Onorevole Luigi Di Maio

Ministero degli Affari esteri e della Cooperazione Internazionale

P.le della Farnesina 1

I – 00194 Roma

Commission européenne/Europese Commissie, 1049 Bruxelles/Brussel, BELGIQUE/BELGIË - Tel. +32 22991111

EUROPEAN COMMISSION

Brussels, 17.9.2020 C(2020) 6459 final

PUBLIC VERSION

This document is made available for information purposes only.

Subject: State Aid SA.57612 (2020/N) – Italy

COVID-19: Patrimonio Rilancio

Excellency,

1. PROCEDURE

(1) Following pre-notification contacts,1 by electronic notification of 10 September 2020 Italy notified an aid scheme in the form of limited amounts of

recapitalisation measures (Patrimonio Rilancio, “the scheme”) under the

Temporary Framework for State aid measures to support the economy in the

current COVID-19 outbreak, as amended (“the Temporary Framework”).2 The

1 There were a series of contacts during the pre-notification period, which can be summarised as

followed: Commission’s questions on 8 June 2020 and Italy’s replies on 26 June 2020; Commission’s

questions on 29 June 2020 and Italy’s replies on 30 June and 7 July 2020; Commission’s questions on

8 July 2020 and Italy’s replies on 23 July 2020; Commission’s questions on 27 July 2020 and Italy’s

replies on 31 July 2020; Commission’s questions on 6 August 2020 and Italy’s replies on the same

day; Commission’s questions on 9 August 2020 and Italy’s replies on 11 and 12 August 2020;

Commission’s questions on 12 August 2020 and Italy’s replies on 13 August 2020; Commission’s

questions on 13 August 2020 and Italy’s replies on 18 August 2020; Commission’s questions of 20

August 2020 and Italy’s replies on 25 August 2020; Commission’s questions on 26 August 2020 and

Italy’s replies on 27 and 28 August 2020; Commission’s questions on 2 September 2020 and Italy’s

replies on 3 and 4 September 2020; Commission’s questions on 9 September 2020 and Italy’s replies

on the same day.

2 Communication from the Commission - Temporary framework for State aid measures to support the

economy in the current COVID-19 outbreak, OJ C 91I, 20.3.2020, p. 1, as amended by

Communication from the Commission C(2020) 2215 final of 3 April 2020 on the Amendment of the

Temporary Framework for State aid measures to support the economy in the current COVID-19

outbreak, OJ C 112I , 4.4.2020, p. 1, by Communication from the Commission C(2020) 3156 final of 8

May 2020 on the Amendment of the Temporary Framework for State aid measures to support the

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measure consists of equity contributions (“Measure A”), mandatory convertible

bonds (“Measure B”), subordinated convertible bonds (“Measure C”) and

subordinated debt (“Measure D”).

(2) Italy exceptionally agrees to waive its rights deriving from Article 342 of the Treaty on the Functioning of the European Union (“TFEU”), in conjunction with

Article 3 of Regulation 1/19583 and to have this Decision adopted and notified in

English.

2. DESCRIPTION OF THE MEASURE

(3) Italy considers that the COVID-19 outbreak has created severe concerns for the financial strength, liquidity and capitalisation of its enterprises in the coming

months. Italy states that its economy is characterized by a lower level of

capitalisation compared to otherwise similar economies, a small average size of

enterprises and the pre-eminence of bank credit in the financial liabilities of

enterprises.4

(4) Italy considers that, due to the COVID-19 outbreak and its consequences on the economy, Italian firms will have a substantial need for equity and other financial

instruments, which the market will probably not provide at affordable terms. Italy

further considers that it is important to safeguard the productive capacity of

Italian firms and ensure that, once aggregate demand recovers, Italy will be able

to have a fast recovery.

(5) Consequently, the Italian Government passed Decree Law 34/202 and set up a EUR 44 billion special-purpose assets fund dedicated to equity and quasi-equity

interventions, the “Patrimonio Rilancio”. That fund aims to strengthen corporate

equity in the form of capital increases, mandatory convertible debts and

subordinated convertible bonds and to support enterprises' solvency through

subordinated debt. Italy strives to ensure that the scheme will be available

promptly and in a streamlined manner to the eligible companies. In that respect,

the scheme aims to provide support to a number of large companies, which Italy

argues, are important for the labour market and cover a wide range of sectors.

(6) The scheme forms part of an overall package of measures and aims to ensure that sufficient liquidity remains available in the market, to counter the liquidity

shortage faced by undertakings because of the COVID-19 outbreak, to ensure that

the disruptions caused by the outbreak do not undermine the viability of

undertakings and thereby to preserve the continuity of economic activity during

and after the outbreak.

economy in the current COVID-19 outbreak, OJ C 164, 13.5.2020, p. 3 and by Communication from

the Commission C(2020) 4509 final of 29 June 2020 on the Third Amendment of the Temporary Framework for State aid measures to support the economy in the current COVID-19 outbreak, OJ C

218, 2.7.2020, p. 3.

3 Regulation No 1 determining the languages to be used by the European Economic Community, OJ 17,

6.10.1958, p. 385.

4 Evidence can be found in the “OECD Capital Market Review of Italy 2020”,

http://www.oecd.org/corporate/ca/OECD-Capital-Market-Review-Italy.pdf

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(7) Italy considers the scheme to be compatible with the internal market on the basis of Article 107(3)(b) TFEU, in light of sections 2, 3.3 and 3.11 of the Temporary

Framework.

