## 1itaea2020004

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### EXECUTIVE SUMMARY — Major Findings on Asset Quality and NPLs
- NPLs fell from €360 billion (16½ percent of gross customer loans) in 2015 to €190 billion (8.1 percent) in June 2019, achieved mainly through circa €145 billion of private NPL disposals.
- Italy’s NPL ratio at end-June 2019 (8.1 percent) remains above the 3.0 percent average of the main EU banks as of June 2019.
- Provisioning coverage was 52.5 percent as of June 2019, placing Italy 7.6 percentage points above the average of the main EU banks as of June 2019.
- New NPL formation has fallen to pre-crisis levels.

### NPL Composition and Concentration
- Aggregate NPLs concentrated in SMEs and corporates: circa 77 percent of gross NPLs toward these borrowers.
- Sector concentration by GBV: services 31 percent, construction 29 percent.
- Vulnerable sector detail: 45 percent of credit to construction companies and 32 percent to real estate activities are non-performing.
- Collateral and guarantees (June 2018): approximately 52 percent of gross NPLs backed by collateral; a further 20 percent have personal guarantees.
- NPL classification: more than half of the NPL stock is Sofferenze (bad loans); over 40 percent categorized mostly as UTP (unlikely to pay); a small proportion are past-due but not UTP.

### UTP Portfolios (Box 1 key points)
- UTP portfolios total €86 billion, accounting for 42 percent of outstanding NPLs for SIs and 48 percent for LSIs (over 40 percent of outstanding NPLs by exposure).
- Concentration: four largest banks account for more than half of total UTP; 78 percent concentrated in the 10 largest Italian banks.
- Provisioning coverage: UTP portfolios 35 percent on average; bad loans 69 percent.
- Typical UTP loan characteristics: majority under €3 million; most under €10 million; borrowers often small enterprises with multiple creditors (up to 30 in some cases).
- Restructuring timelines: market reports indicate two to four years on average to reach agreement on debt restructuring.

### Banks’ NPL Reduction Plans and Drivers
- SIs plan to reduce NPLs from €144 billion (8.3 percent of loans to customers) at end-June 2018 to €107 billion (7 percent of loans to customers) by end-2020.
- LSIs aim to reduce NPL stock from €21.4 billion (16.3 percent of loans to customers) at end-June 2018 to €13.3 billion (9.7 percent of loans to customers) by end-2021.
- Banks’ projected volumes of NPL cures and internal workouts are almost matched by a new inflow of NPLs, implying limited net reduction from internal cures alone.
- Banks rely heavily on disposals and write-offs for NPL reduction; banks achieved or exceeded planned disposals up to December-2019 despite reduced market appetite for Italy country risk from spring 2018 to spring 2019.
- Plan ambition varies across banks; more profitable and better capitalized banks plan more aggressive reductions.

### Supervisory and Regulatory Developments
- Intensive supervisory oversight led banks to develop meaningful NPL management plans with reduction targets; supervisors established dedicated task forces and intensified NPL reporting and monitoring.
- Recommendation: Supervisors should continue robust challenge of banks’ strategies and the ambition of their NPL reduction targets.
- Recommendation: BdI should consider extending the ECB’s approach that sets bank-specific expectations for the gradual path to full provisioning of the existing NPL stock to LSIs with high NPLs with an adequate phase-in period.
- Recommendation: BdI should consider more prescriptive guidance to LSIs on NPL management, including:
  - practical examples of when forbearance is appropriate;
  - expectation to use decision trees to guide forbearance decisions;
  - controls when applying multiple forbearance measures;
  - time constraints on forbearance;
  - examples of when loans should be valued using going- versus gone-concern approaches;
  - illustrative constraints on collateral valuation methodology and minimum discounts and haircuts;
  - guidance on appropriate implementation of impairment triggers.
- Suggestion: elements of the EBA guidelines on the management of nonperforming and forborne exposures could be used as a starting point.

### Market Activity and GACS (Garanzia Cartolarizzazione Sofferenze)
- 2018 transaction volumes exceeded €70 billion, driven by very large deals including a €24.1 billion securitization (Banca MPS) and a €10.8 billion portfolio sale (Intesa).
- GACS-backed securitizations in 2018 included: €5.1 billion (Banco BPM), €2.7 billion (UBI), €2 billion (BPER), €2 billion (ICCREA).
- 2019 estimated disposals: €25 billion; 30 percent of 2019 disposals were through the GACS securitization scheme.
- GACS design highlights:
  - Introduced by Law n. 49/2016; protects buyers of senior notes by lowering their risk to that of a government bond.
  - Notes backed by bad loans (“Sofferenze”) serviced by external servicers independent from the originating bank.
  - Government intervention limited to coverage of interest and capital payment obligation on senior tranches; guarantee callable on amount outstanding at legal final maturity.
  - Eligibility criteria include investment grade rating for senior notes, sale of at least 51 percent of junior tranche, deconsolidation and de-recognition, and bank not affiliated with servicer.
  - Premium for the guarantee is a senior cost in the waterfall and based on average price of a basket of single name CDS covering investment grade rated Italian companies for same duration.
- By March 2019, banks completed 21 transactions using GACS, securitizing more than €62 billion in bad loans.
- Extensions of scheme: September 2017 (one year), September 2018 (six months), March 2019 (two years).
- Extension to UTP: market commentators suggested extension but flagged technical challenges (rating agency models for UTP tranches not developed; expensive valuation; data tape standardization; need to maintain operating relationship with debtors; multi-creditor challenges).

### Adequacy of Provisions and Loss Estimates (Box 3 and Table 2)
- High-level review: variations in provisioning coverage across banks not fully explained by portfolio characteristics; many banks’ provisioning coverage lower than observed loss experience.
- IMF staff estimated range of further provisioning needed for the SIs and 53 LSIs:
  - €5 billion if NPLs are worked out internally.
  - €20 billion if NPLs are disposed.
- Most additional provisioning needs attributed to the UTP portfolios.
- To achieve 2018 agreed reduction targets (assuming reductions via disposal), loan loss provisions would likely have to increase by about €7.2 billion.
- Table 2 (Potential Additional Loan Loss Provisions Needed for SIs and LSIs (€bn)):
  - NPE Internal Workout (€bn):
    - SIs: 4.3
    - LSIs: 0.6
    - Total: 4.9
    - of which, Bad Loans: SIs 0.5, LSIs 0.0, Total 0.5
    - of which, UTP and Past Due: SIs 3.8, LSIs 0.6, Total 4.4
  - NPE Disposal (€bn):
    - SIs: 17.3
    - LSIs: 2.7
    - Total: 20.0
    - of which, Bad Loans: SIs 6.4, LSIs 0.8, Total 7.2
    - of which, UTP and Past Due: SIs 10.9, LSIs 1.9, Total 12.7
  - Source: IMF staff estimates.
- Recovery statistics:
  - Banks recovered on average 38 percent on bad loans through internal workout and 58 percent for UTP and past-due portfolios.
  - Value recovery falls to 25 percent for bad loans and 43 percent for UTP and past-due upon disposal in the open market.
  - Gap between banks’ net book values and market values remains high at 13 percent on average.
- Loss breakdowns (Box 3 conclusion figures):
  - Internal Workout: 62% on aggregate; Secured –49%; Unsecured –74%.
  - BdI & special servicer recovery data (internal workout): 75% on aggregate; Secured –66%; Unsecured –83%.
  - Disposals (BdI recovery data): 42% on aggregate; Secured –33%; Unsecured –50%.
  - Internal workout + Market Premium: 57% on aggregate; Secured –48%; Unsecured –65%.

