A Stop To PIK Loans From The Court Of Milan

PIK (Payment In Kind) loans are loans that typically do not provide for any cash flows from borrower to lender between the drawdown date and the maturity/refinancing date. In PIK loans, interests generally accrue period after period, thus increasing the underlying principal. As an alternative, PIK Loans may include provisions according to which, upon the occurrence of certain events, interest payments due by the debtor become undue and the corresponding amount is added to the principal amount, so that it generates further interests. This latter type of provisions is usually included in loans granted in the context of restructuring proceedings where the borrower may not always be able to meet, in whole or in part, its obligations to pay the agreed interests as they become due.

The 2014 Italian Stability Law1 introduced material amendments to the Italian banking regulation. With limited respect to interest on banking transactions it mandated the Committee for Credit and Savings (in Italian, "Comitato Interministeriale per il Credito e il Risparmio"; the "Committee") to detail2 the terms and criteria for the accrual of interest in banking transactions, but in doing so it also provided the following two firm guidelines: 1. interest periods on bank accounts must be the same for interest owed to and by the bank and 2. "interests periodically capitalized cannot generate further interests which in subsequent capitalization transactions must be calculated exclusively on the principal amount" (new wording of Section 120 of the Italian banking law as changed by the 2014 Stability Law).

PIK Loans never had an easy life in Italy because the Italian Civil Code prohibits the capitalization of interest other than in limited circumstances3; so far PIK Loans survived thanks to a favorable secondary regulation by the Committee and the Bank of Italy that mitigated the rigidity of the Italian Civil Code but which never really overcome the resistance of the courts that ever since the early 2000s challenged the compounding of interest practice of the banks4.

The 2014 Stability Law aimed at finally settling such long-standing contrast and excluding once and for all any periodic capitalization of interest but the banking system has so far resisted the implementation of the new law based on the argument that such law is incomplete until the Committee has enacted the new rules on the capitalization of interest (rules not yet available). PIK Loans have thus continued...