KKR is hitching a ride on a changing Italy. The private equity firm is setting up a fund with Intesa Sanpaolo and UniCredit to invest in troubled Italian companies. Traditionally, Italians would have sat on their dud loans. KKR is plugging itself into bigger trends: new bank regulation, a reformist government led by Matteo Renzi and quantitative easing-driven recovery.
The KKR-UniCredit-Intesa collaboration solves a number of tricky issues. Italian banks are saddled with euro 192 billion of loans to ailing companies. But they lack the skills or capital to nurture the investments back to health. One alternative is for banks to sell to a vulture fund. That, however, can mean taking steep losses and losing clients.
Under the deal, the two leading Italian banks will transfer rather than sell debt and equity in troubled borrowers. KKR provides new capital and management skills. The banks, by pooling their exposures, should be in a stronger position to control restructurings with KKR and avoid protracted disputes with other creditors. If the companies recover, the banks also hang on to some upside.
Still, the American group's timing looks good. The Italian government is pushing banks to consolidate and is streamlining bankruptcy laws. The European Central Bank (ECB) has clamped down on the age-old Italian habit of forbearance and is forcing weak lenders to recapitalise. That may help bring other banks on board, and speed up any restructurings.
Moreover, Italy's long-stagnant economy is starting to feel its first twitches from the ECB's quantitative easing programme. A weaker euro should boost the country's exporters. Italian industrial lobby group Confindustria expects the economy to grow 0.8 per cent this year, up from a predicted 0.5 per cent six months ago, and 1.4 per cent in 2016. The bet on troubled SpAs (società per azioni or a joint-stock company) looks smart.
The KKR-UniCredit-Intesa collaboration solves a number of tricky issues. Italian banks are saddled with euro 192 billion of loans to ailing companies. But they lack the skills or capital to nurture the investments back to health. One alternative is for banks to sell to a vulture fund. That, however, can mean taking steep losses and losing clients.
Under the deal, the two leading Italian banks will transfer rather than sell debt and equity in troubled borrowers. KKR provides new capital and management skills. The banks, by pooling their exposures, should be in a stronger position to control restructurings with KKR and avoid protracted disputes with other creditors. If the companies recover, the banks also hang on to some upside.
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It sounds like an obvious solution. In practice, getting such collaborative vehicles off the ground is hard work. This deal has taken over a year to come to fruition. A similar vehicle in Spain struggled. And, if things don't work out, KKR might find itself at odds with the banks.
Still, the American group's timing looks good. The Italian government is pushing banks to consolidate and is streamlining bankruptcy laws. The European Central Bank (ECB) has clamped down on the age-old Italian habit of forbearance and is forcing weak lenders to recapitalise. That may help bring other banks on board, and speed up any restructurings.
Moreover, Italy's long-stagnant economy is starting to feel its first twitches from the ECB's quantitative easing programme. A weaker euro should boost the country's exporters. Italian industrial lobby group Confindustria expects the economy to grow 0.8 per cent this year, up from a predicted 0.5 per cent six months ago, and 1.4 per cent in 2016. The bet on troubled SpAs (società per azioni or a joint-stock company) looks smart.