How to invest in distressed asset in the Italian renewable energy market
With the latest changes in the Italian bankruptcy laws, the acquisition of distressed assets from the companies has certain advantages for the investor. A small guide from Marco Pistis, Francesca Bisaro or Eleanor Fletcher, lawyers at Abbatescianni Studio Legale e Tributario.
The Italian market for renewable energy has suffered a deep crisis as a result of the reorganization of Government incentives, ongoing changes in the regulatory framework and consequential termination of banks financing new projects.
Many operators in the market, which over the years preceding the crisis had invested capital in Italy in the design and construction of renewable energy plants, found themselves with liquidity problems and are in the process of major divestment and restructuring, or even bankruptcy procedures.
In recent years, the Italian legislature, aware of the widespread crisis that has hit all industries, intervened at various times to change the bankruptcy laws with a view to:
- enabling companies in crisis to access external administration processes;
- protecting the going concern value of the business.
In 2012, article 186 bis of the Bankruptcy Law was introduced, governing the commencement of company voluntary arrangements (concordato preventivo in continuità), inspired by the process of reorganization under Chapter 11 in the United States, which provides for the continuation of the business as a going concern for troubled companies.
The business plan, containing a description of the activities through which the continued operation will be guaranteed, must be certified by a professional as to its accuracy and feasibility.
Article 186 bis of the Bankruptcy Law provides that the plan for continuity may provide for:
- the continuation of the business by the debtor;
- the sale of the business in operation or its transfer to one or more companies, including newly constituted ones;
- liquidation of non-operating assets.
The legislation allows for the plan to provide for the transfer of the business activities to a third party, the so-called guarantor (assuntore).
The guarantor (assuntore), identified in the plan, shall be responsible for paying the company’s debts, in the reduced amount under the proposed agreement, subject to approval of the arrangement.
At that time the guarantor will also acquire the business of the applicant company.
This process allows for possible investors interested in troubled companies, such as owners of renewable energy plants, to act as a guarantor of a voluntary arrangement, after due verification of assets and liabilities of the applicant.
The due diligence process should cover the plants and should consider:
- all technical issues (both construction and management) of the plants;
- economic and financial aspects aimed at assessing the profitability of the plants;
- authorization, contractual and regulatory aspects with regard to bodies responsible for overseeing the operation of the plants and provision of incentives.
The acquisition of assets from the company the subject of the arrangement have certain advantages for the investor because:
- the liability of the purchaser does not extend to liabilities or other constraints existing over assets prior to completion of the sale;
- contingent liabilities relating to debts with claim or title prior to the arrangement withstand the arrangement and are therefore reduced by the percentage set out in the proposal;
- the purchase price of the asset is less than what would be obtained in an open market.
Obviously, however, the procedures do not provide any guarantee of liability. In this area, we have had the opportunity to support some Italian companies, with liquidity and refinancing problems, in the process of submitting a proposed arrangement to Court for its approval, and at the same time allowing international investors to acquire an Italian target with very low risk and a very attractive price.
Marco Pistis, Francesca Bisaro, Eleanor Fletcher