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Owen Sanderson

The “Italian FRN” is a staple of the European high yield market — a financing which, in any other European jurisdiction, would have been a broadly syndicated leveraged loan, but which comes out in the bond market thanks to the onerous regulatory issues around syndicating loan exposures.

Looking across all of 9fin’s bond data, back to 2011, the senior secured FRN volume in Italy far outstrips other European jurisdictions — even those with substantially larger leveraged finance markets — thanks to this trend.

The basic problem is a rule, once common in Europe, that only Italian lenders (meaning banks with a licence from the Banca d’Italia) can lend to Italian companies. Foreign banks and institutional investors are not authorised to participate — though EU-regulated banks can passport in.

It was historically possible to syndicate loan exposures in Italy, but not easy — the mechanism is called a “fronted loan”, in which a bank makes the loan, but is granted a “credit mandate” by an investor, which is converted into a back-to-back loan agreement. 

This gives the investor economic exposure to the loan and de-risks the bank, but, thanks to Italian regulation, foreign fund management companies (including the majority of European SMA loan investors and all CLOs) cannot be lenders in their own right into an Italian LBO.

But this system has been challenged in recent years. The Italian supreme court, in 2019, judged a fronted loan structure with a foreign bank (based in the landlocked principality of San Marino, surrounded by Italian territory) and an Italian bank to be illegal, a breach of the requirement for an Italian banking licence.

This effectively ruled out most fronting structures as a route for foreign non-bank capital, except in very specific circumstances, and encouraged lawyers and arrangers to look for another route.

One workaround is to use securitisation special purpose vehicles (SPVs). Italian securitisation law permits securitisation vehicles to be lenders (since these entities have loans transferred into them as part of the securitisation process).

This comes with the tacit blessing of the Italian authorities — the securitisation law has been amended in 2020 and 2021, allowing securitisation vehicles to lend directly, and allowing securitisations to be financed by loan notes, rather than bonds.

The structures used so far simply repack the economics of the loan into a securitisation vehicle, and issue a securitisation bond from the other side, which investors can purchase, trade or hold as with any other fixed income product.

Because these SPVs are not tranched or credit-enhanced, they are not considered securitisations as far as EU law, the Capital Requirements Regulation, or the Securitisation Regulation are concerned — greatly simplifying the regulatory burden associated with the process. There is no need for risk retention, Securitisation Regulation diligence or disclosures, and no need for securitisation-based risk weights for credit institutions, to take just three points.

They simply use the Italian securitisation law to repack the loan into a distributable bond format.

This process has been used for real estate lending (packaging a commercial mortgage into a securitisation SPV isn’t very different from structuring a CMBS, and a tax ruling last year confirmed the process), and more recently for infrastructure and project finance loans — Societe Generale, as lender and arranger to a telco infrastructure asset (undisclosed), used a securitisation to distribute part of this risk to an international asset management company, including both drawn and undrawn portions of the facility.

Now the technology has been applied to an acquisition loan, with UniCredit using a securitisation to distribute its loan to an undisclosed company for “holding an equity stake in industrial and real estate entities”.

UniCredit, as Italy’s largest lender, has gone a step further, setting up a standardised SPV platform, Agora Finance Srl, allowing it to cut the costs of repeated loan distributions through standardised documents and reusing the same entity.

Allen & Overy advised on both the Societe Generale deal and the UniCredit deal and platform.

This first acquisition loan only went to a single lender, a “fund managed by a leading international alternative investment manager”, according to the release. 

Because the technology is new, banks looking to distribute loans in this format will have to go through extensive investor education to get potential lenders comfortable with the structure. 

Some investor mandates may also exclude “securitisation” notes, even if these are only securitisations under Italian law. 

CLOs are excluded from buying “structured finance securities” — though in one CLO we examined this refers to securities which represent ownership of a pool of assets, meaning a single loan in a securitisation wrapper could be eligible. Even if it is, however, a broadly syndicated LBO is likely to find more demand at the margins by coming out in familiar bond format.

Provided investors (including CLOs) are professional investors from tax “white list” countries (a very long list), they will not have to pay withholding tax on the investment, crucial to making the structure work. 

Preparing a bond is more cumbersome — all the structural complexities of any LBO financing, plus 144A, listing, reporting, and tax — but this is likely to be offset by the tighter pricing available from drawing in all possible investors. Doing a bond also typically requires three years of audited financials, which can be a problem for corporate carveouts. The securitisation structure does not include this requirement.

The securitisation technique is likely to find wider acceptance in infrastructure and project finance deals, which don’t always suit bond format — lending groups are usually smaller, and terms more likely to be revised. Project or infra lending is also more likely to be partially drawn, adding to the difficulties of structuring a bond to match, and encouraging banks to look to alternative solutions.

Enforcement of security works similarly to any other securitisation — it is via the representative of the noteholders, a role equivalent to an English law trustee. Noteholders are able to take actions or give directions if the representative fails to do so in a short timeframe.

Other Italian banks active in wholesale lending and syndication are likely to be looking at similar structures, 9fin understands, and it is expected to become an increasingly active route around the problem of selling down Italian financings.

Are the days of the 'Italian FRN' numbered?

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