### Judicial Enforcement, Insolvency Reform, and Timing Metrics
- Recent reforms: 2015–2016 enforcement amendments shortened procedural deadlines and enhanced auction price formation; new insolvency law adopted January 2019 expected to take full effect in August 2020.
- Nevertheless, slow judicial processes remain a key reason for low NPL recovery rates and large asset sale discounts.
- Recovery statistics (BdI data for 2017):
  - Average recovery rate for total NPL positions closed in 2017: 30 percent.
  - Average recovery rate for NPLs secured by collateral: 39 percent.
  - Average recovery rate for unsecured credit: 21 percent.
- Timing statistics (2017 data):
  - Average time for real estate judicial enforcement: five years.
  - Average insolvency process duration: around seven years.
- BdI estimate: shortening recovery time by one year could increase price by 4.6 percent of gross book value; under assumptions (20 percent IRR), price of a bad loan decreases from 36.2 percent to 12.9 percent of GBV by the 6th year of recovery.
- Foreclosure average length and counts (Cerved 2016–2018H):
  - Average length (years): 2016 = 5,11; 2017 = 5,00; y/y = 0,11; 2018H = 5,00.
  - Average length (days): 2016 = 1.866; 2017 = 1.827; y/y = -39; 2018H = 1.826.
  - Number of closed files: 2016 = 57.527; 2017 = 64.078; y/y = 11,4%; 2018H = 31.066.
- Geographic variation in average foreclosures (Cerved 2016–2017): North West avg years 3.97→4.26; North East 3.75→3.99; Centre 4.89→4.76; Islands 7.14→7.41; South 6.84→6.25 (see source for file counts and year-on-year variations).
- Causes of delay: differing court efficiency, insufficient resources (especially human), and backlogs.
- Recommended judicial actions:
  - Ensure courts have sufficient resources and expertise spread evenly across the country.
  - Strengthen specialization of judges on commercial matters.
  - Streamline and simplify civil procedure rules; improve court internal administration and case management.
  - Consider transferring duties of managing distribution of proceeds from the judge to a court representative subject to judicial control.
  - IT improvements and standardization for the national online public platform for auctions; harmonize court practices on choice of local auction operators.

### Out-of-Court Enforcement of Real Estate Collateral — Marciano Mechanism
- May 2016 law introduced out-of-court enforcement (patto Marciano) allowing creditors to repossess collateral if clause included in loan agreement; intended to speed enforcement.
- Practical limitations:
  - Benefits future NPLs rather than existing stocks because borrowers unlikely to accept clause on existing defaulted loans.
  - Banks reluctant to include clause; mechanism has not spread.
  - October 2018 prudential regulation relaxed limits on banks’ holdings of repossessed assets, but reluctance persists.
- Impediments: lack of legal certainty, rigid repossession rules, reputational risks, asset management burden, no clear rules for appraisal disputes or opt-out if valuation unsatisfactory.
- ABI–Confindustria MOU aimed to address reputational risks but has no force of law and is insufficient.
- Recommendation: introduce further flexibility and clarity to incentivize use (e.g., allow creditors option to sell collateral, detailed rules for appraisal disputes, address rigidities and uncertainties through statutory changes).

### Multi-Creditor Negotiations, Pre-insolvency Tools, and Early Warning System
- Multi-creditor negotiations reportedly take many months and there are no guidelines to assist the process; non-binding principles (e.g., INSOL Global Approach) could be useful.
- Pre-insolvency tools under insolvency law:
  - Out-of-court work-out plans (“piani attestati di risanamento”) — private, certified by independent expert, strengthened documentary requirements in 2019 law.
  - Restructuring agreements (“accordi di ristrutturazione”) — court-controlled, require creditors representing at least 60 percent of claims (special rules for financial creditors), published in companies’ register after filing.
  - Financial restructuring agreements with cramdown mechanism extended to other creditor classes: agreements approved by 75 percent of a class can bind dissenting creditors in that class.
- 2019 law changes:
  - Integrates out-of-court restructuring into insolvency framework; failure to approve may lead to in-court concordato or liquidation.
  - Lowers approval threshold in certain cases from 60 percent to 30 percent (exceptional circumstances); 60 percent continues if stay on creditors’ actions is proposed.
- Early warning system (major novelty of 2019 law):
  - Requires companies to act on distress indicators (yet to be adopted); increases obligations to create internal control bodies for more companies.
  - Obligations to alert: auditors and certain public creditors must inform directors of signs of crisis; if directors fail to act, parties must turn to OCRI (Organismi di Composizione della Crisi) at local Chamber of Commerce.
  - OCRI process: if no agreement with creditors within 6 months from start of OCRI-led process, OCRI reports to public prosecutor, who can file insolvency ex officio.
  - Incentives: exemption/decrease of liability for certain insolvency crimes; reduction of tax sanctions; delay of duty to request commencement of insolvency.
  - Applicability: principally assists small and medium size companies; does not apply to large or listed companies.
- Risks and implementation challenges: no Italian experience; mechanism complex and administrative; potential negative signaling and delays to insolvency filings; effectiveness depends on OCRI competence.
- Recommendations:
  - Promote voluntary code of conduct on debt restructuring (ABI with BdI support).
  - Refine early warning mechanism to avoid negative signaling, ensure it does not replace timely insolvency filings, keep crisis indicators flexible, consider voluntary rather than strictly mandatory use during initial implementation, simplify OCRI processes, issue guidelines for OCRI harmonization, build OCRI competence.

### Enterprise Insolvency — System Efficiency and 2019 Reform Effects
- Current insolvency system historically based on 1942 law; average length of insolvency procedures around seven years with high variability.
- Cerved (2019) average length of pending insolvency cases (years): 2016 = 5,2; 2017 = 5,2; 2018 = 5,3.
- By geographical area average length in years: North-East 4,6; North-West 4,5; Centre 5,4; South and Islands 6,3.
- Number of insolvencies reported 2001–2018: 206k; of which 86k (41.7%) still pending.
- System weaknesses: late filings, poor integration of restructuring mechanisms, slow liquidation, numerous creditor priorities (including public creditors) reducing recoveries, court delays, lack of judicial specialization.
- 2019 reform aims:
  - Rationalize system; single procedure for “crisis” state; informatization measures including electronic voting; limit insolvency moratorium to 12 months.
  - Most provisions to come into force within 18 months of adoption (August 2020); vacatio legis to allow implementing measures and supportive infrastructure (OCRI, distress indicators, insolvency administrators framework).
  - Concordato changes: approval requires vote in favor of 51 percent of outstanding credit; judge must assess economic feasibility based on expert opinion; court approval can remain lengthy.
  - Liquidation stage: largely unaltered and remains lengthy; law lengthens maximum time of liquidation from 2 years (extendable) to 5 years and requires first liquidation sale within a year.
  - Group coordination: allows single petition for group companies before same court; does not consolidate assets/liabilities.

