Autore : Stefano Visalli e Carlotta de Franceschi
In the next weeks and months, businesses of all sizes will experience a vertical fall in orders, revenues and profits. In the face of this situation, which is already a reality for many important industrial and services value chains, companies will suffer liquidity shortages and will be forced to delay and/or suspend payments to suppliers, the Inland Revenues Services and even employees, generating ripple effect of liquidity contraction.
We are about to witness a liquidity crunch for the business world – which is comparable in dynamic, but much deadlier than the typical 1800-1900 banking system liquidity crunches. The estimates by Cerved predicting that 10% of businesses will not survive the health emergency we are facing are likely to be revised upwards. If this number were to be two or three times higher, it would mean millions of additional unemployed and the loss of a significant portion of the know-how of the Country.
Fortunately, to tackle the bank liquidity crises of the 1800s, the concept of lender of last resort was created, meaning an entity – central banks – capable of providing unlimited liquidity to banks to allow them to face panic crisis.
Today, we must come up with a similar scheme for companies (and for citizens, although that is not part of the focus of this proposal) avoiding moral hazard risks and directing support towards providing additional liquidity to businesses. We believe these goals can be achieved by applying the Anglo-Saxon Debtor in Possession (“DIP”) financing concept and extending the notion of “seniority” provided for by the Italian current bankruptcy law to provide companies with the required liquidity and prevent them from going bankrupt. The additional liquidity would then be senior with respect to the existing unsecured creditors, enormously reducing the risk related to this form of emergency financing.
Action Institute suggests providing an additional liquidity facility, senior to any other financial liability and assisted by a state guarantee, distributed rapidly and automatically, proportionally in size to the damages suffered by the business due to Covid-19.
Type of facility: zero rate standby facility, payment by installment in 5 years with a 1-year grace period
Draw down mechanism: on a monthly basis
Amount: 30% of the difference in revenues between the considered month in 2020 and the same month in 2019
Technical form: “finanza in prededuzione” (i.e. DIP financing) as per Law (and ad hoc legislative decree is required)
Allocation modality: liquidity will be provided by Cassa Depositi e Prestiti through the approximately 40 banks adhering to the liquidity agreement
Pool of participating enterprises: All businesses with more than 10 milions in revenues including those undergoing restructuring as per Art67 or 182bis of Legge Fallimentare or in any case belonging to the NPE (Non Performing Exposure) provided they have operated in the three months prior to March 1, 2020.
We believe that in a short period of time the Cassa Depositi e Prestiti, the Italian Development Bank, could and should provide liquidity for more than 100 billion to the Enterprise System, making use of a portion of the substantial surplus on the treasury account within the Ministry of Finance (“Ministero dell’Economia e delle Finanze”), and that, considering the limited risk of related to the seniority of DIP financing, widely diversified, a state guarantee of such size could absorb approximately Eur 1 billion of public resources (hypothesizing a 5% default rate and a 20% loss given default (“LGD”)).
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