(8) Italy confirmed that the aid under the scheme is not conditioned on the relocation of a production activity or of another activity of the beneficiary from another

country within the EEA to the territory of Italy.

2.1. The nature and form of aid

(9) The scheme provides aid in the form of equity and hybrid instruments and subordinated debt.

2.2. Legal basis

(10) The legal basis for the scheme can be described as follows:

(a) Article 27, entitled “Patrimonio destinato”, of Decree-Law No 34 as of 19 May 2020 "Urgent measures in the field of health, support to work and the

economy, as well as social policies related to the epidemiological

emergency from COVID-19" (the “Decree Law”)5, converted into Law

No. 77 as of 17 July 2020 (the “Law”)6, establishes that special purpose

assets will be contributed to a separate fund, the “Patrimonio Rilancio”.

That fund will have a dedicated line of investment, which will operate in

line with the Temporary Framework.

(b) A Decree of the Italian Ministry of Economy and Finance will set out the contribution by the Italian Ministry of Economy and Finance of assets to

the Patrimonio Rilancio.7

(c) A further Decree of the Italian Ministry of Economy and Finance will set out the access criteria, the eligibility conditions and the investment criteria

and arrangements of the Patrimonio Rilancio.8

2.3. Administration of the scheme

(11) Cassa Depositi e Prestiti (“CDP”), a State-owned development bank that supports and promotes Italian development policies, is responsible for administering the

scheme and the Patrimonio Rilancio under a set of operational rules pre-approved

by the Italian Ministry of Economy and Finance. The Patrimonio Rilancio will

however remain totally separate and autonomous from CDP’s general assets and

liabilities and will be ring-fenced from any actions or claims brought by

stakeholders or creditors of CDP and vice versa.

5 Published in the Gazzetta Ufficiale n. 128 of 19 May 2020.

6 Published in the Gazzetta Ufficiale n. 180 of 18 July 2020. The measure only becomes effective as of

the date the present State aid decision takes effect

7 The Decree will be enacted only after the Commission’s decision on the scheme’s compatibility with

the internal market.

8 The Decree will be enacted only after the Commission’s decision on the scheme’s compatibility with

the internal market.

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(12) Undertakings have to apply in writing for support measures from the Patrimonio Rilancio, declaring that all the criteria provided for by the Decree Law and the

Decree of the Italian Ministry of Economy and Finance setting out the access

criteria, the eligibility conditions, the investment criteria and the arrangements of

the Patrimonio Rilancio and the Temporary Framework are respected. If it is

decided that the Patrimonio Rilancio will grant the aid, CDP will conclude an

agreement on behalf of the Patrimonio Rilancio with the beneficiary setting out

all the specific terms and conditions of the aid and the obligations of the

beneficiary.

2.4. Budget and duration of the scheme

(13) The estimated budget of the scheme is up to EUR 44 billion, corresponding to the amount of assets delegated to the Patrimonio Rilancio.

(14) Aid may be granted under the scheme as from its approval until no later than 30 June 2021 for Measures A, B and C and up to 31 December 2020 for Measure D.

2.5. Beneficiaries for Measures A, B and C

(15) The beneficiaries for Measures A, B and C are joint stock companies with a registered office in Italy that have generated a turnover above EUR 50 million

according to the latest approved and audited financial statements. Banks, financial

institutions, insurance companies and not-listed, (fully or partially) State-owned

companies are excluded as eligible beneficiaries.

(16) In order to simplify and streamline the evaluation procedures for Measures A, B and C, the potential beneficiaries of those measures are identified ex ante by Italy

under a set of criteria which reflects the eligibility conditions of the Temporary

Framework. For each actual beneficiary, Italy will subsequently use a uniform

methodology to establish the maximum amount of the recapitalisation.

Nevertheless, each prospective beneficiary will submit a written request for aid

under the relevant measure to CDP justifying its eligibility and the amount of aid

it requests (see recital (12)).

2.5.1. Eligibility criteria

(17) The ex ante approach as a first indicator identifies certain sectors to which eligible companies must belong. That sector identification builds on macro-

economic forecasts developed independently. It looks at overall revenue loss in

2020 in respect to 2019, which divides individual sectors into three clusters:

very sharp drop of revenue: 43 sectors for which a very significant loss of at least -15% is expected.9 They include sectors that will be strongly affected

by lockdown measures, social distancing and reduced consumer mobility, a

sharp drop in international trade and more cautious consumer behaviour (for

instance travel, accommodation, catering).

9 The econometric model builds on historical aggregated balance sheets, obtained from the sum of the

balance sheets of all corporations operating in a given sector and on the basis of a series of exogenous

variables foreseen by the econometric models (macro and sectorial).

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sharp drop of revenue: 25 sectors are expected to lose between -15% and -5%; that group comprises sectors with a sharp drop in turnover such as the

manufacturing sectors that were classified as non-core activities,

construction-related activities, which had to be suspended during the

lockdown, or non-food retail trade (mainly clothing) and recreational

activities, both of which have been reduced due to social distancing

measures.

a small drop of revenue, being stable or growing: 13 sectors for which revenues are expected to grow in line with those of 2019 or with a drop of no

more than -5%. Those sectors include activities that have been classified as

essential, but were still affected by the COVID-19 outbreak as a result of

falling demand from customer sectors, such as electricity and gas supply,

professional and technical services, accounting, and wholesale. Certain health

services are also part of that group.

(18) Each company is then examined further in light of the requirements of the Temporary Framework and additional provisions of the Italian law on the basis of

several additional tests. Those tests are based on historical data and forecast

balance sheets for 2020 following the COVID-19 shock.

