoking the exceptions and objections which pertain to the debtor in the interest of which the guarantee was issued (the relevant debtor);
- the guarantor may, before paying and under certain conditions, act against the relevant debtor to be released from the guarantee or to obtain due counter guarantees or counter security for the satisfaction of its claims after the payment; and
- the guarantor is released if the guaranteed creditor has further financed the relevant debtor although it was aware of its difficult financial conditions.
- An autonomous first demand guarantee is intended as an instrument ensuring payment to the relevant creditor irrespective of the circumstances affecting the relevant debtor or the underlying guaranteed obligation if the contractual conditions/steps and procedures provided by the relevant agreement are met.
Both of the above described guarantees shall expressly provide for the maximum guaranteed amount should the guaranteed obligation be a future/conditional obligation.
Common forms of security
There are four basic types of security interest that can be created under Italian law:
- a mortgage;
- a pledge;
- an assignment by way of security; and
- a privilegio (general or special lien).
Different types of security are suitable for securing different types of assets.
Under Italian law it is not possible for a single security to cover all of the assets of an Italian company, but only individual assets or classes of assets. Granting security over all of a company's assets will tend to be achieved through the granting of the following multiple security interests:
- a pledge over movable assets (including shares/quotas of a company) or receivables;
- a mortgage over real estate assets or vehicles or ships;
- a privilegio (general or special lien) over movable assets different from vehicles and ships; and
- an assignment by way of security of receivables.
With respect to financial transactions it is customary to establish securities in the form of “financial collateral guarantees” according to Legislative Decree 170/2004 implementing in Italy Directive EC 2002/47. Financial collateral guarantees relating to financial transactions are documented as transfer-title pledge over assets granted by a transferor in favour of a transferee covering the exposure of one party to another under the relevant financial transactions.
In addition to the above, the following securities have been recently introduced in Italy:
- Security transfer of immovable asset; and
- Non-possessory pledge (not implemented).
SECURITY TRANSFER OF IMMOVABLE ASSET
A loan granted to an entrepreneur by a bank or another financial entity authorized to grant loans to the public in Italy can be secured by transferring to the creditor (or to a company in the creditor’s group authorized to purchase, hold, manage and transfer rights in rem in immovable properties) the ownership of an immovable asset of the entrepreneur or of a third party. Such transfer is subject to the condition precedent of the debtor defaulting. In such a case, the creditor is entitled to notify the pledgor its intention to enforce such security pointing out the amount of its credit; following such notification an independent valuer is appointed by the relevant Court in order to determine the value of the relevant immovable asset and consequently the sale process is carried out. The creditor shall pay to the pledgor the difference (if any) between the transfer price and the amount of its credit towards the pledgor.
NON-POSSESSORY PLEDGE
A non-possessory pledge allows the pledgor (who shall be engaged in entrepreneurial activities) to continue to use, transfer or otherwise dispose of the pledged assets for business purposes, provided that in such a case, the pledge would extend to any asset resulting therefrom. A non-possessory pledge agreement requires a written form and shall indicate a maximum secured amount. However, the pledge is enforceable vis-à-vis third parties only upon registration on an electronic register of non-possessory pledges to be set up. In this respect, since such electronic register has not been implemented, such security is not currently effective.
Are there any restrictions on lending and borrowing?
Lending
In general terms, under Article 106 of the Consolidated Banking Act the granting of loans in any form is reserved to duly authorized financial intermediaries enrolled with a Register kept by the Bank of Italy.
Specific exclusions are set forth in Ministerial Decree No. 53 of 2015, as well as cases in which the granting of loans is not considered as performed vis-à-vis the public.
In addition, loans can be granted also by Italian special purpose vehicles incorporated pursuant to the Italian Securitization Law. Such SPVs can carry out lending activity in the context of securitisation transactions, both in performing and non-performing scenario, in accordance with the specific requirements and limits set out under the Italian Securitization Law.
Borrowing
While borrowers are generally not regulated, it is advisable for borrowers to consider whether the consumer-lending regime applies to their activities, in which case they will benefit from some additional protections and benefits (such as, for example, in terms of limitations to unilateral amendments by the finance party and transparency rules).
What are common lending structures?
Lending in Italy can be structured in a number of different ways to include a variety of features depending on the commercial needs of the parties.
A loan can either be provided on a bilateral basis (a single lender providing the entire facility) or syndicated basis (multiple lenders each providing parts of the overall facility).
Syndicated facilities by their nature involve more parties (such as the agent which fulfils certain roles for the finance parties), are more highly structured and involve more complex documentation. Larger financings will typically be done on a syndicated basis with one of the syndicate taking the lead in coordinating and arranging the financing.
Loans will be structured to achieve specific purposes, eg mortgage loans (including credito fondiario in relation to the financing of real estate assets), working capital loans, equity bridge facilities, bridge to cash facilities, project facilitiesand, letter of credit facilities and export facilities.
Finally, loans can be 'in cash' (finanziamenti per cassa), when the lender makes available to the borrower cash, or through the issue of documental guarantees in favour of third parties in the interest of the borrower (finanziamenti per firma).
