New Italian Measures Facilitate Debt Restructuring And Protect DIP Financing - Update

This is an updated version of the StayCurrent Client Alert published on 2 July 2012 "New Italian Measures Facilitate Debt Restructuring and Protect DIP Financing", following the conversion of law decree No. 83 of 22 June 2012 (with amendments) (the "Decree") into law No. 134 of 7 August 2012.1

Notably, the Decree has introduced material changes to the Italian Bankruptcy Act2 ("IBA") that have the effect, amongst other things, of facilitating debt restructuring and company bailouts, thus enhancing investment opportunities in distressed situations (the "New Provisions").

The Decree represents the very last step of a reform movement of the Italian bankruptcy system which began in 20043 with the aim of improving its efficiency and making the Italian distressed market more appealing for potential domestic and international investors.

In particular, the New Provisions will:

Change the dynamics of restructuring negotiations, reducing shareholders' leverage and providing a safer environment for negotiations; Increase investment opportunities by facilitating loan-to-own strategies and equity investments by third parties; and Provide a safe environment for DIP or bridge financings, thus facilitating restructurings and increasing investment opportunities. A. RESTRUCTURING TOOLS AVAILABLE UNDER THE IBA.

In order to better understand the changes introduced by the New Provisions, it may be helpful to first summarize the restructuring proceedings available under the IBA and to which such changes apply.4

1. Concordato Preventivo.

   Concordato preventivo is the proceeding available under Article 160 and other provisions of the IBA ("Concordato Preventivo") and consists of an arrangement proposal that, if approved by the creditors holding the majority of the debts and by the majority of the classes, binds all the creditors (including the ones who have not approved it). The procedure is supervised by the court and is somewhat similar to Chapter 11 in the U.S. In broad terms, the debtor makes a proposal to the creditors, that may be divided in different classes and, if the proposal is approved by the creditors representing the majority of the company's debts and, if creditors have been divided into different classes, by the majority of the classes, the proposal is binding for all creditors. The procedure may also be carried forward through a competitive bidding process. The Concordato Preventivo has been used in prominent restructurings such as Mariella Burani Fashion Group and Fondazione San Raffaele del Monte Tabor.

2. Article 182bis.

   Under Article 182bis of the IBA ("Article 182bis") a debtor may restructure his debts through one or more agreements with his creditors that represent at least 60% of the debtor's total outstanding debts. Such agreements and the underlying plan must be assessed by an expert (appointed by the debtor) and the overall transaction has to be filed with the competent court. The restructuring goes ahead only if the court approves it. Such expert is defined in the IBA at Article 67, paragraph III, letter (d)5 ("Expert"), and plays a pivotal role in both Article 182bis and Article 67 restructurings. Recent prominent restructurings done with an Article 182bis proceeding are Risanamento S.p.A., Ferretti S.p.A. (2012) and Lucchini S.p.A.

3. Article 67.

   The procedure available under Article 67, paragraph III, letter (d) of the IBA ("Article 67") is an out-of-court procedure that allows a distressed company and its creditors to carry out a restructuring plan without incurring the risk of clawback actions. Payments and security over the debtor's assets granted in execution of a plan assessed by an Expert, suitable for the restructuring of the debts and that can ensure the debtor's prospects of financial recovery, are not subject to clawback actions. This proceeding has been used in prominent restructurings such as Aedes S.p.A., Ferretti S.p.A. (2010) and Seat Pagine Gialle (2012).

   2. KEY AMENDMENTS INTRODUCED BY THE NEW PROVISIONS.

   New restructurings will have to take into account the New Provisions. The main effects can be summarized as follows:

   i. Interim period available after the filing to choose the most appropriate restructuring proceedings, granting the debtor the necessary protections on the actions taken in the meantime;

   ii. Enhanced protection of (a) bridge and DIP financing, even immediately after the filing and before the restructuring is finally approved by the court; and (b) the business of the debtor as a going concern during and after the restructuring;

   iii. Easier and more flexible access to restructuring proceedings for debtors also facing capital losses and/or negative net equity;

   iv. Possibility to carry out Concordato Preventivo proceedings with a going concern; and

   v. Increased importance of (and responsibilities for) the independent expert called to assess the reasonableness of the restructuring and the data on which it relies.

1. New features of the Concordato Preventivo.

   The Concordato Preventivo, due to the former legal framework, has been used more as a liquidation tool rather than a restructuring option. The New Provisions have now significantly changed...