Italy

Author: | Published: 1 Dec 1999
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After a year-long legislative review, the Italian Parliament enacted Law no. 130 of April 30 1999 concerning the securitization of receivables by Italian originators. The Italian financial and legal communities have welcomed Law no.130 as a much needed improvement to the legal framework that Italian originators and their advisors face when structuring a securitization transaction.

Before the adoption of Law no.130, securitization transactions involving Italian originators had to be implemented through complicated structures, including foreign entities, to avoid the restrictions and limitations of the Italian legal system and unfavourable tax treatment. The principal obstacles created by the Italian legal system to the implementation of securitization transactions included:

  • burdensome formalities for perfecting an assignment of receivables from an originator to a special purpose vehicle;

  • the prohibition against the issuance by Italian companies of bonds for amounts exceeding their paid-in capital; and

the application of a 12.5% withholding tax on the payment of interest by an Italian issuer to holders (including any non-resident holders) of its bonds.

Law no.130 eliminates many of those restrictions and limitations and provides for favourable tax treatment, thus facilitating the structuring of Italian securitization transactions.

Scope

Law no.130 applies to securitization transactions implemented through the assignment for consideration of existing or future accounts receivable, identifiable en bloc, provided that:

  • the assignee is a securitization company, ie, a company having as its sole purpose the implementation of one or more securitization transactions; and
  • proceeds generated by the assigned receivables are used by the assignee exclusively to satisfy the obligations deriving from the securities issued by the securitization company to finance the acquisition of the receivables and pay transaction costs, for so long as such obligations remain outstanding and such costs unpaid (however, certain provisions of Law no.130 imply that such proceeds may also be used otherwise, see below, Prospectus and rating requirements).

Securitization company

A securitization company is subject to the same regime applicable to financial companies, eg, supervision of the Bank of Italy when certain quantitative thresholds are met; competence requirements for directors, auditors and officers; and moral standing requirements for stockholders, directors, auditors and officers. However, unlike financial companies, securitization companies need not have a minimum capitalization.

p>Receivables assigned to a securitization company in the context of a given transaction are segregated from other assets of the securitization company (including receivables assigned to it in the context of other transactions) and may be attached only by holders of the securitization securities pertaining to those receivables.

Law no.130 also indicates that the assignee of the receivables and the issuer of the securities may be two separate entities, both subject to the rules applicable to securitization companies.

Prospectus and rating requirements

Securitization securities are subject to the same regime applicable to other securities and their offer to the public in Italy is conditional upon the publication of a prospectus. Unlike other securities, however, the offer of securitization securities to institutional investors is subject to the publication of a short-form prospectus, the content of which is set forth by Law no.130.

Among other things, the prospectus for institutional investors must specify under what circumstances the securitization company may reassign the assigned receivables or reinvest proceeds generated by the assigned receivables, thus suggesting that such proceeds may be used for purposes other than paying interest on and the principal of securitization securities and transaction costs.

If the securitization securities are offered to the public, the credit-worthiness of the transaction must be assessed by a credit rating agency meeting certain requirements to be set forth by CONSOB (the Italian Securities and Exchange Commission).

Assignment of receivables and transfer of security interest

Under ordinary rules, an assignment of Italian receivables is:

  • valid as between the parties upon a meeting of the minds;

  • perfected vis-à-vis the assigned debtors upon (a) notification of the assignment to, or acceptance of the assignment by, the assigned debtors or (b) the assigned debtors' becoming otherwise aware of the assignment; and

perfected vis-à-vis third parties upon notification of the assignment to the assigned debtors or upon acceptance of the assignment by the assigned debtors through an instrument whose date may be established with certainty (eg, such as a notarial deed).

Under Law no.130, assignment of the receivables to the securitization company is perfected vis-à-vis the assigned debtors and third parties upon publication of an assignment notice in the Official Journal of the Republic of Italy. As of the date of such publication, the assigned receivables, and the proceeds generated by them, may be attached only for satisfying obligations deriving from the securitization securities and, although a strict interpretation of Law no.130 would indicate otherwise, transaction costs.

Liens and security interests of any kind securing payment by the assigned debtors are automatically transferred in favour of the securitization company (and maintain their priority ranking) without formalities or annotations upon the assignment of the receivables to the securitization company.

Bankruptcy provisions

Under ordinary Italian bankruptcy rules, payment of outstanding debts in the year or two years (depending on the circumstances) prior to the adjudication in bankruptcy of the payor may be subject to avoidance in bankruptcy. However, Law no.130 provides that payments made by the assigned debtors to the securitization company are not subject to avoidance.

Similarly, any other transactions taking place in the context of a securitization transaction (eg, the assignment of the receivables to the securitization company) during the year or two years (depending on the circumstances) prior to the adjudication in bankruptcy of one of the parties may be subject to avoidance in bankruptcy. However, Law no.130 provides that, for securitization transactions, the above-mentioned terms are reduced to six months (instead of two years) and three months (instead of one year). Law no.130 does not further specify the scope of this special regime.