### Special Insolvency Regime for Large Enterprises and Recommendations
- Italy retains “extraordinary administration” (amministrazione straordinaria) for large distressed enterprises focusing on preservation of employment and production over creditors’ interests.
- This regime likely interferes with economic efficiency and contrasts with international insolvency standards.
- Institutional strengthening under reform:
  - Creation of register of insolvency professionals at the Ministry of Justice.
  - Adoption of qualification requirements and continuous education/training for insolvency professionals.
  - Powers for insolvency administrators to bring actions against shareholders and directors.
- Judicial specialization and court supervision:
  - New law transfers jurisdiction over large enterprises and groups to courts with specialized sections in large cities; court gains greater supervisory powers (feasibility assessment, liquidation oversight).
  - Efficiency depends on judges’ expertise; without it, new powers risk further delays.
- Recommendations:
  - Reinforce new insolvency law with revision of creditor priorities and further streamlining of in-court processes; consolidate and reduce special priorities where possible.
  - Bring extraordinary administration regime for large enterprises into the general insolvency regime so large enterprises and creditors benefit from general rules for restructuring and liquidation.
  - Within concordato, allow expedited court approval of reorganization plans already agreed by necessary majority of creditors (fast track pre-pack), subject to additional supporting documentation.
  - Increase competence of enterprise courts and promote judicial specialization in commercial and insolvency matters.
  - Complete and implement framework for regulation and supervision of insolvency administrators to ensure continuous build-up of expertise and accountability.

### Policy Recommendations (summary from Table 1)
- Continued scrutiny of banks’ credit risk, loan classification, provisioning; more frequent reviews and targeted inspections, particularly of UTP portfolios. (SSM, BdI) — Timing: C
- Continue regular challenge of progress and ambition of banks’ NPL reduction plans. (SSM, BdI) — Timing: C
- Apply the SSM approach for path to full provisioning of existing NPL stocks to LSIs with high NPLs over an appropriate transition (e.g., 3–5 years). (BdI) — Timing: I
- Review BdI NPL guidelines for LSIs to incorporate EBA guidelines and include prescriptive expectations on forbearance, collateral valuations, and impairment triggers. (BdI) — Timing: I
- Develop bank guidance and enhance on-site supervision guidance for management of UTP portfolios. (SSM, BdI) — Timing: I
- Ensure courts have sufficient resources and specialization; spread best practices in court administration and case management. (MoJ/NJC) — Timing: ST
- Improve foreclosure procedures to reduce time between asset sale and distribution of proceeds. (MoJ/Government to present law proposal) — Timing: ST
- Develop online platform for judicial auction sales as a nation-wide marketplace. (MoJ) — Timing: I
- Facilitate out-of-court foreclosures of real estate in corporate debt context and regulate out-of-court collateral sales. (MoJ/Government to present law proposal) — Timing: I
- Promote development of a code of conduct on voluntary and consensual debt restructuring. (BdI to support ABI) — Timing: ST
- Refine the early warnings mechanism and its implementation measures. (MoJ/Government to present law revision proposal) — Timing: I
- Allow expedited court approval of reorganization plans already agreed by necessary majority of creditors (fast track pre-pack) within “concordato”. (MoJ/Government to present law revision proposal) — Timing: ST
- Complete the regulatory and supervisory regime of insolvency administrators. (MoJ) — Timing: I
- Implement the new insolvency framework and reinforce with revision of creditor priorities and reform of extraordinary administration. (MoJ/Government to present law revision proposal; all agencies responsible for insolvency reform implementation) — Timing: I,C

*Italic source: IMF staff report (content unit: 1itaea2020004).*

### EXECUTIVE SUMMARY __________________________________________________________________________ 4

### EXECUTIVE SUMMARY

### Major Findings on Asset Quality and NPLs
- NPLs fell from €360 billion (16½ percent of gross customer loans) in 2015 to €190 billion (8.1 percent) in June 2019, achieved mainly through circa €145 billion of private NPL disposals.
- Italy’s NPL ratio at end-June 2019 (8.1 percent) remains above the 3.0 percent average of the main EU banks as of June 2019.
- Provisioning coverage was 52.5 percent as of June 2019, placing Italy 7.6 percentage points above the average of the main EU banks as of June 2019.
- New NPL formation has fallen to pre-crisis levels.

### NPL Composition and Concentration
- Aggregate NPLs are concentrated in SMEs and corporates, with circa 77 percent of gross NPLs toward these borrowers.
- Sector concentration by gross book value (GBV): services 31 percent, construction 29 percent.
- Vulnerable sector detail: 45 percent of credit to construction companies and a further 32 percent to real estate activities are non-performing.
- Collateral and guarantees: as of June 2018, approximately 52 percent of the total stock of gross NPLs was backed by collateral, with a further 20 percent having personal guarantees.
- NPL classification breakdown: more than half of the NPL stock is Sofferenze (bad loans); over 40 percent of banks’ gross NPL stock is categorized mostly as UTP (unlikely to pay); a small proportion are past-due but not UTP.

### UTP Portfolios (Box 1 key points)
- UTP portfolios total €86 billion, accounting for over 40 percent of outstanding NPLs by exposure (42 percent for SIs and 48 percent for LSIs).
- Concentration: four largest banks account for more than half of the total UTP; 78 percent concentrated in the 10 largest Italian banks.
- Provisioning coverage: UTP portfolios 35 percent on average; bad loans 69 percent.
- Typical UTP loan characteristics: majority under €3 million; most under €10 million; borrowers are often small enterprises with multiple creditors (up to 30 in some cases).
- Restructuring timelines: market reports indicate two to four years on average to reach agreement on debt restructuring.

### Banks’ NPL Reduction Plans and Drivers
- SIs with high NPLs plan to reduce NPLs from €144 billion (8.3 percent of loans to customers) at end-June 2018 to €107 billion (7 percent of loans to customers) by end-2020.
- LSIs aim to reduce the NPL stock from €21.4 billion (16.3 percent of loans to customers) at end-June 2018 to €13.3 billion (9.7 percent of loans to customers) by end-2021.
- Banks’ projected volumes of NPL cures and internal workouts are almost matched by a new inflow of NPLs, implying limited net reduction from internal cures alone.
- Banks rely heavily on disposals and write-offs for NPL reduction; banks achieved or exceeded planned disposals up to December-2019 despite reduced market appetite for Italy country risk from spring 2018 to spring 2019.
- Plans vary across banks; more profitable and better capitalized banks plan more aggressive reductions.

### Supervisory and Regulatory Developments
- Intensive supervisory oversight led to banks developing meaningful NPL management plans with reduction targets; supervisors established dedicated task forces and intensified NPL reporting and monitoring.
- Recommendation: Supervisors should continue robust challenge of banks’ strategies and the ambition of their NPL reduction targets.
- Recommendation: BdI should consider extending the ECB’s approach that sets bank-specific expectations for the gradual path to full provisioning of the existing NPL stock to LSIs with high NPLs with an adequate phase-in period.
- Recommendation: BdI should consider more prescriptive guidance to LSIs on NPL management, including:
  - practical examples of when forbearance is appropriate;
  - expectation to use decision trees to guide forbearance decisions;
  - controls when applying multiple forbearance measures;
  - time constraints on forbearance;
  - examples of when loans should be valued using going- versus gone-concern approaches;
  - illustrative constraints on collateral valuation methodology and minimum discounts and haircuts;
  - guidance on appropriate implementation of impairment triggers.
- Suggestion: elements of the EBA guidelines on the management of nonperforming and forborne exposures could be used as a starting point.