(19) The first test identifies companies that, without Italy’s intervention, would go out of business or face serious difficulties in maintaining their operations and which

are not able to find financing on the markets at affordable terms. In that respect,

the companies first need to confirm that public liquidity support would be

insufficient to ensure their viability. In addition, the Italian authorities will assess

the debt:equity or debt:EBITDA ratios of the companies. Companies will be

considered eligible if their debt ratios are higher than the normalised median and

the companies experienced a substantial deterioration of the debt:equity or

debt:EBITDA ratio compared to 31 December 2019.

(20) The second test identifies beneficiaries that are companies included in the Strategic Infrastructure List10 or the Strategic Sector List11 or companies in the

top 30% per number of employees per province.

(21) Companies which do not pass the first test may submit additional documentation for a company-specific analysis, in order to demonstrate that they nevertheless

meet the requirements of the ex-ante approach or the Temporary Framework

(22) The third test identifies companies in difficulty within the meaning of the General Block Exemption Regulation (“GBER”)12 the Agricultural Block Exemption

Regulation (ABER)13 and the Fisheries Block exemption Regulation (FIBER)14

10 Connettere l'Italia - DEF, ATECO code F-H

11 Decree MEF 2 luglio 2014/Separata 12 aprile 2016 art. 1, Cerved Report (ATECO code C-E-D-F-J-P-

L-O-R)

12 As defined in Article 2(18) of Commission Regulation (EU) No 651/2014 of 17 June 2014 declaring

certain categories of aid compatible with the internal market in application of Articles 107 and 108 of

the Treaty, OJ L 187, 26.6.2014, p. 1.

13 As defined in Article 2(14) of Commission Regulation (EU) No 702/2014 of 25 June 2014 declaring

certain categories of aid in the agricultural and forestry sectors and in rural areas compatible with the

internal market in application of Articles 107 and 108 of the Treaty, OJ L 193, 1.7.2014, p. 1.

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on 31 December 2019, by directly applying the criteria set out in the GBER, and

excludes them from the scheme.

(23) Italy confirmed that it will separately notify individual aid above the threshold of EUR 250 million.

2.5.2. Amount of aid

(24) The amount of the recapitalisation will be limited to the amount both necessary and proportionate to ensure the viability of the beneficiary. In that regard, Italy

states it will determine the maximum amount of aid by calculating three different

indicators and applying the one leading to the lowest amount. The three tests,

which will be based on forecasted balance sheet variables at a two-year horizon,15

are:

(a) Test 1: the minimum amount needed to restore the company-specific debt:equity ratio to the normalized ratio applicable for the sector. The

latter will be calculated as the median debt:equity ratio for two-digit

sectors that applied on average between 2017 and 2019;

(b) Test 2: the minimum amount needed to restore the company-specific debt:equity ratio to the debt:equity ratio reported for that undertaking by

31 December 2019;16

(c) Test 3: the minimum amount needed to bring the NFP17/EBITDA ratio to 3, which represents the "investment grade" for the market (the "Rating

Agencies test"). In applying that test Italy will apply a 10% flexibility so

that a ratio between 2.7 and 3.3 will be acceptable.

(25) The overall amount of the recapitalisation (i.e. Measures A, B and C cumulatively) will be limited to what is needed to ensure the viability of the

beneficiary and to restoring its capital structure to the one on 31 December 2019,

as described in recital (24), and will not exceed 20% of the beneficiary’s shares

that were outstanding and issued over the latest 12 months, except for non-listed

beneficiaries in Measure B, where the maximum amount will not exceed 24.99%.

In Measures A and C, for non-listed beneficiaries, that maximum may be raised to

24.99% of shares outstanding provided co-investors invest at least the same

additional amount (i.e. 4.99%) under the same terms as the Patrimonio Rilancio.

14 As defined in Article 3(5) of Commission Regulation (EU) No 1388/2014 of 16 December 2014

declaring certain categories of aid to undertakings active in the production, processing and marketing

of fishery and aquaculture products compatible with the internal market in application of Articles 107

and 108 of the Treaty, OJ L 369, 24.12.2014, p. 37.

15 Italy stated that it will use a conservative model as a basis to estimate the forecasted ratios, verified

against the beneficiary’s own forecasts if appropriate and available to ensure reliability of the

estimates.

16 The debt ratios at 31 December 2019 will be calculated based on the financial statements at that date,

if they are available, or failing that on the normalised value output by the econometric model.

17 NFP = net financial position. If a beneficiary’s EBITDA is negative, the NFP:EBITDA ratio is not

meaningful. In that case, Italy will determine the amount of aid using Test 2 and a modified Test 1.

The modification consists in setting the benchmark debt:equity ratio at the third quartile instead of the

median of the sector.

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For Measure B and C, the 20% and 24.99% thresholds are applied to the number

of underlying shares.

2.6. Beneficiaries of Measure D

(26) The beneficiaries of Measure D are all joint stock companies (including cooperatives) with a registered seat in Italy, except those operating in banking,

financial and insurance sectors and non-listed State-owned companies. The

beneficiaries must have a turnover for 2019 of EUR 50 million or more and

registered a revenue drop of 10% or more in the period from 1 March 2020 to the

date of the application compared with the same period of the previous year. SMEs

are excluded from Measure D.18 Beneficiaries will also need to demonstrate a

credit rating of at least B1.

(27) Undertakings in difficulty within the meaning of Regulation (EU) No 651/2014, Regulation (EU) No 702/2014 and Regulation (EU) No 1388/2014 on 31

December 2019 are excluded from Measure D.