Therefore, it is not clear whether this special regime applies, for example, in the case of bankruptcy of any of the entities involved in a securitization transaction or only of certain entities (eg, the securitization company). If the special regime applied only in the case of bankruptcy of the securitization company, the issue would still arise as to whether it should apply to all transactions entered into by the securitization company in the context of a securitization transaction or only to specific transactions, such as the assignment of the receivables. One of the first commentators has expressed the view that this regime should only apply to the assignment of the receivables in case of bankruptcy of the securitization company. Another commentator is of the opinion that this regime should apply to any transactions entered into in the context of a securitization transaction.

Issuance of the securitization securities

Under ordinary rules, Italian companies may not issue bonds for an amount exceeding their paid-in capital unless certain guarantees are provided, or a special exemption is granted for reasons of national economic interest. Law no.130 provides that these rules (and other procedural rules applicable to corporate bonds in general) do not apply to the issuance of securitization securities, thus eliminating one of the main obstacles to the implementation of securitization transactions by Italian originators.

Law no.130 expressly provides that securitization securities are subject to Section 129 of Legislative Decree no.385 of September 1 1993 (Section 129), under which the issuance and offering of securities in Italy requires prior notification to the Bank of Italy (20 to 30 days prior to the transaction). The Bank of Italy, in turn, can delay or prohibit the issuance or the offering to ensure the stability and efficient functioning of financial markets (the Bank of Italy's failure to respond within 20 days is deemed approval).

Tax and accounting aspects

Law no.130 provides that securitization securities are subject to taxation in the same manner as corporate bonds issued by companies listed in regulated Italian markets. A tax of 12.5% on interest payments applies if interest is paid to, among others, individuals, real estate investment funds and pension funds. This tax does not apply if interest is paid to, among others, Italian companies and investment funds (other than real estate investment funds), provided that the securitization securities are deposited with a financial intermediary. Such interest payments must be included in the overall taxable income of the recipient.

The tax also does not apply if interest is paid to foreign recipients residing in a country with which Italy has entered into a double taxation convention providing for a mutual exchange of information clause and which do not reside in a so-called tax haven. To that effect, the securitization securities must be deposited, directly or indirectly, with an Italian resident bank or investment services company, or with the Italian permanent establishment of a non-resident bank or investment services company, both having certain direct computerized links with the Italian tax authorities.

As to registration tax, despite the absence of specific provisions in Law no.130, legislative history suggests, and the Report to the House of Representatives expressly states, that the tax applicable to the assignment of the receivables to the securitization company is due in the fixed amount of L250,000 (about $130), and not in a proportional amount.

Finally, as an incentive for securitization transactions effected shortly after the entry into force of Law no.130, for both accounting and fiscal purposes, any loss recognized by the assignor from the assignment of the receivables may be spread over five years.

In fact, any losses in value, recorded by the originator on the receivables assigned to the securitization company, on the guarantees granted to the securitization company and on assets, other than the receivables themselves, serving as collateral for the securitization, as well as any funds set aside with respect to guarantees granted to the securitization company, may be accounted for as reserves on the balance sheet of the originator if they relate to "securitization contracts executed within two years of the date of entry into force" of Law no.130. These losses and funds are then to be accounted for in the income statement of the originator in the fiscal year in which the losses are suffered or the funds are set aside and in the four subsequent fiscal years, in equal shares. The originator's taxable income for the same fiscal years is decreased accordingly.

Other types of securitization transactions

Law no.130 also applies, as far as compatible, to (a) securitization transactions effected through the grant of financing by the securitization company to a financed entity and (b) the assignment of receivables to investment funds trading in receivables.

Other open issues

The general terms of securitization securities (which are to be specified in the prospectus distributed to investors) are not set forth by Law no.130. The definition of these general terms is, therefore, left to market practice or, possibly, the regulatory powers of the Bank of Italy.

Also, Law no.130 does not specify which future receivables may be assigned in the context of a securitization transaction. Some commentators argue that the principles applicable to ordinary assignments of receivables should apply, thus allowing assignment of future receivables only if arising from contracts entered into by the assignor before the assignment. Others argue that the principles of the law on factoring (Law no.52 of February 21 1991) should apply, thus also allowing assignment of future receivables when arising from contracts to be entered into by the assignor within two years of the assignment.

Conclusion

To conclude, Law no.130 appears to be a major step forward in the development of a solid legal framework for securitization transactions in Italy. In particular, provisions concerning bankruptcy and perfection of assignment of receivables, substantially modifying the general rules of Italian law, eliminate major obstacles to the implementation of Italian securitization transactions. Law no.130, in general, adapts the Italian legal framework to deal with transactions that could not easily fit into the ordinary rules and categories of Italian law. The contributions of the Bank of Italy and CONSOB will prove essential in completing this adaptation.


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