### Legal and Institutional Framework for NPL Resolution
- Italy has undertaken several reforms of its legal system of debt enforcement and insolvency and has improved court informatization via telematics processes.
- Remaining gaps and implementation needs:
  - strengthen regulation of insolvency administrators;
  - fine-tune the early warning mechanism;
  - improve efficiency of liquidation processes;
  - consider revising creditor priorities and reforming the special regime for large enterprises (e amministrazione straordinaria);
  - legislative changes to provide greater legal certainty and flexibility for the out-of-court foreclosure mechanism.
- Judicial timing constraints:
  - average time for judicial enforcement of claims is five years;
  - insolvency takes around seven years;
  - high heterogeneity in duration of processes across the country.
- Causes of delay: lengthy in-court processes due to courts’ lack of resources and accumulated case backlogs.
- Recommendation: Judicial reform should focus on ensuring courts have sufficient resources and expertise is spread evenly across the country; improvements needed at structural level combined with enhancements in internal court administration and case management.

### Policy Recommendations (summary from Table 1)
- Continued scrutiny of banks’ credit risk, loan classification, provisioning; more frequent reviews and targeted inspections, particularly of UTP portfolios. (SSM, BdI) — Timing: C
- Continue regular challenge of progress and ambition of banks’ NPL reduction plans. (SSM, BdI) — Timing: C
- Apply the SSM approach for path to full provisioning of existing NPL stocks to LSIs with high NPLs over an appropriate transition (e.g., 3–5 years). (BdI) — Timing: I
- Review BdI NPL guidelines for LSIs to incorporate EBA guidelines and include prescriptive expectations on forbearance, collateral valuations, and impairment triggers. (BdI) — Timing: I
- Develop bank guidance and enhance on-site supervision guidance for management of UTP portfolios. (SSM, BdI) — Timing: I
- Ensure courts have sufficient resources and specialization; spread best practices in court administration and case management. (MoJ/NJC) — Timing: ST
- Improve foreclosure procedures to reduce time between asset sale and distribution of proceeds. (MoJ/Government to present law proposal) — Timing: ST
- Develop online platform for judicial auction sales as a nation-wide marketplace. (MoJ) — Timing: I
- Facilitate out-of-court foreclosures of real estate in corporate debt context and regulate out-of-court collateral sales. (MoJ/Government to present law proposal) — Timing: I
- Promote development of a code of conduct on voluntary and consensual debt restructuring. (BdI to support ABI) — Timing: ST
- Refine the early warnings mechanism and its implementation measures. (MoJ/Government to present law revision proposal) — Timing: I
- Allow expedited court approval of reorganization plans already agreed by necessary majority of creditors (fast track pre-pack) within “concordato”. (MoJ/Government to present law revision proposal) — Timing: ST
- Complete the regulatory and supervisory regime of insolvency administrators. (MoJ) — Timing: I
- Implement the new insolvency framework and reinforce with revision of creditor priorities and reform of extraordinary administration. (MoJ/Government to present law revision proposal; all agencies responsible for insolvency reform implementation) — Timing: I,C

*Timing legend: C = continuous; I (immediate) = within one year; ST = Short Term (within 1–2 years); MT = Medium Term (within 3–5 years).*

_Italicized source: IMF staff technical note (authors Dermot Monaghan and Natalia Stetsenko), EXECUTIVE SUMMARY section._

### 4.      The Italian NPL market is the most active in Europe, with the 2018 volume of

### 4.      The Italian NPL market is the most active in Europe, with the 2018 volume of transactions exceeding €70 billion and estimated at €25 billion in 2019

### Market activity and GACS (Garanzia Cartolarizzazione Sofferenze)
- 2018 transaction volumes:
  - Exceeded €70 billion.
  - Driven by very large deals, including a €24.1 billion securitization (Banca MPS) and a €10.8 billion portfolio sale (Intesa).
  - GACS-backed securitizations in 2018 included: €5.1 billion (Banco BPM), €2.7 billion (UBI), €2 billion (BPER), €2 billion (ICCREA).
  - A number of true sale transactions also contributed.
- 2019 estimated disposals:
  - Estimated at €25 billion.
  - 30 percent of 2019 disposals were through the GACS securitization scheme.
- GACS overview and main features:
  - GACS introduced by Law n. 49/2016; protects buyers of senior notes issued by an SPV by lowering their risk to that of a government bond.
  - Notes are backed by bad loans (“Sofferenze”) serviced by external servicers independent from the originating bank.
  - Government intervention limited to coverage of interest and capital payment obligation on the senior tranches; guarantee can be called on the amount outstanding on the senior notes at their legal final maturity date.
  - Eligibility criteria highlights:
    - Senior notes need to be rated investment grade and the rating is not revocable.
    - The bank has to sell at least 51 percent of the junior tranche.
    - Deconsolidation and de-recognition of the assets sold must be obtained.
    - The bank cannot be affiliated with the servicer.
    - Waterfall allows principal repayment on senior to be subordinated only to payment of interest on mezzanine (if issued), but not the junior notes.
    - The premium for the guarantee is a senior cost in the waterfall and is at a market-rate: based on the average price of a basket of single name CDS covering investment grade rated Italian companies, for the same duration of the notes.
- GACS market impact and usage:
  - By March 2019, banks had completed 21 transactions using GACS, securitizing more than €62 billion in bad loans.
  - First GACS-backed transaction in 2016: Banca Popolare di Bari, €480 million GBV.
  - Usage expanded in 2017 (several transactions, over €7 billion GBV) and 2018 (14 transactions worth circa €45 billion GBV).
  - The scheme was extended: September 2017 for one year, September 2018 for six months, and March 2019 for two years.
- Extension to UTP:
  - Market commentators suggested extending GACS to UTP portfolios but highlighted technical challenges: rating agency models for UTP tranches not developed; expensive valuation of highly granular UTP portfolios; difficulties standardizing data tape; need to maintain operating relationship with debtors; multi-creditor challenges to achieve critical mass for enterprise rehabilitation.