2.7. Sectoral and regional scope of the scheme

(28) The scheme is in principle open to all sectors – except banking, financial and insurance ones – and applies to the whole territory of Italy. However, the

application of the ex-ante approach for Measures A, B and C and the 10%

revenue drop condition for Measure D aims to target those companies most

affected in an objective way.

2.8. Basic elements of Measures A to D

2.8.1. Measure A (Capital contributions)

(29) Under Measure A, the Patrimonio Rilancio will, upon request, perform capital contributions with a minimum of EUR 100 million against the issuing of shares

by a beneficiary (“COVID shares”) at a price to be fixed based upon the

following conditions.

(30) The price for the COVID shares when issuing those shares (“Initial Reference Price of Measure A”) will be established:

(a) For listed companies, the Volume Weighted Average Price (“VWAP”) calculated during (i) 15 calendar days prior to the request of intervention,

or (ii) 15 calendar days prior to the market announcement of the

application by the beneficiary to Measure A, or (iii) 6 months prior to

market announcement of the application by the beneficiary to Measure A,

whichever is lower;

(b) For non-listed companies, based on the market value resulting from the valuation of an independent expert, appointed by the beneficiary among a

list prepared by the Patrimonio Rilancio. The valuation will be based on a

vendor due diligence prepared by the beneficiary’s external auditor. The

18 Just applying the dimensional and sectoral limitations limits the potential number of beneficiaries to

approximately 3.400. This will be further reduced through the 10% revenue drop condition.

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valuation of the beneficiary will be based on standard valuation methods.

The market value will be endorsed by the beneficiary’s board of directors

upon favourable opinion of the internal auditors.

(31) The capital contribution will be subject to a 10% increase in COVID shareholding at zero price for the State after 4 years (for listed companies) or 5 years (for non-

listed companies) if at that time less than 40% of the COVID shares have been

redeemed, and a further 10% increase in COVID shareholding after 6 years (for

listed companies) or 7 years (for non-listed companies) if at that time less than

100% of the COVID shares have been redeemed (“step-up”). The step-up

mechanism will not be applied in case of interventions of the Patrimonio Rilancio

in favour of listed State-owned beneficiaries where the State invests under the

same conditions as private investors, who invest at least 30% of the new equity

injected.

(32) As an alternative to the step-up described in recital (31), the beneficiary may distribute an equivalent extraordinary cash dividend in favour of the Patrimonio

Rilancio only. For listed companies, the amount of any such extraordinary cash

dividend will be determined as the VWAP calculated during 15 calendar days

before step-up event times the number of shares such that the COVID

shareholding increases by 10%. For non-listed companies it will be determined as

the share price based on a valuation consistent with the criteria in recital (30)(b)

no more than 90 days preceding the step-up date, times the number of shares such

that the COVID shareholding increases by 10%.

(33) The Patrimonio Rilancio may be redeemed either by the beneficiary buying-back the COVID shares or by disposing the COVID shares to purchasers other than the

beneficiary at market value.

(34) The beneficiary may, at any time, buy back the COVID shares from the Patrimonio Rilancio at the higher of the (i) the market value of the COVID shares

at the time of the buy-back and (ii) the Initial Reference Price of Measure A

increased by an internal rate of return equal to the margins set out in Table 1 plus

an additional 200 bps. In the case of non-listed companies, the market value will

be established based on a valuation consistent with the criteria in recital (30)(b)

no more than 90 days preceding the buy-back date.

Table 1: Internal Rate of Return margins (bps)

Year 1 Years 2-3 Years 4-5 Years 6-7

250 350 500 700

(35) As an alternative to a share buy-back described in recital (34), the Patrimonio Rilancio may, at any time, dispose of the COVID shares on the market or to other

investors at market price. The market price will be determined through an open

and non-discriminatory consultation or through a sale on the stock exchange. The

Patrimonio Rilancio may give existing shareholders priority rights to acquire the

COVID shares at the price resulting from the public consultation. If the market

price is less than the minimum price of recital (34), the governance conditions set

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out in recital (69) continue to apply until the fourth year from the capital

contribution.

(36) If within 12 months of a redemption set out in recitals (34) or (35), any third party acquires shares of the beneficiary at a price that exceeds the price received by the

Patrimonio Rilancio, the beneficiary will be required to compensate the

Patrimonio Rilancio up to the difference (so-called “anti-embarrassment clause”).

(37) In respect of non-listed companies, the Patrimonio Rilancio will have the following additional rights:

(a) Tag-along and drag along rights vis-à-vis the major shareholder of the beneficiary after the capital contribution, leading to the exit of the

Patrimonio Rilancio;19

(b) The right to initiate an Initial Public Offering (“IPO”) during the fifth year from the capital contribution;

(c) As a further exit right, the Patrimonio Rilancio has the right to sell the COVID shares to the beneficiary’s controlling shareholder as from the

sixth year from the capital contribution. If there is no controlling

shareholder or it is not able to acquire the COVID shares for any reason,

the Patrimonio Rilancio may withdraw from the beneficiary for the

minimum price set in recital (34).

(38) Upon a breach of covenants and commitments by the beneficiary, the Patrimonio Rilancio will have the right to immediately terminate the investment agreement.

In that event:

(a) For listed companies, the beneficiary will be obliged to buy-back the COVID shares at the minimum price indicated in recital (34).

