General structuring of financing
Choice of law
What territory’s law typically governs the transaction agreements? Will courts in your jurisdiction recognise a choice of foreign law or a judgment from a foreign jurisdiction?
Loan and intercreditor agreements are typically governed either by Italian law, particularly if arranged by Italian banks and intended for the Italian market only, or by English law, if the involvement of non-Italian players is envisaged, in order to facilitate the sale or transfer of any interest in the loan. High-yield bond documents are governed by New York law in nearly all cases.
Subject to exceptions, whether the countries involved are EU member states or not, the Italian courts will apply the Rome I Regulation ((EC) No. 593/2008) on the law applicable to contractual obligations to determine the governing law of a contract made on or after 17 December 2009. The general rule under Rome I is that the contract is governed by the law chosen by the parties. Exceptions include, in particular, circumstances where the choice of law is fraudulent or the application is manifestly incompatible with the public policy of the forum or in the case of overriding mandatory provisions of the law of the forum. Subject to certain exceptions, an Italian court would also uphold an agreement made in advance to submit non-contractual obligations (eg, a claim in respect of a misrepresentation made in the course of contractual negotiations) to the law of a particular country, in accordance with the terms of the Rome II Regulation ((EC) No. 864/2007).
In Italy, enforceability of final judgments obtained in a foreign court is governed by either the recast Brussels Regulation ((EU) No. 1215/2012) (in the case of judgments from the courts of other EU member states) or Title IV of Law No. 218/1995 on the Reform of the Italian System of Private International Law if no bilateral treaty applies. A final and conclusive judgment for a definite sum of money entered by a foreign court in any proceeding should be enforced by the Italian courts without re-examination or re-litigation of the matters adjudicated upon, provided that:
- the foreign courts that rendered the final judgment had jurisdiction according to Italian law principles of jurisdiction;
- the relevant summons and complaint were appropriately served on the defendants in accordance with the foreign law and, during the proceeding, the essential rights of the defendants have not been violated;
- the parties to the proceeding appeared before the court in accordance with the foreign law or, in the event of default by the defendants, the foreign court declared such default in accordance with the foreign law;
- the foreign judgment is final and not subject to any further appeal in accordance with the foreign law;
- the foreign judgment is not in conflict with any final judgment previously rendered by an Italian court;
- there is no action pending in Italy among the same parties and arising from the same facts and circumstances that commenced prior to the action in the foreign country; and
- the provisions of such judgment would not violate Italian public policy.
Restrictions on cross-border acquisitions and lending
Does the legal and regulatory regime in your jurisdiction restrict acquisitions by foreign entities? Are there any restrictions on cross-border lending?
In general terms, the acquisition of domestic companies by foreign entities is not restricted. However, the acquisition of assets and companies of ‘strategic relevance’ for the Italian national interest is also subject to a specific set of rules and limitations. More specifically, Law Decree No. 21 of 15 March 2012 (which has been converted into Law No. 21 of 11 May 2012), grants the Italian government veto and other powers (‘special powers’) in relation to, inter alia:
- the acquisition of any interest from any person in any company operating in the defence and national security sector, if that represents a ‘threat of material prejudice to essential defence and national security interests’; and
- the acquisition of a controlling interest from any non-EU person in any company operating in the energy, transport or communication sector, if that represents a ‘threat of material prejudice to essential public interests relating to national security, the functioning of infrastructure and the safety and stability of supplies’.
Implementing regulations provide that relevant transactions must be notified to the Italian government prior to completion. These special powers apply irrespective of whether the Italian government has any equity interest in the relevant company and, in addition to veto rights, include the authority to impose special terms and conditions to the acquisition. All special powers are to be exercised in compliance with the principles of proportionality, reciprocity and reasonableness.
Further, Legislative Decree No. 58 of 24 February 1998 (the Securities Act) and the related regulation issued by CONSOB (the Italian financial markets regulator) and Legislative Decree No. 385 of 1 September 1993 imposes limitations and requirements (applicable to all buyers, irrespective of our jurisdiction of incorporation) in relation to the acquisitions or disposals of holdings in banks, regulated financial services and insurance companies. In addition, concentrations are subject to antitrust review and clearances, subject to certain thresholds, at the national as well as EU level, and disclosure requirements apply in respect of the acquisition or disposals of shares (whether by way of full ownership or through physically or cash-settled derivatives) in listed companies.
There are no specific restrictions on cross-border lending into Italy. For further details on the regulatory restrictions applicable to lending in Italy, see question 6. It is worth noting that any cross-border payments may become subject to restrictions imposed by sanction regimes or other similar measures adopted by the United Nations, the European Union or Italy.