### Adequacy of provisions and loss estimates (Box 3 and Table 2)
- High-level review findings:
  - Variations in provisioning coverage across banks not fully explained by portfolio characteristics.
  - Many banks’ provisioning coverage is lower than observed loss experience.
  - Estimated range of further provisioning needed for the SIs and 53 LSIs considered:
    - €5 billion if NPLs are worked out internally.
    - €20 billion if NPLs are disposed.
  - Most additional provisioning needs attributed to the UTP portfolios.
  - To achieve the 2018 agreed reduction targets (assuming reductions will be achieved through disposal), loan loss provisions would likely have to increase by about €7.2 billion.
- Table 2: Potential Additional Loan Loss Provisions Needed for SIs and LSIs (€bn)
  - NPE Internal Workout (€bn):
    - SIs: 4.3
    - LSIs: 0.6
    - Total: 4.9
    - of which, Bad Loans: SIs 0.5, LSIs 0.0, Total 0.5
    - of which, UTP and Past Due: SIs 3.8, LSIs 0.6, Total 4.4
  - NPE Disposal (€bn):
    - SIs: 17.3
    - LSIs: 2.7
    - Total: 20.0
    - of which, Bad Loans: SIs 6.4, LSIs 0.8, Total 7.2
    - of which, UTP and Past Due: SIs 10.9, LSIs 1.9, Total 12.7
  - Source: IMF staff estimates.
- Data review and recovery statistics (Box 3):
  - The mission used EBA transparency exercises and risk dashboards, SI financial statements, ECB Finrep (SIs), Bank of Italy FSAP data for LSIs (sample of 62 banks), BdI aggregate data, NPL servicer recovery information, and proprietary market adviser data.
  - Two dominant drivers of loss: credit risk mitigation and legal status of the NPL.
  - Banks have demonstrated a finite capacity to resolve NPLs through internal means—NPL reduction is expected to occur mainly through disposals or write-offs.
  - Gap between banks’ net book values and market values remains high at 13 percent on average.
- Recovery rates and implications:
  - On average, banks have recovered 38 percent on bad loans through internal workout and 58 percent for UTP and past-due portfolios.
  - Value recovery falls to 25 percent for bad loans and 43 percent for UTP and past-due once banks dispose of the risk in the open market.
  - Many banks’ loan loss provisions fall below these averages, particularly for UTP portfolios.
- Loss breakdowns (figures from Box 3 conclusion):
  - Losses from Bad Loans / Losses from UTPs & Past Due:
    - Internal Workout: 62% on aggregate; Secured –49%; Unsecured –74%.
    - BdI & special servicer recovery data (internal workout): 75% on aggregate; Secured –66%; Unsecured –83%.
    - Disposals (BdI recovery data): 42% on aggregate; Secured –33%; Unsecured –50%.
    - Internal workout + Market Premium: 57% on aggregate; Secured –48%; Unsecured –65%.

### Recent supervisory actions, bank plans, and targets
- Supervisory intensity and plans:
  - Intensive supervisory oversight led banks to develop meaningful NPL management plans with reduction targets.
  - Dedicated supervisory task forces reviewed and challenged banks’ strategies for credibility and ambition; reporting and monitoring intensified.
- SIs and LSIs NPL reduction targets:
  - SIs plan to reduce NPLs from €144 billion at end June 2018 to €107 billion (or 7 percent on average) by end-2020.
  - LSIs aim to reduce NPL stock from €21.4 billion (16.3 percent) at end-June 2018 to €13.3 billion (9.7 percent) by end 2021.
- BdI guidance and oversight for LSIs:
  - BdI issued guidance on management of NPLs for LSIs in January 2018: expects formal strategies to maximize current value of recoveries, short and medium-to-long term operational plans (roughly one and 3/5 years respectively), governance and operational arrangements, forbearance policies, loan classification, value adjustments and write-offs, and collateral valuation.
  - BdI requested 53 LSIs with high NPL ratios (other than cooperative banks/BCCs) to prepare/update NPL management plans by December 2021.
  - The BdI established a dedicated task force to assess plans’ credibility and ambition.
  - Based on plans, NPL ratio for a sample of 47 LSIs expected to decrease from 16.3 percent in June 2018 to 9.7 percent in December 2021.
- Plan monitoring and challenges:
  - BdI identified some inadequate or insufficiently ambitious plans and requested amendments; second-round updates scheduled for March 2019 and annual updates thereafter.
  - The BdI’s guidance is non-binding and not detailed enough on forbearance measures and processes; it refers LSIs to SSM Guidance for operational details.
  - Banks’ NPL reduction plans rely heavily on disposals and write-offs due to limited internal workout capacity and persistent inflows of new NPLs.
  - Planned disposal volumes appear achievable in the current liquid market environment, but reduced foreign investor appetite for Italy country risk could adversely affect outcomes.
  - Plan ambition varies across banks; more profitable and better capitalized banks plan more aggressive reductions.

### Policy recommendations to promote NPL reduction
- Maintain supervisory priority:
  - Supervisors should continue to prioritize strategies and reduction plans for banks with high NPLs. Persistent and assertive supervisory oversight is effective and should continue for all Italian banks with high NPL levels.
- Enhance BdI guidance and consider binding measures:
  - The BdI should further enhance regulations and guidelines to LSIs on treatment and management of problem assets.
  - Consider transforming the BdI’s NPL guidance into a binding regulation and incorporate the EBA NPE definition and subsequent guidelines on NPE management.
  - Prescribe more detailed criteria and examples on:
    - When forbearance is appropriate; require decision trees to guide forbearance decisions.
    - Controls on applying multiple forbearance measures and time constraints on forbearance.
    - Examples of when loans should be valued using going versus gone-concern valuation approaches.
    - Illustrative constraints on collateral valuation methodology and minimum discounts and haircuts to be applied.
    - Guidance on appropriate implementation of impairment triggers.
  - Continue monitoring implementation and scrutinizing NPL plans for credibility and ambition.
- Focused supervision for UTPs:
  - Given complexity of Italian UTP exposures, supervisors should pay particular attention to banks’ management of UTP risks.
  - Recommendations for supervisor actions:
    - Undertake targeted on-site reviews to ensure unviable firms are not granted unsustainable forbearance.
    - Consider partnering with specialist firms for a one-off, limited-term project to identify balance sheet vulnerabilities and build methodological approaches for future on-site challenges.
    - Develop guidance for banks and review internal supervisory policies to steer on-site inspections.
  - Suggested minimum criteria for UTP classification and forbearance eligibility include (examples provided in the guidance):
    - The enterprise operates as a credible going concern (evidence of generating cashflows sufficient to service debt under a lower interest rate and longer time horizon; at a minimum, an interest service coverage ratio of greater than 1).
    - The firm has sufficient current and historical quantitative financial data to credibly inform a financial restructuring.
    - The firm fully cooperates with all creditors’ requests and shares pertinent information with all other creditors.
    - No creditor has litigated against the firm in a way that threatens a potential financial restructuring.
    - The firm is not subject to third-party (non-creditor) litigation that places viability and solvency at material risk.
    - The loan has been categorized as UTP for less than 18 months; or if more than 18 months, there is clear evidence that more than half the creditors by total credit exposure support a proposed restructuring and are cooperating.
    - For medium and large firms (>50 employees, turnover >€10 million, and balance sheet >€10 million), the enterprise has been subject to an independent business review to verify viability and is undergoing a mix of financial and operational restructuring with industry expert involvement.

*Italic source: IMF staff report (content unit: 1itaea2020004).*

### 15.      Measures aimed at ensuring banks recognize losses on deeply delinquent debt using a

### 15.      Measures aimed at ensuring banks recognize losses on deeply delinquent debt using a

### Calendar-based provisioning and NPL reduction
- Calendar-based provisioning initiatives by the ECB and EU are welcomed and needed to ensure banks recognize losses on deeply delinquent debt and to incentivize timely restructuring.
- Expected effects:
  - Incentivize quick restructuring of cases that can realistically be rehabilitated.
  - Ensure recognition of costs associated with recovery for borrowers that cannot be rehabilitated.
  - Incentivize banks that have been slow in reducing NPLs to accelerate reductions.
- Recommendation:
  - The BdI should consider extending the SSM’s approach (expectations for gradual path to full provisioning of existing NPL stocks) to LSIs with high NPLs with an adequate phase-in period.
- Regulatory timelines and expectations (as stated in the source):
  - EU draft regulation (expected to be enacted in April/May 2019): progressive provisioning to 100 percent within three years for new unsecured exposures, seven years for those secured with movable collateral, and 9 years for immovable collateral.
  - SSM’s 2018 addendum guidance: by 2021, banks should be 100 percent provisioned after two years for unsecured exposures and seven years for secured exposures that become non-performing from April 2018.
  - January 2019 SSM bilateral communication: expectation that the existing stock of NPEs will be fully provisioned within five to six years.