(b) For non-listed companies, the Patrimonio Rilancio will have the right to immediately exercise the put option against the major shareholder. If that

put option is unsuccessful, the Patrimonio Rilancio may withdraw from

the beneficiary. In both events, the price will equal the minimum price set

in recital (34).

2.8.2. Measure B (Mandatory Convertible Bonds)

(39) Measure B concerns an equity measure which is described as mandatory convertibles subscribed to by the Patrimonio Rilancio and issued by beneficiaries.

The mandatory convertibles have a minimum nominal value of EUR 25 million

and are issued under the conditions set out in this section.

(40) The mandatory convertibles will be subordinated, ranking in priority to any class of the beneficiary’s share capital, to strumenti finanziari issued under Article

19 Both rights are enforceable vis-à-vis the controlling shareholder. The tag along right entitles the

Patrimonio Rilancio to sell its stake along with the controlling shareholder in case the latter intends to

sell its shares. The drag along right entitles the Patrimonio Rilancio to force the controlling

shareholder to sell its stake if the Patrimonio Rilancio receives an offer from a third party to purchase a

controlling stake in the beneficiary.

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2346 of the Italian Civil Code and to any other instruments issued or guaranteed

by the beneficiary which rank or are expressed to rank junior to the mandatory

convertibles. The mandatory convertibles will have a maturity of 4 years for listed

beneficiaries and 5 years for non-listed companies.

(41) The mandatory convertibles will bear an annual coupon based on 1-year IBOR plus a margin no less than set out in Table 1.

(42) The coupon is mandatory. Any coupon accrued and unpaid at the relevant maturity date or early redemption date will be paid in cash, even in the event of

conversion.

(43) Upon maturity, the mandatory convertibles will be converted into shares based on a conversion ratio determined at the time of issuance. For the purpose of

establishing the conversion ratio, the reference price is the following:

(a) For listed companies, 95% of the VWAP calculated during (i) 15 calendar days prior to the request for intervention, or (ii) 15 calendar days prior to

the market announcement of the application by the beneficiary to Measure

B, or (iii) 6 months prior to market announcement of the application by the

beneficiary to Measure B, whichever is lower;

(b) For non-listed companies, 95% of the market value of the share resulting from the valuation of an independent expert, appointed by the beneficiary

among a list prepared by the Patrimonio Rilancio. The valuation will be

based on a vendor due diligence prepared by the beneficiary’s external

auditor. The valuation of the beneficiary will be based on standard

valuation methods. The market value will be endorsed by the beneficiary’s

board of directors upon favourable opinion of the internal auditors.

(44) Upon conversion, the value of the underlying shares based on the conversion ratio will be determined based on the VWAP calculated during 15 days prior to the

conversion event for listed beneficiaries or based on a valuation exercise

consistent with recital (43)(b) and no older than 90 days preceding the conversion

for non-listed beneficiaries. The conversion will be performed in the following

manner:

(a) If, at maturity, the value of the underlying shares is greater than, or equal to, the nominal value of the bond, the conversion will be performed either

by cash settlement based on the value of the underlying shares, or by cash

settlement up to the nominal value of the bond and by shares for the

excess;20

(b) If, at maturity, the value of the underlying shares is less than the nominal value of the bond, the beneficiary may elect to convert in shares (at the

conversion ratio), or may redeem in cash up to the nominal value of the

bond.

20 Corresponding to the difference between the nominal value of the bond and the value of the underlying

shares.

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(45) The beneficiary may redeem the mandatory convertibles prior to maturity subject to the following conditions:

(a) The beneficiary may, at any payment date (except maturity), reimburse the mandatory convertibles in cash at the higher of the nominal value of the

bond increased by an internal rate of return equal to the margins set out in

Table 1 plus an additional 200 bps, or the value of the underlying shares at

that payment date, whereby any amount due in excess of the nominal

value plus accrued interests can be settled either in cash or shares21 at the

option of the beneficiary (the “net share settlement option”).

(46) After conversion, the shares obtained by the Patrimonio Rilancio may be redeemed either through a buy-back by the beneficiary or by disposal to

purchasers other than the beneficiary.

(a) The beneficiary may, at any time, buy back the shares from the Patrimonio Rilancio at the higher of the (i) the market value of the shares at the time

of the buy-back and (ii) the share price at conversion increased by an

internal rate of return equal to the margins set out in Table 1 plus an

additional 200 bps. In the case of non-listed companies, the market value

will be established based on a valuation consistent with the criteria in

recital (43)(b) no more than 90 days preceding the buy-back date.

(b) The Patrimonio Rilancio may, at any time, dispose of the shares on the market or to other investors at market price. The market price will be

determined through an open and non-discriminatory consultation or

through a sale on the stock exchange. The Patrimonio Rilancio may give

existing shareholders priority rights to acquire the shares at the price

resulting from the public consultation. If the market price is less than the

minimum price in letter (a) of this recital, the governance conditions set

out in recital (69) continue to apply at least until the fourth year from the

issuance of the mandatory convertible.

(47) The post-conversion shareholding will be subject to a 10% increase in shareholding at zero price for the State after 2 years if at that time less than 100%

of the shares have been redeemed (“step-up”).

(48) As an alternative to the step-up described in recital (47), the beneficiary may distribute an equivalent extraordinary cash dividend in favour of the Patrimonio

Rilancio only. For listed companies, the amount of such extraordinary cash

dividend will be determined as the VWAP calculated during 15 calendar days

before step-up event times the number of shares such that the shareholding

increases by 10%. For non-listed companies it will be determined as the share

price based on a valuation consistent with the criteria in recital (43)(b) no more

than 90 days preceding the step-up date, times the number of shares such that the

shareholding increases by 10%.

