Economic recessions leave an aftermath that can last for several years. In certain situations shrinking cash flows can make it impossible for companies to repay the bank loans they took out to start up their commercial activities: in many casesthe unhappy ending is the sale at auction of the assets acting as security for their creditors. The frenzy doesn’t help negotiations, nor does the presence of a large number of parties at the negotiating table, a factor which, on the contrary, can lead to an even more costly stalemate. But there’s another way out, one not involving a judicial approach.

We spoke about this with Francesca Giani, Head of UTP Management in neprix, and Massimo Bianchi, Head of Special Situations Real Estate in illimity’s Distressed Credit Division, who told us about a recent case in which, thanks to some painstaking stitching and management, not only saw the repayment of the entire debt but also the creation of value obtained by investing in the quality of the asset.

The story is that of TRE Holding, a Tuscan real estate company formed as a spin-off from a local industrial group which, as the result of undergoing a period of difficulty, found itself having to face up to a restructuring process. Assets and debt were spun off into TRE Holding.

The company had three properties acting as security: a spacious logistical and production centre at Campi Bisenzio, capable of generating important returns as the result of being rented to a well-known large brand in the Italian fashion sector; a top quality historical villa in Chianti; and lastly a small warehouse in Bibiena. It became clear from the start that to exploit the potential of the properties to the full, a project was called for that was based on a medium-long term view. In short, the need to shift the horizon beyond the mere settlement of the debt.

The importance of having a vision

“The main problem that had to be tackled”, said Massimo Bianchi, “was that the debt was split between thirteen different lenders, including a number of investment funds and an international bank. A factor making discussions even more difficult”.

“TRE Holding”, Bianchi continued, “didn’t yet have a well-defined strategic direction, because it found itself having to face myriad interlocutors, each with its own different vision”.

“When we got things going the only positive note was the presence of a chief executive whose validity we immediately recognised, a person who was to become fundamental over the following months”.

This professional, whose quality and experience were known in the sector, proved himself to be the valuable link needed to get the players to talk constructively. An essential figure, one requiring not only technical skills but also the ability to act diplomatically and a vision”.

“When we took over, the debt had already been restructured into a secured, sustainable part and another part represented by participating financial instruments (“PFIs”), for which the expectations of recovery were distinctly lower”, Bianchi pointed out.

illimity took over all the debt, acting as a focal point and proposing an earn-out to the banks: the possibility of recovering higher amounts if the value enhancement and sale of the properties turned out to be particularly positive.

“A solution which was to everybody’s benefit and which, luckily, the chief executive was able to interpret in an exemplary way”.

First of all, don’t undersell

At this point the management team led by Francesca Giani came into play.

“This phase lasted around a year”, she recalls, “a period in which we sought to establish continuous dialogue between the debtor and the creditor. These are operations in which the levels of emotion and stress are at their utmost: it is never easy for a company in difficulty to dispose of its assets. Interacting with a third-party professional undoubtedly helped us capture any potential issues on a timely basis and then reduce them, never forgetting that the solution would open up a new chapter for everyone”.

The priority”, Giani emphasised, “was to find the right place on the market for the properties, one that ensured they would not be undersold”.

“The security of having the backing of a solid group such as illimity allowed us to go scouting on the long-term but profitable market. And the results arrived”. The Campi Bisenzio property, as stated let to a leading Italian industrial group, was sold at the planned price after renegotiating the existing rental agreements. The historical villa, magnificent and valuable, found an international buyer who fell in love with it; and the warehouse too, the smallest asset with a limited value, went for an acceptable price”.

All the properties were sold well in advance of the deadlines that had been set. The proceeds made it possible not only to extinguish all the secured debt, but also to ensure a good level of remuneration for the PFIs (the participating financial instruments held by illimity), to create a reserve to cover the costs incurred by TRE Holding through to its liquidation, and, lastly, to achieve an extra return for the banks that had sold the loan.

A lesson to be drawn: transparency at all stages

To be able to replicate this virtuous model one might ask what counted the most in TRE Holding’s journey, meaning what are the key factors in general for turning a negative situation into the possibility of a new start. “Undoubtedly the chief executive with whom we worked, who with his support consisting of objectivity and human qualities simplified a good number of steps along the way”, stated Bianchi. “Secondly, a certain knowledge of the local property market was fundamental for finding the right buyer in a timeframe which, all in all, was quite short, and for obtaining the most advantageous conditions”. But there’s another factor: “I believe that transparency in negotiations with the banks played a decisive role in bringing a positive conclusion to the process: in situations of this kind, it is understandable for lenders to be somewhat wary, for example because they think that better conditions can be offered to a competitor. Often it’s not like that: but experience shows that establishing a climate of trust is the right way to arrive at an agreed solution, thereby avoiding the courts. A solution that in the end is positive for everyone involved”.