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Owen Sanderson

Leveraged finance in Italy can be a painful process, thanks to a combination of legal and tax issues that force borrowers to use bond markets, instead of loans, to fund buyouts. Now a possible solution has come a step nearer.

Allen & Overy said it had advised on the first use of UniCredit’s Agora securitisation vehicle for a leveraged finance transaction, which “involves both the refinancing of existing debt and the granting of new finance… by leading private credit funds in the context of a pool of financing entities that includes UniCredit”.

The ‘Italian FRN’ is a mainstay of European leveraged finance, and replicates as closely as possible the economics of a leveraged loan, as would be used anywhere else in Europe. But withholding tax, combined with the Italian banking monopoly rules (loans can only be made by banks) mean that syndicated LBO finance ends up exclusively in bond format.

This has worked for years, but it’s still a major pain point for sponsors and lenders alike. 

It’s more costly to do a bond, given listing requirements and the scope of the Market Abuse Regulation in Europe. But the bond format also makes it much harder to execute amendments or waivers, covenant resets, add-ons and other changes. Each change can take months to put in place, and incur costs of perhaps €100k per time to run through convening noteholder meetings, consents and notarisation.

It’s possible to work around some of these problems using an Italian law securitisation SPV — as we discussed in January 2022, when UniCredit’s Agora Finance vehicle was first used to fund sponsor-backed real estate lending.

This approach has since become widely used in real estate finance. Most large bank real estate teams are quite comfortable using SPV structures, since these often occur in CMBS and CRE repacking / back leverage deals, and this has helped the adoption of securitisation SPVs in CRE lending in Italy.

Sometimes this is done on a deal-by-deal basis, but two other banks have similar platforms to UniCredit, giving a useable platform for regular issuance, with some common terms and documents. Individual deals can be done through a securitisation ‘compartment’, a sub-vehicle to the main Agora platform.

Italian private credit loans incur a particular credit risk — which is arguably underpriced by the market. Even if a loan is repaid, it can still be clawed back through a subsequent insolvency process, potentially any time in the next two years. Lending through a securitisation vehicle, however, carves the loan out from clawback.

As part of using the Italian securitisation law, a bank is required to keep 5% of the net economic interest, across drawn and undrawn facilities, meaning mixed bank and private credit lending groups if using these structures.

Crucially, although Agora and vehicles like it are securitisations under Italian law, they are not securitisations under the EU Securitisation Regulation — they are not tranched and have no subordination. That means they’re outside the burdensome reporting requirements for securitisations.

Bonds issued from these vehicles can also, in theory, be held by other securitisation vehicles. Resecuritisations (securitisation bonds inside securitisations) are banned in the EU, but only with reference to the EU definition of securitisation.

This potentially would allow CLO investors to participate into Italian leveraged loans structured through an Italian securitisation vehicle.

‘Italian FRN’ workaround appears in levfin

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