21 It is understood that any new shares obtained by the Patrimonio Rilancio in the context of a conversion

under Measures A, B or C will be considered as COVID shares, which must be redeemed and for

which section 3.11 applies analogously.

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(49) Upon default of interest (at any payment date) or payment or a breach of covenants or commitments by the beneficiary, the Patrimonio Rilancio will have

the right to immediately terminate the investment agreement. In that event the

beneficiary will be obliged to redeem the mandatory convertible at the minimum

price set in recital (45)(a) in cash or, at the option of the issuer, in shares based on

the market price of the shares at that moment.

(50) If within 12 months of a redemption set out in recital (46), any third party acquires shares of the beneficiary at a price that exceeds the price received by the

Patrimonio Rilancio, the beneficiary will be required to compensate the

Patrimonio Rilancio up to the difference.

(51) In respect of non-listed beneficiaries, the Patrimonio Rilancio will have the following additional rights post conversion:

(a) Tag-along and drag along rights vis-à-vis the major shareholder of the beneficiary after the capital contribution, leading to the exit of the

Patrimonio Rilancio;22

(b) The right to initiate an IPO;

(c) As a further exit right, the Patrimonio Rilancio has the right to sell the COVID shares to the beneficiary’s controlling shareholder as from the

sixth year from the capital contribution. If there is no controlling

shareholder or it is not able to acquire the COVID shares for any reason,

the Patrimonio Rilancio may withdraw from the beneficiary for the

minimum price set in recital (45)(a).

2.8.3. Measure C (Subordinated Convertible Bonds)

(52) Measure C concerns subordinated convertible bonds that are subscribed to by the Patrimonio Rilancio. They are subordinated to ordinary senior creditors in the

event of insolvency procedures, but they are senior to equity shares, unless they

are converted into equity shares, as described below.

(53) Beneficiaries of Measure C must have a credit rating of a least B+ (or equivalent) issued by an External Credit Assessment Institution (ECAI), referring to its

financial situation on 31 December 2019 or a later date.

(54) The subordinated convertible bonds will have a maturity of

(a) 5 years for listed companies, and

(b) 6 years for non-listed companies.

(55) The subordinated convertible bonds will have a minimum nominal amount of EUR 1 million and are issued under the conditions set out in this section.

22 Both rights are enforceable vis-à-vis the controlling shareholder. The tag along right entitles the

Patrimonio Rilancio to sell its stake along with the controlling shareholder in case the latter intends to

sell its shares. The drag along right entitles the Patrimonio Rilancio to force the controlling

shareholder to sell its stake if the Patrimonio Rilancio receives an offer from a third party to purchase a

controlling stake in the beneficiary.

13

(56) The “initial number of underlying shares” is calculated as the nominal amount of the bonds divided by the “Initial Conversion price”, which is equal to:

(a) For listed companies, 150% of the “Initial Reference Price of Measure C” (as defined below in recital (57)); and

(b) For non-listed companies, 140% of the Initial Reference Price of Measure C.23

The recapitalisation limits set in section 2.5.2 are to be respected with respect to

the initial number of underlying shares and the nominal amount of investments.

(57) The Initial Reference Price of Measure C will be established as:

(a) For listed companies, the VWAP calculated during (i) 15 calendar days prior to the request of intervention, or (ii) 15 calendar days prior to the

market announcement of the application by the beneficiary to Measure C,

or (iii) 6 months prior to market announcement of the application by the

beneficiary to Measure C, or (iv) 5 trading days following the market

announcement of the application by the beneficiary to Measure C,

whichever is lower; and

(b) For non-listed companies, the market value based on a valuation consistent with the criteria in recital (30)(b), discounted as following:

– First, the nominal amount of Measure C, including any amount subscribed by private participants, is expressed as a percentage (i.e.

as a number out of 100) of the market value of the beneficiary’s

share capital, at the time of the application to the Measure;

– Second, that percentage is divided by 5 and, in the case the resulting number is not a percentage integer, it is rounded to the

closest higher percentage integer. That finally resulting number is

the percentage point reduction to be applied to the market value to

calculate the Initial Reference Price of Measure C.24

(58) The “Redemption Amount” is defined as the higher of (i) the nominal amount of the bonds, and (ii) the value of the “adjusted number of underlying shares”, as

defined and calculated with the following mechanism:

(a) First, the “Adjusted Conversion Price” is calculated as the Initial Conversion Price minus the sum of dividends attributed to shareholders

between the issue date and the redemption date;

23 If the Patrimonio Rilancio invests for example EUR 100 million, the nominal amount is EUR 100

million, and when the Initial Reference Price of Measure C is e.g. EUR 100 and the Initial Conversion

price is EUR 140, the “initial number of underlying shares” is then 100 million/140 = 714,286.

24 For example, if the nominal amount is EUR 100 million and the market value of the beneficiary’s

share capital is EUR 625 million, the nominal amount of Measure C is 16.0% of the beneficiary’s

share capital. The discount to be applied to the market value, to calculate the initial reference price, is

then equal to 4%, i.e. the closest higher integer to 3.2%, which is in turn the result of 16.0%/5.

