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Bank credit and Covid-19 the provisions of the Cura Italia Decree

24 March 2020

Bank credit and Covid-19 the provisions of the Cura Italia Decree

1. Introduction.

In order to deal with the emergency situation resulting from the spread of the so-called "coronavirus", the "Cura Italia Decree" (Law Decree no. 17 of 16 March 2020) has introduced some measures with an important impact on the credit system, supporting businesses and families.

2. The moratorium for credit granted to SMEs under Article 56.

2.1 The beneficiaries

One of the most relevant measures is the moratorium under Article 56 of the “Cura Italia Decree”, which is applicable to SMEs, as defined in the European Commission Recommendation no. 2003/361/EC. 

Debt exposures are already classified as “non-performing” on the date of publication of the “Cura Italia Decree”, are expressly excluded from the application of Article 56.

Moreover, Article 56, paragraph 3, requires SMEs to self-certify that they have suffered temporary liquidity shortages as a direct consequence of the spread of the Covid-19 epidemic. 

2.2 Contracts subject to moratorium

The contracts that are subject to the moratorium are the following:

(a) for credit line agreements and for loans granted against receivables in force on 29 February 2020 or, if higher, on the date of the publication of the “Cura Italia Decree”, it is provided that the committed amounts may not be revoked (in whole or in part) until 30 September 2020;
(b) for non instalment loans with maturity date falling before 30 September 2020, the contracts are extended until 30 September 2020;
(c) for mortgages and other loans repayable in instalments, payments of instalments and leasing payments due before 30 September 2020 are suspended until 30 September 2020. 

The explanatory report to the "Cura Italia Decree" clarifies that the request for a moratorium does not lead to an automatic change in the credit quality classification of the exposures subject to the moratorium "unless there are new objective elements that lead intermediaries to review their judgement on the credit quality of the borrower during the moratorium period". 

2.3 Support from the SME Guarantee Fund

In order to mitigate the impact on the banking system of a deterioration in the quality of loans subject to the moratorium, the measure indicated above are also accompanied by the applicability of the so-called SME Guarantee Fund.

3. Liquidity support measures through guarantee mechanisms under Articles 49 and 57.

In order to avoid liquidity crisis for Italian companies, the Cura Italia Decree also provides for guarantee mechanisms to encourage access to credit (Articles 49 and 57).

3.1 The extension of the Guarantee Fund for SMEs according to Article 49

Article 49 extends the eligibility to the Guarantee Fund for SMEs established by Law no. 662/1996, whose purpose is to foster lending to SMEs through public guarantee mechanisms.

The new regime shall remain in force for a 9-month period from the entry into force of the “Cura Italia Decree”. In particular, Article 49 provides that the guarantees are granted free of charge, raises the maximum guaranteed amount per company (up to €5 million), and increases the maximum guaranteed percentage.

The guarantee will automaticly be extended in case of any moratorium arising from the COVID-19 emergency.

3.2 The guarantees for large companies and the intervention of Cassa Depositi e Prestiti pursuant to Article 57

Article 57 of the “Cura Italia Decree” provides for the intervention of the Cassa Depositi e Prestiti ("CDP") in order to extend guarantee mechanisms (similar to those already provided for SMEs) to large companies, which have suffered a reduction in turnover due to the emergency situation and which operate in sectors to be identified on the basis of implementing regulations that are expected to be enacted.

 CDP may both provide loans directly to these companies and support the banks that provide these loans through guarantees.

The State, in turn, may grant "counter-guarantees" up to a maximum of 80% of the exposures taken on by CDP.

4.  Implementation of the Solidarity Fund "first home loans" under Article 54. 

Under Article 54, the Government decided to further extend the range of potential beneficiaries of the moratorium on first-home loans (i.e. self-employed workers, freelancers, professionals – collectively “Self-Employed Workers”), in addition to employees and other para-subordinated workers who already benefited from this measure). 

The suspension was already granted with the Law Decree No. 9/2020 in favour of those who have been suspended from work or reduced working hours for at least thirty days.

In the next nine months, Self-Employed Workers will be able to apply for it if they certify that they have suffered a reduction in their turnover at least equal to 33%, compared to the turnover of the last quarter of 2019.

It is possible to request the suspension of the loan for a maximum of two times and a total period of 18 months.

The suspension shall only apply to loans that have been regularly paid or that have been paid with a delay in the relevant instalments not exceeding 90 consecutive days. Therefore, it does not apply to loans for which enforcement proceedings have already been initiated. 

5. Assignment of NPLs and Conversion of DTAs into payable tax credits under Article 55.

Article 55 of the "Cura Italia Decree" intends to encourage the assignment of non-performing receivables (i.e. receivables not paid within 90 days of the due date).

In case of transfer for consideration by 31 December 2020 of non-performing receivables, a company may convert into tax credits the amount of the deferred tax assets related to the following components (even if not booked in the financial statements):

- tax losses not yet used to decrease the taxable income at the date of the transfer;
- the Notional Interest Deduction (Aiuto alla crescita economica — ACE) still available at the date of the transfer.

The provision does not apply to intra-group assignments or to companies in default or at risk of default pursuant to Italian bankruptcy applicable law.

Deferred tax assets may be converted into tax credits up to an amount equal to 20% of the nominal value of the receivables transferred.

 For this purposes, receivables may be considered only for a maximum nominal value of Euro 2 billion calculated considering the total amounts of receivables transferred, by December 31, 2020, by companies being part of the same group.

As from the effective date of the assignment of the receivables, the transferor will no longer be able to offset losses, nor deduct or take advantage of the excess of the Notional Interest Deduction by means of a tax credit, corresponding to the portion of convertible deferred tax assets.

The conversion into tax credits: (i) is allowed if an option is exercised by the end of the tax period in which the disposal of the credits is effective; and (ii) is effective starting from the following fiscal year.