As a consequence of the epidemiological emergency caused by COVID-19 (coronavirus), the Italian Government and the Italian Banking Association (ABI) have approved a number of measures to support micro, small- and medium-sized companies (SMEs) (as defined by the European Commission Recommendation No. 2003/361/EC of May 6, 20031), facing the economic impact of COVID-19. Some of those measures may have an impact on loans, financial leasing and other financial arrangements between lenders and borrowers. This briefing focuses on:
- Law Decree March 17, 2020, No. 18 concerning measures to strengthen the National Health Service and economic support for families and workers and companies related to the epidemiological emergency of COVID-19 (the Law Decree).
- 2019 ABI Access to Credit Agreement and related Addendum of the Italian Banking Association (the 2019 ABI Agreement).
1. Law Decree
On March 17, 2020, the Italian Government approved Law Decree March 17, 2020, No. 18 concerning measures to strengthen the National Health Service and economic support for families and workers and companies related to the epidemiological emergency of COVID-19.
This Law Decree came into force immediately after its publication in the Official Italian Gazette (which took place on March 17, 2020), but must be enacted into law by the Italian Parliament within 60 days of publication, otherwise it will lose effectiveness from the date of approval. As a result of parliamentary scrutiny, the Law Decree may still undergo both formal and substantial changes.
Article 56 of the Law Decree concerns financial support measures for SMEs which are established in Italy and are affected by the COVID-19 epidemic. In particular:
- SMEs who have suffered losses or business interruption due to the COVID-19 pandemic may apply to their lender(s) in order to benefit from the following financial support measures in relation to their exposure towards banks, financial intermediaries listed under Article 106 of Legislative Decree No. 385 of September 1, 1993 (the Consolidated Banking Act) and other entities authorized to provide credit in Italy:
a) For uncommitted credit facilities and credit facilities committed but not yet fully advanced entered into before February 29, 2020 or, if later, the date of publication of the Law Decree, the facility (both in respect of amounts already drawn and undrawn), cannot be revoked in whole or in part until September 30, 2020.
b) For bullet loans with contractual maturity before September 30, 2020, the loan tenors will be extended, and any related security will remain in place, in each case without any formalities, until September 30, 2020 on the same terms.
c) The repayments under mortgage loans and other loans repayable in instalments, including those executed through the issuance of agricultural bills of exchange (cambiali agrarie) or lease payments, falling due before September 30, 2020 will be suspended until September 30, 2020 and the repayment schedule will be extended without any formalities, in a manner that ensures that there are no new or increased charges for either party; note that companies may request the suspension of capital repayments only and not amounts of interest.
- The SME’s application to the lender to receive the benefits provided by the Law Decree must be accompanied by a declaration by the SME certifying (pursuant to art. 47 of Presidential Decree 445/2000) that it has suffered temporary liquidity shortages as a direct consequence of the spread of the COVID-19 epidemic.
- Only debt exposures which are not classified as ‘impaired credit exposures’ under the rules applicable to credit intermediaries at the date of publication of the Law Decree may benefit from these measures.
2. 2019 ABI Access to Credit Agreement
The 2019 ABI Access to Credit Agreement (Accordo per il Credito 2019) was approved on November 15, 2018 by the Italian Banking Association (ABI) and some Italian companies associations (e.g. Confidustria, Coldiretti, Confedilizia, Confcommercio and Confesercenti) and, after the spread of COVID-19, a new addendum has been adopted on March 6, 2020 to extend the scope of application of the 2019 ABI Access to Credit Agreement to loan agreements executed up to January 31, 2020.
According to the 2019 ABI Agreement and its Addendum:
- The adhering banks and financial intermediaries may implement, in agreement with borrowers, two types of arrangements: (i) suspension of payments of principal amounts of the instalments of the loans (the Suspension); and (ii) extension the maturity of loans (the Extension).
- The measure is applicable to loans outstanding on January 31, 2020. The instalments may already be overdue (not been paid or paid only partially), but no more than 90 days before the date of submission of the application.