### Legal aspects of NPL resolution — scope and focus
- Focus: selected legal aspects of insolvency and creditor rights immediately relevant to resolution of distressed corporate debt, motivated by concentration of the largest part of the NPL portfolio in Italy in the corporate sector.
- Note: discussion is not a full assessment of the Italian insolvency and creditor rights regime against international standard.
- Five key legal/economic approaches to tackle NPLs:
  - Enforcement of collateral
  - Insolvency
  - Loan restructuring
  - Settlement with debtor at a discount to loan value
  - Disposal of risk to third parties
- Foundational pillars of NPL resolution: enforcement and insolvency.
- Prices for sale of NPLs are heavily influenced by duration, cost, and effectiveness of debt recovery and restructuring mechanisms.

### Recent reforms and their effects
- Italy reforms to debt enforcement and insolvency:
  - 2015–2016 amendments to enforcement framework: shortened procedural deadlines, enhanced flexibility for price formation in auctions, increased transparency in sales.
  - 2006–2018 changes significantly modernized the insolvency framework, culminating in new insolvency law adopted in January 2019 and expected to take full effect in August 2020.
- Despite reforms, slow judicial processes remain a key reason for low NPL recovery rates and large asset sale discounts.
- Recovery statistics (BdI data for 2017):
  - Average recovery rate for total NPL positions closed in 2017: 30 percent.
  - Average recovery rate for NPLs secured by collateral: 39 percent.
  - Average recovery rate for unsecured credit: 21 percent.
- Timing statistics (2017 data):
  - Average time for real estate judicial enforcement: five years.
  - Average insolvency process duration: somewhat over seven years.
- BdI estimate on foreclosure time and pricing impact:
  - Shortening recovery time by a year could increase the price by 4.6 percent of gross book value.
  - Under assumptions (20 percent IRR), price of a bad loan decreases from 36.2 percent to 12.9 percent of gross book value by the 6th year of recovery.

### Judicial enforcement — delays, heterogeneity, and specific metrics
- Judicial delays are endemic and highly variable across courts and regions.
- Foreclosure (procedura esecutiva immobiliare) average length and counts (Cerved 2016–2018H data):
  - Average length (years): 2016 = 5,11; 2017 = 5,00; y/y = 0,11; 2018H = 5,00.
  - Average length (days): 2016 = 1.866; 2017 = 1.827; y/y = -39; 2018H = 1.826.
  - Number of closed files: 2016 = 57.527; 2017 = 64.078; y/y = 11,4%; 2018H = 31.066.
- Geographic variation in average length of foreclosures (Cerved 2016–2017):
  - North West: 2016 files = 17.767; average length in years = 3.97. 2017 files = 21.306; average length in years = 4.26. var. y/y number of files = 19.9%; average length in years = 0.19.
  - North East: 2016 files = 9.777; average length in years = 3.75. 2017 files = 12.014; average length in years = 3.99. var. y/y number of files = 22.9%; average length in years = 0.24.
  - Center: 2016 files = 10.399; average length in years = 4.89. 2017 files = 10.709; average length in years = 4.76. var. y/y number of files = 3.0%; average length in years = -0.13.
  - Islands: 2016 files = 6.125; average length in years = 7.14. 2017 files = 6.839; average length in years = 7.41. var. y/y number of files = 11.7%; average length in years = 0.27.
  - South: 2016 files = 13.459; average length in years = 6.84. 2017 files = 13.210; average length in years = 6.25. var. y/y number of files = -1.9%; average length in years = -0.59.
- Court-to-court variance causes: differing court efficiency levels, insufficient resources (especially human resources), and backlogs.
- Foreclosure process stages: court order for seizure, appraisal, auction sale (public notary or other professional) under court supervision, distribution of proceeds to creditors.
- Ordinary procedure for unsecured credit is lengthier due to claim legitimacy verification and asset identification for seizure and sale.

### Reforms, online platform, and remaining issues
- 2015–2016 reforms reduced pre-sale procedural deadlines, improved auction sale rules, and allowed price reductions (up to 50 percent after multiple failed auctions). Estimated shortening:
  - Pre-sale procedures shortened on average between 10–15 percent; sale procedure shortened up to 43 percent (BdI sample study).
- Post-sale distribution delays persist; distribution of proceeds to creditors can take many months.
- Nation-wide online platform for sales of assets (Portale delle vendite pubbliche) introduced:
  - Effective February 2018; aims to increase transparency and participation in public sales.
  - Platform serves as interface between potential buyers and private auction operators appointed at court level.
- Platform limitations reported:
  - System not yet the intended “national market place”; asset information is not standardized or user-friendly.
  - Platform is not an auction platform per se; it links to local auction operators and rosters vary by court.

### Judicial performance variation and harmonization efforts
- Northern Italy generally records higher court efficiency and reduced backlogs versus South, Center, and Islands.
- Structural factors: appointment and rotation system concentrates more experienced judges in Northern regions; smaller courts with single judges lack commercial expertise.
- Backlogs at courts of appeal and the Supreme Court larger than at ordinary courts.
- National Justice Council 2017 guidelines on best practices for foreclosure process aim to harmonize and speed up foreclosures (including case management, organizational recommendations, and encouragement of partial distribution of auction proceeds). Effect of guidelines is yet to be seen.

### Judicial enforcement — recommendations
- Improvements needed at the structural level of the Italian justice system combined with strengthening resources, organization, and case management at court level.
- Judicial reform should focus on:
  - Improving the structure of the judiciary and ensuring expertise/experience is spread evenly across the country.
  - Strengthening specialization of judges on commercial matters.
  - Streamlining and simplifying civil procedure rules for greater efficiency.
- Consider additional changes to foreclosure procedures to reduce time between asset sale and distribution of proceeds:
  - Further standardization in court management of distribution of proceeds.
  - Consider transferring duties of managing distribution of proceeds from the judge to the court representative subject to judicial control.
- Further development of the online public platform for auctions:
  - IT improvements and standardization of asset-related data in a user-friendly manner.
  - Harmonization of court practices on choice of local auction operators to bring uniformity and predictability.