Loan durations
The duration of a loan can vary between:
- a term loan, provided for an agreed period of time but with a short availability period;
- a revolving loan, provided for an agreed period of time with an availability period that extends nearer to maturity of the loan and which may be redrawn on a roll over basis;
- an overdraft, provided on a short-term basis to support short-term cash flow issues; or
- a standby or a bridging loan, intended to be used in exceptional circumstances when other forms of finance are unavailable and often attracting a higher margin.
Loan security
A loan can either be secured, unsecured or guaranteed. For more information, see Giving and taking guarantees and security.
Loan commitment
A loan can also be:
- committed, meaning that the lender is obliged to provide the loan if certain contractual conditions are fulfilled; or
- uncommitted, meaning that the lender has discretion whether or not to provide the loan.
Loan repayment
A loan can be repayable on demand, on an amortizing basis (in instalments over the life of the loan) or bullet (usually meaning the loan is repayable in full at maturity).
What are the differences between lending to institutional / professional or other borrowers?
Lending to institutional/professional borrowers entails a reduced set of protections and limitations in favour of the borrower.
Lending activities towards retail clients and consumers in particular are subject to stricter provisions and limitations.
Do the laws recognize the principles of agency and trusts?
In theory both principles are recognized as a matter of Italian law, although the trust concept is not yet commonplace in the Italian market and is seldom present in common lending structures.
From a practical perspective, in finance transactions with more than one finance party an agent is always appointed to act on behalf of the finance parties. It is extremely rare to have trustees appointed in connection with secured assets as generally trustees may encounter legitimacy issues in enforcing security interests. Parallel debt structure is not recognized/applicable in Italy.
Moreover, the agent usually is granted with reduced representation powers when such powers are granted by hedging banks which, for example, often have more flexibility in the management of the security interests assisting their claims (although subject to the restrictions of any intercreditor agreement).
Are there any other notable risks or issues around lending?
Generally
Loan agreements and other finance documents are subject to general contractual principles.
However, certain principles of law cannot be contractually derogated and any contrary provisions contained in the finance documents would be null and void. As an example, finance documents may not provide for the exclusion of liability in case of gross negligence (colpa grave) or willful misconduct (dolo), and there are limitations to accrual and liquidation of interest (the Italian Usury Legislation applies in this case) and compound interest.
Furthermore, the enforcement of obligations of a party or the binding effect of such obligations may be limited by laws regarding bankruptcy, receivership, insolvency, liquidation, reorganization and any laws generally affecting the rights of creditors. In particular any payment made in advance in respect of its due date as originally agreed between the parties, including as a consequence of the acceleration of such payment obligation or as a result of the operation of any mandatory prepayment provision contained in the finance documents, may, at certain conditions, be deemed ineffective vis-à-vis the bankruptcy administration of the payer, pursuant to Article 65 of the Bankruptcy Law, and accordingly the bankruptcy administration of such payer may request the restitution of such payment.
In addition, it is worth noting that:
- In banking transactions, a loan facility (from an accounting perspective) constitutes an asset of the lending bank rather than a liability but Directive 2014/59/EU (Bank Recovery and Resolution Directive or BRRD) and the relevant powers of the competent resolution authority may still be relevant eg in relation to a bank's potential liabilities to other syndicate members in a loan or an inter-creditor arrangement.
- If a financial institution happens to be a borrower, then its liabilities to repay debt may be subject to bail-in.
Specific types of lending
Specific to the area of mortgage lending is the issue of whether a lender falls within the recently formed Italian mortgage regime. The Directive 2014/17/EU on credit agreements for consumers relating to residential immovable property, implemented in Italy through the Consolidated Banking Act and the Transparency Provisions, aims to prevent the irresponsible lending and borrowing practices that were exposed during the global financial crisis. The implementing regulations impose a number of requirements on lenders including the need to:
- conduct affordability tests before lending;
- provide standard information about the mortgage to enable borrowers to compare products; and
- ensure that staff are suitably trained.
Standard form documentation
It is quite common to see Italian law syndicated finance transactions governed by documentation based on forms published by the Loan Market Association (LMA), duly amended and integrated to be compatible with Italian law and Italian market standards. It is, however, also very common to see syndicated and bilateral finance transactions documented on bank standard form documentation prepared in-house or other simplified standard forms prepared by external legal advisors but diverging from the LMA.
Are there any other notable risks or issues around borrowing?
Borrowers should be aware of the potential implications of the BRRD, which outlines certain measures for dealing with failing financial institutions.
The BRRD applies to financial institutions incorporated in the European Economic Area (EEA), but does not apply to EEA branches of non-EEA incorporated entities.
Article 55 of the BRRD gives authorities the power to 'bail in' obligations of failed EEA financial institutions and also postpones the enforcement of early termination rights against the affected institution. 'Bail in' describes a variety of write down and conversion powers, such as the power to convert certain liabilities into shares or cancel debt instruments. In the case of EEA law contracts, such powers override what the contracts says. In the case of non-EEA law contracts, there are requirements to incorporate such provisions into the contract.
Luciano Morello
Partner
DLA Piper LLP
[email protected]
T +39 338 690 73 96
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