- The measures of the 2019 ABI Agreement are not applicable to loans for which any suspension or extension has already been granted within the previous 24 months the date of submission of the application, except for those benefits granted ex lege in general.
- Any request from the companies must be submitted by December 31, 2020.
- This measure is not applicable to non-performing loans and other exposures (i.e. non-performing loans unlikely to pay and past due).
- The bank or the financial intermediary may request additional security in order to mitigate or avoid increase in the applicable interest rate.
Terms and conditions of Suspension
- The Suspension is applicable also to: (i) medium/long-term loans (i.e. loans with a tenor of 18+ months) executed through the issuance of agricultural bills of exchange (cambiali agrarie), and to leasing transactions, real estate or movable property (in this second case the Suspension applies to the periodical leasing instalment (only considering its principal part. i.e. not including interest)); and (ii) loans and financial leasing supported by public finance, both in the form of principal and/or interest aid, subject to the following conditions: (a) the public institution which makes available the facility must have expressly approved the relevant loan or financial leasing as one eligible for the Suspension and reported its decision to grant the facility to the Ministry of Economy and Finance; and (b) after the Suspension, the original drawdown plan of the public contribution must not be changed.
- The adhering banks may allow the Suspension, also for overdraft facilities secured by a mortgage, provided that the loan is already being amortized at the date the application is made and that there is a repayment schedule in instalments, in which principal and interest amounts are clearly identified for each instalment.
- The maximum Suspension period is 12 months.
- Following the Suspension, the repayment plan will resume for the original remaining period of time and with the interest on the suspended principal payable on the corresponding delayed dates.
- Where the loan is supported by security, the extension of such security for the additional amortizing period is a precondition to the Suspension.
- The interest rate for the duration of the Suspension may be increased in comparison to the original interest rate only where the bank will suffer higher costs strictly related to the Suspension, up to a maximum of 60 basis points.
Terms and conditions of Extension
- The Extension is applicable to loans, short-term loans and agricultural loans ex art. 43 of the Italian Consolidated Banking Act, executed with or without bills of exchange, existing as at January 31, 2020.
- The loans can be extended by a maximum of 100 per cent of the remaining duration of the repayment plan. For short-term credit and for the agricultural loans, the maximum Extension period is up to 270 days and 120 days respectively.
- The Extension of short-term maturity may also be requested in relation to payment defaults that the SME has incurred in respect of credit advanced by the bank.
- The interest rate at which the Extension is granted may be increased as compared to original interest rate only where the bank will suffer higher costs strictly related to the execution of the Extensions.
- The amount of the amortization instalments under the new interest rate, must be significantly lower than the original one, and agreed with the SME at the time the Extension was agreed.
The aim of both the 2019 ABI Agreement and its Addendum and the Law Decree is the same: to reduce the negative effects that the COVID-19 pandemic is having on the national socio-economic fabric by providing support measures for SMEs. Indeed both the 2019 ABI Agreement and the Law Decree are addressed to SMEs as defined by the European Commission Recommendation No. 2003/361/EC of May 6, 2003 which are established in Italy and both allow for a suspension and/or extension of the repayment terms of specific kind of loan agreements.
The Law Decree provides, for now, for only a minimum extension period (i.e. until September 30, 2020), while the Suspension or the Extensions pursuant to the 2019 ABI Agreement may potentially last for a longer period.
However, the scope of application of the Law Decree is wider if we consider that:
- It involves any bank and financial intermediary (even if foreign) which has lent money to an Italian SME, while the 2019 ABI Agreement applies only on a voluntary basis, to those banks and financial intermediaries who have signed up to it and in any event can be deviated from on a case by case basis.
- It is applicable to loans existing as at February 29, 2020, while the 2019 ABI Agreement applies to loans existing as at January 31, 2020.
In both cases it is hoped that some respite will be provided to the SMEs of Italy in surviving the COVID-19 pandemic.