### Out-of-court enforcement of real estate collateral — Marciano mechanism
- May 2016 law introduced out-of-court enforcement (patto Marciano) allowing financial creditors of defaulted corporate debt to directly repossess collateral if clause is in loan agreement.
- Intention: speed up enforcement by avoiding judicial system delays.
- Practical limitations:
  - Mechanism benefits future NPLs rather than existing stocks because borrowers of defaulted loans unlikely to accept inclusion of clause without concessions.
  - Banks reluctant to include Marciano clause; practice has not spread.
  - October 2018 prudential regulation changes relaxed limits on banks’ holdings of repossessed assets, yet reluctance persists.
- Impediments to use:
  - Lack of legal certainty, rigid repossession rules, reputational risks, and additional asset management burden for banks.
  - Law lacks clarity on rules applicable to disputes over appraisal value and does not envisage option to opt-out from repossession if valuator’s evaluation is unsatisfactory.
- ABI–Confindustria memorandum of understanding (MOU) aimed to address reputational risks and provide common understanding of some provisions, but:
  - MOU has no force of law and is insufficient to overcome perceived shortcomings and flexibilities needed.

### Out-of-court enforcement — recommendation
- Introduce further flexibility and clarity in regulation of the out-of-court enforcement mechanism to incentivize its use within constitutional constraints.
- Possible reforms:
  - Explicitly allow creditors the option to sell the collateral, in addition to repossession (would require changes to current framework, regulation of sale process, and perhaps allow margin for price reduction below appraised value in a public sale).
  - Introduce detailed rules for appraisal disputes.
  - Address rigidities and uncertainties identified in the ABI–Confindustria MOU through statutory changes.

*International Monetary Fund — excerpt from chapter on legal aspects of NPL resolution and enforcement measures*

### 27.      Multi-creditors negotiations in Italy reportedly take many months and there are no

### 1itaea2020004 - 27.      Multi-creditors negotiations in Italy reportedly take many months and there are no

### Multi-creditor negotiations
- Multi-creditors negotiations in Italy reportedly take many months and there are no guidelines to assist this process.
- A set of principles and guidelines governing negotiation and conduct (e.g., INSOL International Global Approach to Multi-creditors Workouts) could be useful even if non-binding.
- The ABI considered adopting debt restructuring guidelines in the past, but the project never materialized.

### Pre-insolvency out-of-court restructuring tools (current system)
- The pre-insolvency restructuring mechanisms are covered under the insolvency framework law and include:
  - out-of-court work-out plans (“piani attestati di risanamento”)
  - restructuring agreements (“accordi di ristrutturazione”)
  - a special type of restructuring plans designed for financial creditors
- Workout plans (piani di risanamento):
  - Are “private” agreements fully outside of court control.
  - Are not subject to obligation to be disclosed to public sources.
  - Can provide for an internal reorganization (e.g., merger or capital increase) or involve restructuring agreements with creditors.
  - Are certified by an independent expert appointed by the debtor.
  - Provide protection for acts executing the plan from the regime of avoidance actions and criminal prosecution in case of subsequent bankruptcy proceeding.
  - The 2019 insolvency law strengthened documentary requirements for the piani di risanamento.
- Restructuring agreements (accordi di ristrutturazione):
  - Are subject to court control.
  - Can be concluded when agreed with creditors representing at least 60 percent of all claims against the debtors.
  - Special rules for financial creditors allow extension of the effect on dissenting creditors when approved by 75 percent of all financial creditors’ claims.
  - Advantages include recognition of priority of new finance within the agreement and possibility to request a stay on creditors’ actions during negotiation.
  - After filing with the court, the debtor must publish the restructuring agreement in the companies’ register where the debtor has its registered office.

### 2019 insolvency law: changes to restructuring agreements and thresholds
- The 2019 law integrates out-of-court restructuring agreements into the broader insolvency framework: failure to approve may lead to in-court concordato or liquidation.
- The law relaxes, in certain cases, the requirements for conclusion of restructuring agreements:
  - Lowers the approval threshold from 60 percent to only 30 percent of creditors’ consent provided interests of non-adhering creditors are not affected (applies only in exceptional circumstances).
  - If a stay on creditors’ actions is proposed, the 60 percent threshold continues to apply.
- The regime of the current “financial restructuring agreements” with a cramdown mechanism will be extended to other creditor classes:
  - Agreements approved by 75 percent of the creditors’ claims of a class can be binding on dissenting creditors of the same class.

### Early warning system (major novelty of the 2019 law)
- Objective: incentivize early restructuring when insolvency could still be avoided and address late insolvency filings.
- New procedures require companies to take necessary actions to address distress assessed by a set of financial distress indicators (yet to be adopted).
- More companies are required to create internal control bodies, increasing costs for small enterprises.
- Obligations to alert:
  - Debtor’s statutory and external auditors and certain public creditors (e.g., tax administration) must immediately inform company directors of signs of a crisis.
  - If directors fail to address it, those parties must turn to a special “crisis-assistance commission” (Organismi di Composizione della Crisi (OCRI)) to be created at the local Chamber of Commerce.
- OCRI process:
  - OCRI are meant to assist the debtor in working out a consensual arrangement with creditors.
  - If no agreement with creditors is reached within 6 months (as of the date of the start of the OCRI-led process) the OCRI reports the case to the public prosecutor, who can file insolvency (liquidation) ex officio.
- Incentives for using early warning mechanism:
  - Exemption or decrease of liability for certain insolvency crimes
  - Reduction of tax sanctions
  - Delay of the duty to request commencement of insolvency
- Applicability:
  - Procedures principally assist small and medium size companies and do not apply to large companies or listed companies.

### Risks and implementation challenges of the early warning system
- Italy has no experience with the early warning system and no best practices exist for it.
- The mechanism appears complex and highly administrative.
- Potential involvement of the prosecutor to file for insolvency needs careful consideration.
- Efficiency depends heavily on ability and competence of OCRI (yet to be created).
- Appropriateness and flexibility in use of “crisis indicators” (yet to be adopted) will be crucial.
- Potential risks:
  - Perceived reputational risks from negative signaling to creditors and business partners.
  - Creating an antechamber to insolvency which delays insolvency filings, enabling potential avoidance of liability.

### Recommendations (from the source)
- Promote the development of a code of conduct on a voluntary and consensual basis for debt restructuring, potentially through the ABI with endorsement and assistance of the BdI.
- Further refine the early warning mechanism to ensure efficiency:
  - Avoid negative signaling associated with entrance into early warning processes.
  - Ensure passage through the mechanism does not replace timely submission of an insolvency filing.
  - Crisis indicators to be sufficiently flexible to accommodate the variety of corporate distress situations and allow room for judgement.
  - While experience is gained, reconsider the strict mandatory nature in favor of a more voluntary procedure.
  - Consider simplifying OCRI processes, issuing guidelines for harmonization of OCRI-assistance, and building up OCRI competence.

