Necessity is mother of financial invention in Italy

Thu Oct 18, 2012 12:09pm EDT

* Small firms squeezed by credit crunch get unusual help

* Capital requirements constrain some forms of bank lending

* Local government helps with first-loss guarantee

By Alan Wheatley and Stephen Jewkes

BOLOGNA, Italy, Oct 18 (Reuters) - Companies, banks and local authorities are seeking innovative ways to help family firms in Italy's Emilia-Romagna to survive a credit crunch brought on by the euro zone debt crisis.

The search for solutions, which include partial loan guarantees and steps to bolster the creditworthiness of small suppliers, reflects historically strong community links in the region of north-central Italy.

Italian companies complain their borrowing costs are higher than those of competitors abroad, and the measures aim to make cheaper credit more readily available to smaller firms.

The regional government is making 70 million euros available to guarantee the first part of any losses on certain types of loans, Gian Carlo Muzzarelli, Emilia-Romagna's minister for business, said in an interview.

Marchesini, a packaging company with annual turnover of about 200 million euros, has agreed with Banca Popolare dell'Emilia-Romagna to backstop loans to some of its sub-contractors so they pay the same interest rate as it does.

"We cover them with our umbrella," said Maurizio Marchesini, the company's chief executive.

The arrangement is in Marchesini's interest because the rigidity of Italy's labour laws means it makes only about 10 percent of the components for its packaging machines itself. It buys the rest from local suppliers, some of which are under financial strain.

"If it's not possible to have internal flexibility, you're obliged to find it in other ways. So it's easier to have subcontractors," said Marchesini, who is also regional president of the Confindustria employers' association.

Other firms that form the core of Emilia-Romagna's industrial clusters are helping in more traditional ways.

Franco Manfredini, head of an eponymous ceramic tile maker, said he was extending buyer's credit for as long as 120 days, twice as long as usual.

A CAPITAL IDEA

Giampiero Bergami, regional head of Unicredit's network for family and small and medium-sized enterprises, welcomed the government's first-loss initiative but said it would not reduce the capital the bank must set aside for the loans involved.

Unicredit is exploring an alternative. It is working with two big companies, with a combined turnover of about 2.5 billion euros, to try to organise their supply chains as a single legal entity.

Contractors and sub-contractors would sign multi-year supply deals with the large firms, which typically account for most of their turnover in any case, thus underpinning their business and strengthening their creditworthiness.

This would give Unicredit greater confidence to provide working capital to suppliers by "factoring" - buying their future invoices for cash at a discount - something it usually does not do now because the firms are too small.

"Should this project take shape, I could use factoring as the main tool to buy their credit - without recourse - because at that point I'm not dealing with a guy with 1.5 or 2.0 million euros in turnover; I'm dealing with a legal entity with turnover of 25 to 30 million and this legal entity has contracts in place for 3-4 years," Bergami said.

Crucially regulators require banks to set aside less capital for factoring than for normal loans, meaning that such financing is cheaper to provide.

Bergami said the scheme would also give him a much clearer picture of the dynamics of the industry and of the supply chain's investment needs.

HOLDING HANDS

Mutual support extends to the industrial level. In Sassuolo, which makes 80 percent of Italy's ceramic tiles, companies are sharing space in trucks to reduce transport costs.

Firms also think nothing of sharing knowledge with clients and suppliers, said Emilio Mussini, chairman of Panariagroup Industrie Ceramiche.

In a country that is a patchwork of regions and communities, local relationships are especially strong in Emilia-Romagna. Cooperatives are deeply rooted in the region, which was long a bastion of the Communist Party.

If a company boss and his employees rub shoulders in the local café and send their children to the same school, the firm lays off staff only as a last resort. To do so would damage its all-important reputation among suppliers and clients.

This behaviour might not maximise profits but yields returns in the long run, said Stefano Zamagni, an economics professor at the University of Bologna, the regional capital. "A strong cooperative network of firms accumulates social capital, which facilitates cohesion," he said.

That's why, Mussini said, one of his factories damaged in a deadly earthquake that struck Emilia-Romagna in May was able to resume production within 90 days without any government help.

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