February 18, 2016 / 3:42 PM / 2 years ago

Insight: Parmesan bonds replace bank loans in Italy's new credit order

ROME/MILAN (Reuters) - When Parmesan prices proved too volatile for Italy’s strained banks a dairy cooperative near Bologna came up with a novel solution to its funding needs, bonds backed by wheels of cheese.

Worker inspects wheel of Parmesan cheese at storehouse shelf 4 Madonne Caseificio dell'Emilia dairy cooperative in Modena, Italy, February 16, 2016. REUTERS/Alessandro Bianchi

But 4 Madonne Caseificio dell‘Emilia remains an exception among small businesses struggling to get long-term funds in Italy, where a credit crunch risks holding back a fragile economic recovery after more than a decade of stagnation.

At the heart of the problem is the failure by successive governments to cut the cosy ties between Italy’s banks and companies, weaning them off loans and onto capital markets, something Bank of Italy Vice Director Fabio Panetta says “could activate a virtuous circle between market growth, investments and economic development”.

Because many small enterprises have never had to present a business plan or detailed accounts to get a loan, they are ill-equipped to make the transition cheesemaker 4 Madonne did in filing quarterly accounts and certifying balance sheets.

“It is a challenge for us because these are things we never did, not because we lack transparency but because that’s how the system works,” 4 Madonne’s Chief Financial Officer Andrea Setti told Reuters in a telephone interview.

“In our sector you balance the books at the end of the year, everyone agrees and the discussion ends there.”

Such light demands from banks were the norm in Italy until three years of recession bankrupted thousands of clients, piling up 200 billion euros (154.30 billion pound) of bad debt on banks’ balance sheets.

Their response was to cut lending drastically, leaving small firms to find other ways to pay the bills overnight.

“The majority of the small businessmen we see might be good at their trade but they have not evolved financially,” Nunzia Onesti, who runs a professional training firm in Naples, said.

Onesti says that some are not even able to communicate their financial needs clearly, something which makes it hard for firms to take advantage of the “mini-bond” scheme used by 4 Madonne.

This scheme was devised by then-Prime Minister Mario Monti in 2012 to help reduce companies’ reliance on banks by allowing companies that make more than 2 million euros a year and have more than 10 employees to issue such bonds.

But so far the numbers don’t add up.

Bank loans, which at 793.5 billion euros ($883 billion) in December make up some 88 percent of all corporate debt, fell by 24 billion euros in the past two years, according to Italy’s banking association.

Yet mini-bonds have far from filled the gap - only about 3 billion euros have been raised in this way since 2013 by unlisted companies that are not units of bigger groups or backed by private equity, according to Reuters calculations.

“Mini-bonds are complicated for small and medium-sized companies, and the people who should be investing have trouble really getting to know the business,” Davide Baldini, principal at Oliver Wyman consultancy, said.

RUNS IN THE FAMILY

One major obstacle to Italian corporations raising more money on the capital markets is that family-owned companies are close-knit and often unwilling to open up their books.

Some of the country’s biggest and best-known firms such as the world’s largest pasta producer Barilla and Nutella maker Ferrero are resolutely family-controlled, while on Milan’s AIM market for smaller companies, there are only 74 names listed, compared with more than 1,000 on the equivalent in London.

The Bank of Italy’s Panetta said in a speech in January that companies were reluctant to open up to markets and invite scrutiny from shareholders, watchdogs and tax authorities.

“Business people see entering capital markets as involving a fixed cost, to a great extent in terms of transparency, which outweighs the advantages,” he said.

For companies that have shouldered this cost and broken the family-owned, locally-funded mould, adapting to the realities of market financing has posed unforeseen challenges.

Massimo Zanetti Beverage Group (MZB) MZB.MI, which owns 20 coffee brands including Segafredo Zanetti and Britain’s Puccino‘s, was turning over about 1 billion euros a year before it floated, but its scale did not fully prepare it for the rigors of a stock market listing.

After releasing quarterly results that undershot analyst expectations during their first year on the market, its stock nosedived and it had to go on a roadshow to reassure investors.

“We were used to being treated with patience by our owner and founder, Mr. Zanetti, but after we listed, we found ourselves under pressure from investors and analysts to come up with positive figures every quarter,” MZB chief financial officer Pascal Heritier said.

The stock is trading more than 30 percent lower since its market debut in June but Heritier said MZB does not regret listing, which allowed it to cut debt and gave it more flexibility to consider acquisitions.

It will take time to coax others into raising money independently, but the banks’ lending squeeze will encourage them, said Vito Ferito, associate partner at Frame Capital UK which co-arranged 4 Madonne’s bond.

“There needs to be a cultural shift to encourage a businessman who has gone to his usual bank for 40 years to start looking at other options,” said Ferito.

Additional reporting by Valentina Za; Editing by Alexander Smith

0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below