Article 1(71) the Financial Law for 2005 (Law 311 of December 30 2004) provides that state, regional and local authorities must convert loans whose debt service is paid either fully or partially by the state into notes of new issue, or re-negotiate those loans, if:
- the original loans contain a prepayment option; and
- the refinancing conditions, including the relevant commissions and any other costs and fees arising from early repayment of the loans, reduce the financial value of the aggregate liabilities of the relevant debtor.
As to loans entered into at fixed-rate interest, local authorities must regularly monitor the interest rates and start refinancing when the rate of the swap with a maturity equal to the average life of the outstanding debt is lower than one percentage point compared with the interest rate of the loan to be refinanced.
This is the only case in which local authorities are expressly required to convert or re-negotiate loans; in all other cases, local authorities are only required to assess the trend of interest rates and the presence of certain market conditions that could reduce the financial value of the liabilities.
A circular issued by the Ministry of Economy and Finance on June 28 2005 has provided guidelines for the interpretation of paragraph 71.
According to the circular, the conversion of loans and the consequent novation of the debt and of the relevant loan represent a transformation of one outstanding liability into another, without creating a new debt. It is done for the sole purpose of reducing the cost of the indebtedness.
Also, in the case of refinancing loans whose debt service is entirely paid the state, the payment of principal and interest under the notes must be allocated in the state's budget and must be paid directly by the state, irrespective of the fact that the local authority is the issuer of the relevant bonds. As a consequence, the issuer will issue no delegation of payment pursuant to Article 206 of the Local Authorities Act (Legislative Decree 267 of August 18 2000) to its treasurer, because the payment of interest and principal under the notes will be paid by the state.
In the case of refinancing loans whose debt service is only partially paid by the state, the local authority issuing bonds for the refinancing of the outstanding loans will be obliged to repay to the noteholders the whole debt deriving from the issue. As a consequence, the payment of principal and interest to the noteholders under the notes must be allocated in the budget of the local authority and the state will only reimburse the local authority with the corresponding amount paid by the state.
The new legislation's application is strictly limited to loans repaid in whole or in part by the state and entered into by the state, the regions, the autonomous provinces of Trento and Bolzano and by local authorities.
The new legislation does not apply to companies owed by the state or other public entities.