14

(b) Second, the adjusted number of underlying shares is calculated as the ratio between the nominal amount of the bonds and the Adjusted Conversion

Price;

(c) The value of the adjusted number of underlying shares is calculated as the product of the adjusted number of underlying shares, and

– For listed companies, the VWAP calculated during 15 calendar days prior to redemption date, for listed companies;

– For non-listed companies, a valuation consistent with the entry valuation as defined in recital (57)(b) no older than 90 days from

the redemption date.25

(59) The redemption of subordinated convertible bonds may take place:

(a) At any payment date, upon decision of the beneficiary, in cash at the Redemption Amount plus accrued and unpaid interests;

(b) At maturity, if the subordinated convertible bonds have not been redeemed earlier:

– In cash at the Redemption Amount, if the value of the adjusted number of underlying shares is lower than, or equal to, the nominal

amount of the bonds;

– In cash, at the Redemption Amount, or through physical delivery of the adjusted number of underlying shares, upon decision of the

beneficiary, if the value of the adjusted number of underlying

shares is higher than the nominal amount of the bonds. If the

beneficiary elects physical delivery and the nominal amount of the

bonds increased by 5.26% exceeds the Redemption Amount, the

beneficiary will additionally reimburse the difference in cash.

(60) In addition to the redemption foreseen under recital (59), reimbursement and conversion can be requested by the Patrimonio Rilancio in case of the following

“relevant events of default”:

– Insolvency proceedings;

– Failure to pay interest (at any payment date) or principal;

– Breach of the use of proceeds provisions;

– Breach of conditions pre conversion of the Issuer (as specified below);

– Invalidity of obligation;

25 Following the example of footnote 23, if the value of the share at maturity is EUR 160 and no dividend

has been paid out, then the value of the adjusted number of underlying shares is EUR 160 x 714,286 =

EUR 114.4 million, the Redemption Amount is therefore EUR 114,4 million. If the value of the share

is EUR 120, the value of the adjusted number of underlying shares is EUR 120 x 714,286 = EUR 86

million, the Redemption Amount would therefore be the nominal amount of EUR 100 million.

15

– Downgrade of the Issuer of more than one notch.

In that case, the Patrimonio Rilancio has the choice between:

– reimbursement of the bonds in cash at their nominal amount; or

– conversion of the bonds into a number of beneficiary’s shares equal to the nominal amount of the bonds divided by 95% of the TERP at the time of

conversion. In any case the number of shares to be received upon

conversion will not be lower than the adjusted number of underlying

shares. Accrued and unpaid interests, as well as default interests, will

always be paid in cash.

(61) The subordinated convertible bonds will bear an annual coupon equal to 1-year IBOR plus a margin no less than indicated in Table 2:

Table 2 – Subordinated convertible bond margins (bps)

Interest accrued and not paid on the relevant maturity date or early redemption

date will be always paid in cash, even in case of conversion in shares.

(62) Italy submits that Measure C not only provides downside protection to the beneficiary through the conversion in equity, but also an upside in favour of the

bondholder, obtained through the Redemption Amount described in recital (58),

even if that upside can be limited by the beneficiary through the early redemption

mechanism described in recital (59). Accordingly, the coupon levels in Table 2

are calculated starting from the levels set by Point 66 of the Temporary

Framework, subtracting the value of the option - in favour of the bondholders -

entailed by the redemption amount, as detailed in recital (63), and adding the

value of the option - to the detriment of the bondholder (or in favour of the

beneficiary) - entailed by the early redemption mechanism, as detailed in recital

(64). To ensure an adequate remuneration for the State in the first years, the

coupon has been adjusted in a non-linear way, shifting the reduction of the

coupon towards the end of the lifetime of the bond.

(63) To calculate the value of the option in favour of the bondholder entailed by the determination of the reimbursement amount, Italy has used a traditional Black-

Scholes model26 to price a call option on the shares of the beneficiary with the

following relevant assumptions: (i) a strike price equal to the adjusted conversion

26 The Black-Scholes (or Black–Scholes–Merton) model is a mathematical model that describes the

dynamics of financial derivative instruments. It was first published in the Journal of Political Economy

(Vol. 81, No. 3 (May - Jun., 1973), pp. 637-654). A derivative instrument is a contract between two or

more parties whose value is based on the dynamics of a third underlying financial asset.

Year 1 Years 2-3 Years 4-5 Year 6

Listed 250 300 420

Non-Listed 250 315 420 500

https://en.wikipedia.org/wiki/Mathematical_modelhttps://en.wikipedia.org/wiki/Derivative_(finance)

16

price as described in recital (58)(a), (ii) a zero dividend yield, (iii) a time to expiry

equal to the bond maturity, (iv) risk-free rates equal to the EUR swap rates with a

tenor equal to the option’s time to expiry, (v) an implied volatility equal to the

recent implied volatility of the FTSE MIB index27, with a 1.00% downward

adjustment for non-listed corporates and a 0.50% downward adjustment for listed

corporates. Italy contends that any possible dilution effect, which may raise from

the possibility to settle the bonds in newly issued shares and which may in

principle reduce the true value of the option vis-à-vis the value resulting from the

traditional Black-Scholes method, is addressed by the calculation of the

conversion price that is based on the Initial Reference Price of Measure C (which

in turns takes into account the share price post-market announcement for listed

companies and a proper discount for the unlisted companies), and by the presence

of anti-dilution market standard provisions. In conclusion, according to the

calculation submitted by Italy, the value of the option may be converted into a

running discount equal to 54 bps and 72 bps of the nominal amount of the bonds,

for the 5 year and the 6 year bonds respectively.

(64) To calculate the value of the option in favour of the beneficiary entailed by the early redemption option, Italy has used a model that is consistent with the

methodology and assumptions spelled in recital (63). According to the calculation

submitted by Italy, the value of the option may be converted into a running

premium equal to 3 bps and 2 bps of the nominal amount of the bonds, for the 5

year and the 6 years bond, respectively.