Types of debt
What are the typical debt components of acquisition financing in your jurisdiction? Does acquisition financing typically include subordinated debt or just senior debt?
The typical components of debt financing vary depending on the size of the deal. It is common for larger financing to comprise a combination of senior and mezzanine debt or senior debt and high-yield bonds. Financing can include senior term and revolving debt, first and second lien debt in the form of loans or notes, mezzanine term debt, payment-in-kind (PIK) loans or notes, vendor financing or high-yield bonds.
Mezzanine debt, to the extent legally possible, is usually guaranteed by, and secured on, the same assets as senior debt. Intercreditor arrangements are put in place, pursuant to which in certain circumstances payment on the mezzanine debt is subordinated to the senior debt and the ability of the mezzanine lenders to enforce their guarantee and security package is subject to a standstill. Mezzanine debt is not typically structurally senior to the senior debt. While a significant amount of the senior debt will be borrowed by the same holding company as the mezzanine debt, some senior debt may be borrowed at a structurally senior level to refinance existing debt within the target group at closing or for working capital. In cross-border financing, senior debt that is borrowed at operating company level and that is used to refinance existing debt may benefit from an enhanced guarantee and security package due to corporate benefit and other legal considerations.
The mezzanine facility usually matures one year after the latest dated senior debt. Financing structures including second lien debt are similar to mezzanine debt, except that the second lien debt is typically an additional tranche in the same credit agreement as the senior debt but with a maturity date six months later than the other senior loans. Under the intercreditor agreement, second lien debt is contractually subordinated to the other senior bank debt in a similar manner to mezzanine debt, except that the second lien lenders may not have an independent right to enforce in some cases.
PIK debt and vendor financing are the most junior pieces of debt finance in the capital structure. They tend to be lent to, or issued by, holding companies of the borrowers of the senior and mezzanine debt and tend to have limited, if any, recourse in the form of security and guarantees from the obligors in respect of the senior or mezzanine debt. They mature after the other debt in the structure. The interest on PIK facilities generally capitalises (but see restrictions described in question 8), or there may be an option for the borrower to pay part in cash, if permitted under the terms of the other debt in the structure.
Due to the market conditions, which have made it more difficult to fund larger deals solely with bank debt, acquisitions have increasingly been financed with the proceeds of issue of secured bonds combined with a revolving credit facility with priority over the realisations of security enforcement, or term debt ranking pari passu. Bond issues are generally only suitable for larger transactions where the debt will not be repaid quickly because of the cost and non-call features, although the size of the deal being financed with high-yield bonds has become smaller. Similar to bank financing, the capital structure in the context of a high-yield bond issuance may contemplate senior and subordinated debt components through the issuance of different types of notes, with senior secured notes eventually being structurally senior to the subordinated notes. The number of acquisitions entirely funded through a high-yield bond issuance is still limited in the Italian market, but we expect a considerable increase of acquisition bond financing in the near future.
Are there rules requiring certainty of financing for acquisitions of public companies? Have ‘certain funds’ provisions become market practice in other transactions where not required?
In relation to an offer for the acquisition of a public company, the Securities Act and the related regulation issued by CONSOB state that the bidder must file the proper documentation with CONSOB no later than the day before the publication of the tender offer document evidencing that it has sufficient funds available to pay the maximum amount of consideration that may become due pursuant to the offer. Prior to that, at the time the tender offer is first announced to the market and communicated to CONSOB, the bidder must confirm that it has sufficient funds available to pay the maximum consideration that may become payable under the offer. It is at this point that the bidder requires certainty of financing in relation to the offer.
‘Certain funds’ provisions have become increasingly common for the acquisition of private companies too. As a result, a lender will only be entitled to withhold funding at closing in respect of representations, undertakings and events of default relating to the actions or omissions of the acquiring group companies (and not the target group) and any failure to satisfy the conditions to acquisition.
Restrictions on use of proceeds
Are there any restrictions on the borrower’s use of proceeds from loans or debt securities?
Loan agreements usually include a purpose clause specifying how the loan proceeds are to be used (see question 15 in relation to financial assistance).
What kind of indemnities would customarily be provided by the borrower to lenders in connection with a financing?
There are numerous indemnity provisions contained in a credit agreement covering various matters, including:
- stamp duty;
- loss to lenders arising from an obligor’s failure to pay and various other defaults;
- the costs of converting a payment from one currency into the currency that was due under the finance documents;
- yield protection and costs and expenses arising from documenting and executing the transaction;
- amendments to the documentation; and
- enforcement and preservation of security.