### Enterprise insolvency: system efficiency and 2019 reform effects
- The current insolvency system is undermined by complex and long procedures based on the 1942 insolvency law amended multiple times.
- Average length of insolvency procedures (latest statistics; source: Cerved (2019)):
  - The average length of the insolvency procedures is around seven years (with high variability across courts).
  - Table 5: The Average Length of Pending Insolvency Cases — Average length in years:
    - 2016: 5,2
    - 2017: 5,2
    - 2018: 5,3
  - By Geographical Area — Average length in years:
    - North-East: 4,6
    - North-West: 4,5
    - Centre: 5,4
    - South and Islands: 6,3
  - The number of insolvencies reported from 2001 to 2018 is equal to 206k: of which 86k (41.7%) are still not closed («pending»).
- System weaknesses:
  - Insolvency filings often occur too late to save the business.
  - Restructuring mechanisms are poorly integrated into the general insolvency framework.
  - Liquidation process is slow.
  - Numerous creditor priorities—including public creditors—reduce recoveries.
  - Court delays and lack of judicial specialization further aggravate inefficiencies.
- 2019 reform aims:
  - Rationalize the insolvency system and better align with international best practices.
  - Provide a single procedure for insolvency cases based on the state of “crisis” (actual and imminent insolvency); a single procedural scheme applies regardless of restructuring or liquidation choice.
  - Informatization measures, including electronic voting, to speed some procedural actions.
  - Duration of the insolvency moratorium limited to 12 months.
  - Reform guided by EU Regulation 2015/848, Commission Recommendation 2014/135/EU, and UNCITRAL recommendations.
  - Emphasis on encouraging early restructurings, avoiding insolvency, and continuing enterprise activities.
- Further implementation and timing:
  - Most provisions of the new law will come into force within 18 months of adoption, i.e., in August 2020, with a few immediate corporate law changes.
  - Vacatio legis period intended to allow adoption of implementing measures and creation of supportive infrastructure (including OCRI, financial distress indicators, framework for insolvency administrators).
- Changes to the reorganization procedure (concordato):
  - The law aims to ensure concordato is used to preserve business continuity rather than as creditors-managed liquidation.
  - Assets-sale reorganizations within reorganization are admitted only under limited/exceptional circumstances.
  - Approval of a plan requires vote in favor of 51 percent of outstanding credit.
  - If one creditor holds majority of votes, plan also needs approval by the majority of creditors in number.
  - Judge must assess economic feasibility of the restructuring plan based on an expert opinion (in addition to legal assessment).
  - Court approval of concordato can be a long process and take months.
- Liquidation stage:
  - Largely unaltered and remains lengthy with numerous priorities that reduce recovery of unsecured claims.
  - Informatization is fostered.
  - Law modifies general authorization to liquidate assets: requires court approval of each single act of liquidation (risk of prolonging liquidation stage).
  - Original intention to consolidate and reduce list of priorities did not materialize; no changes to multiple priorities.
  - The law lengthens the current maximum time of liquidation from 2 years (extendable) to 5 years, and requires organizing the first liquidation sale within a year of opening the liquidation procedure.
- Group coordination:
  - New law provides for coordination of insolvency procedures of companies belonging to the same group.
  - Companies of the same group are allowed to file before the same court a single petition for restructuring agreement, a single concordato preventivo plan and proposal, or a petition for commencement of judicial liquidation proceedings.
  - This does not lead to consolidation of assets and liabilities of different companies in the group.

*Source: 1itaea2020004 - 27.*

### 41.      The new insolvency law of 2019 brings no changes to the special regime for large

### The new insolvency law of 2019 brings no changes to the special regime for large enterprises

### Special insolvency regime for large enterprises
- Italy maintains a special insolvency regime known as “extraordinary administration” (amministrazione straordinaria).33
- The regime applies to large distressed enterprises that satisfy certain requirements in terms of number of employees and size of debt.
- Objective: ensure temporary continuation of distressed large companies to safeguard employment and production levels during the insolvency procedure, rather than orderly liquidation.
- The regime accords special protection to broader social and employment preservation considerations over creditor rights.
- If the business cannot be restructured, it will eventually be subject to liquidation — a feature that is contrary to the international standard on insolvency.
- The existence of the special regime likely interferes with general economic efficiency, compromising investment and competitiveness.34
- Footnote detail: The special regime is characterized by two types of extraordinary administration procedures generally referred to as “Prodi-bis” and “Marzano” procedures (for large enterprises and very large enterprises, respectively). Both procedures are largely focused on preserving economic activities and maintaining employment’s levels in large enterprises rather than maximization of creditors’ interests as in normal insolvency processes. The procedures represent a hybrid of a judicial and an administrative procedure and assign a prominent role to the Ministry of Economic Development and the commissioners appointed by the Ministry who perform functions similar to those of insolvency administrators.33

### Institutional strengthening under the reform
- The reform establishes the creation of a register of insolvency professionals at the Ministry of Justice.
- Provides for further adoption of the qualification requirements and continuous education/training for insolvency professionals.
- Expected effects (when the new rules are adopted in the coming year): increase the professionalism and accountability of insolvency administrators, incentivizing good practices.
- Insolvency administrators’ powers will be augmented, allowing them to bring actions against shareholders and directors of the company responsible for its economic distress.

### Judicial specialization, jurisdiction, and court supervision
- The lack of judicial specialization in insolvency has been a continuous challenge for Italy and was not appropriately addressed under the latest reform.35
- Apart from the introduction of COMI (i.e., center of main interests of the debtor) as the criterion to determine territorial competence, the only other significant change to jurisdictional competence has been to transfer the jurisdiction over large enterprises and groups of enterprises to the courts with specialized sections in enterprise matters established in large cities, which usually include specialized insolvency judges.36
- The new law strengthens the supervisory power of the courts over the insolvency process:
  - The court will be granted greater powers on confirmation of reorganization plans (by the requirement of the feasibility assessment), liquidation of assets and general supervision of the process.
  - Court supervision provides safeguards for the parties and the integrity of the process, but efficiency depends on the ability of the judge to make speedy and expert decisions.
  - Without improvements in judicial expertise, speeding up internal court processes and harmonization of court practices across the system, the new additional powers of the court allow for risks of further delays to the process.

### Recommendations
- Reinforce the new insolvency law with the revision of creditor priorities and further streamlining of in-court processes.
  - Consolidate the system of multiple special priorities under the insolvency law, reducing them whenever possible.
  - Revisit the new requirement for judge’s approval of each liquidation act and return to the current rule providing the administrator with a general mandate to liquidate the estate.
- Bring the extraordinary administration regime for large enterprise into the general insolvency regime.
  - Large enterprises and its creditors should be able to benefit from the general insolvency rules both when it comes to restructuring and liquidation.
  - The ability to renegotiate all contracts, including labor contracts, during the restructuring process is an important element for effective corporate restructuring.
  - Secured creditors should also benefit from the general safeguards limiting the stay on creditors’ actions.
  - Judicial control over the process is key for impartial and efficient outcomes of the restructuring or liquidation of distressed businesses.
- Within concordato framework allow the expedited court approval of reorganization plans already agreed by the necessary majority of creditors (fast track pre-pack).
  - Fast track plans could be subject to additional supporting documentation requirements to facilitate and speed up the court’s review.
- Increase the competences of the enterprise courts allowing concentration of commercial and insolvency disputes and promoting judicial specialization.
  - Considering the general delays of the court system and the general complexity and time of insolvency processes, these should be dealt with by judges with special expertise on the matter.
  - Further consideration of this issue is necessary, including as per the proposals in the law outlining the principles for the insolvency reform.37
  - The knowledge and expertise of judges in insolvency matters should be progressively increased.
- Complete and implement the framework for the regulation and supervision of insolvency administrators.
  - The new rules envisaged by the new insolvency law should ensure the continuous build-up of expertise and the accountability of insolvency administrators.

*Source: Italy — IMF staff assessment (excerpt).*

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_Source: https://www.imf.org/-/media/files/publications/cr/2020/english/1itaea2020004.pdf_