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Principal payment holiday

On August 3 2009 the Minister of Economy and Finance, Associazione Bancaria Italiana (ABI) and the major Italian associations of enterprises published a common notice to the Italian banking system fixing the general terms for a principal payment holiday (PPH) in favour of small and medium-sized enterprises (SMEs) leaving open to the ABI's members the decision of allowing their clients to participate to the principal payment holiday.

The common notice was entered into in the context of the anti-crisis measures enacted in Italy in order to back Italian SMEs.

The principal payment holiday concerns principal instalments only of amortising loans or leases granted to performing borrowers, and is granted for a period no longer than 12 months depending on the product type. Any principal instalments that fall due during the payment holiday are paid at a future date.

The banks adhering to the common notice are allowed to make the following interventions:

a) Twelve-month suspension of the payment of principal instalments under loan agreements;

b) Six or 12-month suspension of the payment of the implicit principal component of instalments due under movable or real-estate lease agreements respectively;

c) Extension to 270 days of the maturities of short-term advances on receivables due and payable.

(collectively, the relevant transactions).

With the PPH the original amortisation schedule is extended for the relevant period and interest on the principal, whose reimbursement is temporarily suspended, continues to accrue and to be paid on the original maturities. The principal instalments that are suspended on the basis of the principal payment holiday are amortised using the original contractual interest rate and the same interest periods.

A SME may apply for the principal payment holiday provided that:

(i) It must have, as at the time of the request, financial and economic conditions proving the continuity of the relevant business (continuità aziendale although it may be, due to the general crisis, under temporary financial difficulties);

(ii) It was classified to be in bonis (a regular payer, without any overdue amount) as at September 30 2008 and not having any indebtedness classified as restructured (ristrutturata) or any bad debt (in sofferenza) nor having any ongoing enforcement procedure, as at the date of the request for the principal payment holiday;

(iii) As at the date of the filing of the request for the principal payment holiday, the relevant instalments are falling due or have been overdue (not paid in whole or in part) for not more than 180 days.

SMEs are entitled to file a request for the principal payment holiday with the bank or financial institution with which they have entered into a relevant transaction by June 30 2010.

ABI has indicated that only banks and financial intermediaries with the exclusion of special purpose vehicles involved in securitisation transactions may adhere to the common notice.

However, ABI has also indicated that securitised receivables can be eligible for the principal payment holiday considering that any adherent bank to the common notice is allowed to adopt any initiative and activity for the purpose of granting the principal payment holiday to the receivables it has assigned under relevant securitisations.

As a consequence, banks that assigned their receivables under securitisation transactions and are willing to grant the PPH to those receivables, may decide to provide a facility in favour of the relevant special purpose vehicles to provide the funds which may not be collected as a direct consequence of the application of the PPH to the relevant lease contracts, maintaining unchanged the cash flows of the payments of the lease instalments under the lease contracts during the PPH.

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