Italian corporates are a step closer to tapping the debt
capital markets after the governments capital raising
reforms were passed by the lower house of parliament last
lawyers have long called for the improvements, introduced into
parliament on June 22 as part of the so-called Growth Decree,
which bring Italys debt issuance laws in line with
two fundamental changes elimination of withholding tax
and interest deductibility upped to bank-loan levels
remove the obstacles that have stopped private company bond
on the deductibility of interest paid by unlisted companies and
investors having a 20% withholding tax effectively killed the
market as they made
it non-economic for both issuer and investor, said Tobia
Croff, a Milan-based Shearman & Sterling
banks are deleveraging, giving private issuers the same tax
treatment as public companies when issuing bonds means a quick
uptake is expected once the reforms become law.
addition to the withholding tax and deductibility changes, the
decree intends to kick-start Italys commercial paper
sector and encourages small and medium enterprise bond
issuances by introducing a sponsor role.
approving the decree last week, the lower house limited the
sponsor requirement to commercial paper issuances only. This
was after some banks pushed back on requiring them to hold the
bonds in their portfolio.
it left untouched the key difficulty that must be resolved
before the law can be utilised to its true potential.
issuers deductibility benefit of 30% Ebitda (earnings
before interest, taxation, depreciation and amortization) is
subject to investor certification that they are a qualified
investor and are not a shareholder in the issuer. This applies
throughout the life of the security.
& Watkins Milan partner Jeff Lawlis said this was the one
pragmatic issue that would need to be resolved before the law
could be utilised to its true potential.
we will get some clarity through a circular from the tax
authorities, but if not immediately forthcoming, it will be
left to the market participants to create a sufficiently strong
certification mechanism that will ensure the issuers
ability to deduct interest expense on the bonds, Lawlis
is where the Italian proposal diverges from European standards.
Its also the key aspect of the decree to be tested in
practice. As the certification has no bearing on the
investors tax benefit, the challenge is devising a system
that encourages successive investors to make the required
Coletti, also of Latham & Watkins in Milan said the crucial
point is that the procedure must be investor-friendly and
non-Italian investors in Italian debt securities are accustomed
to providing the Law 239 certification for withholding tax
purposes, utilising a similar certification procedure regarding
qualified investor status may simplify the process,
this manner of certification should not extend to the
investors shareholding in the issuer. Its thought
this is best managed directly between the two
decree promises an end to the financing conundrum faced by the
majority of the countrys corporates.
bank finance started to dry up in 2008, private companies
sought to issue bonds through offshore vehicles and repatriate
the funds back into Italy to avoid the countrys tax
barriers. But tax advisers became nervous when Italian tax
authorities started investigating these structures. As a
result, few of them were then established.
banks deleveraging, now is a prime time for small corporates to
be able to tap the bond market particularly to refinance
their maturity debt.
high-yield market has been performing well,
despite the eurozone crisis, many expect the instrument to help
with the upcoming debt maturity wall.
one London-based bankers counsel told IFLR the big challenge would be getting this
rolled out to the corporates in Europe.
in Italy now have a step-up in this regard, however Croff
predicted a degree of caution.
may be reluctant to resort to bonds at the beginning, as I
think for cultural reasons its perceived to be easier to
deal with a bank rather than the market, he
I think in reality it will be used as an alternative, and they
will be enticed to do so by banks which will be happy to have
an alternative, Croff added.
buyout (LBO) financing is another likely use.
converted into law, Lawlis said a big difference was likely to
be seen over the medium and even short-term as Italian private
corporates and sponsors considering LBOs of Italian companies
will know they can issue bonds directly without having the
added expense of grossing up investors for the withholding tax
while being able to fully deduct the interest
also expected the new regime to be picked up as a new form of
reforms are in decree-form until approved and passed into law
by the parliaments upper house.