(65) The post-conversion shareholding will be subject to a 10% increase after 1 year if at that time less than 100% of the shares have been redeemed (“step-up”). Such

an increase can take place through the issuance of new shares for free or the

distribution of an equivalent cash extraordinary dividend. The reference price for

the step-up event will be the VWAP calculated during 15 calendar days before

step-up event. For non-listed companies it will be determined as the share price

based on a valuation consistent with the criteria in recital (30)(b).

(66) After conversion, the shares obtained by the Patrimonio Rilancio may be redeemed either through a buy-back by the beneficiary or by disposal to

purchasers other than the beneficiary.

(a) The beneficiary may, after conversion, buy back the shares from the Patrimonio Rilancio at the higher of the (i) the market value of the shares

at the time of the buy-back and (ii) the share price at conversion increased

by an internal rate of return equal to the margins set out in Table 1 plus an

additional 200 bps. In the case of non-listed companies, the market value

will be established based on a valuation consistent with the criteria in

recital (30)(b) no more than 90 days preceding the buy-back date.

(b) The Patrimonio Rilancio may, at any time, dispose of the shares on the market or to other investors at market price. The market price will be

determined through an open and non-discriminatory consultation or

through a sale on the stock exchange. The Patrimonio Rilancio may give

27 The FTSE MIB is the primary benchmark index for the Italian equity markets, capturing

approximately 80% of the domestic market capitalisation.

17

existing shareholders priority rights to acquire the shares at the price

resulting from the public consultation. If the market price is less than the

minimum price in letter (a) of this recital, the governance conditions set

out in recital (69) continue to apply at least until the fourth year from the

issuance of the mandatory convertible.

(67) In respect of non-listed beneficiaries, if within 12 months of a redemption set out in recital (66), any third party acquires shares of the beneficiary at a price that

exceeds the price received by the Patrimonio Rilancio, the beneficiary will be

required to compensate the Patrimonio Rilancio up to the difference.

(68) In respect of non-listed beneficiaries, the Patrimonio Rilancio will have the additional rights post-conversion as described in recital (37).

2.8.4. Governance conditions for Measures A, B, and C

(69) Beneficiaries that have obtained a recapitalisation measure will be subject to the following governance conditions:

(a) Beneficiaries must not engage in aggressive commercial expansion financed by State aid nor take excessive risks;

(b) Beneficiaries will not be allowed to advertise the capital contribution for commercial purposes;

(c) Beneficiaries will commit to maintain plants and workforce levels in Italy as those that prevailed prior to the capital increase;

(d) In the case of non-listed beneficiaries, the major shareholder will take a non-competition commitment;28

(e) Notwithstanding the dividend ban in letter (k) in the case of listed companies, minority investor rights are respected as provided by the

applicable law;

(f) In the case of non-listed companies, the Patrimonio Rilancio may appoint one independent member to the board of directors and/or one member of

the supervisory body without prejudice to the other corporate rights

attached to its minority stake;

(g) Beneficiaries will commit not to use State aid to cross-subsidise economic activities of integrated undertakings that were in economic difficulties

already on 31 December 2019. A clear account separation will be put in

place in integrated companies to ensure that the recapitalisation measure

does not benefit those activities;

(h) The beneficiary will prepare a plan for the use of the capital contribution, which must also take into account the Union objectives and national

28 The commitment is valid until the Patrimonio Rilancio has been fully redeemed. During that period,

the controlling shareholder cannot start a new business that is in competition with the beneficiary’s

business.

18

obligations related to the green and digital transformation, including the

EU objective of climate neutrality by 2050;

(i) Beneficiaries, as long as the instruments issued under Measures A, B and C have not been redeemed up to at least 75%, will not be allowed to

acquire a more than 10% stake in competitors or other operators in the

same line of business, including upstream and downstream operations.

Acquisitions of stakes higher than 10% are allowed in exceptional

circumstances only and without prejudice to merger control, if they are

necessary to maintain the beneficiary’s viability and have been authorised

in advance through a decision by the Commission.

(j) Beneficiaries, as long as the instruments issued under Measures A, B and C have not been redeemed up to at least 75%, may not pay bonuses nor

increase the fixed remuneration of its existing board members and

management team. In the event of new hires, the total remuneration will

not be higher than the remuneration of the substituted or equivalent

managers prior to the capital contribution.

(k) Beneficiaries, as long as the instruments issued under Measures A, B and C have not been fully redeemed, cannot make dividend payments, nor

non-mandatory coupon payments, nor buy back shares, other than in

relation to the State. If co-investors participate in the capital contribution

along with the Patrimonio Rilancio and under the same conditions up to at

least 30% of the total new equity, the dividend ban is lifted in respect of

those new shares. Any dividend will, in any event, be paid only after the

Patrimonio Rilancio’s hybrid capital and subordinated debt instruments, if

any, have been remunerated;

(l) If 6 years (for listed beneficiaries) or 7 years (for non-listed beneficiaries) after the capital increase, the Patrimonio Rilancio’s shareholding has not

been reduced below 15% of the beneficiary’s equity, a restructuring plan

will be notified to the Commission for approval in accordance with point

85 of the Temporary Framework.

(m) Capital contributions above EUR 250 million will be notified to the Commission as individual aid measures. If the beneficiary of such a

measure is an undertaking with significant market power, commitments to

preserve effective competition will be proposed.

(70) In case of interventions of the Patrimonio Rilancio in favour of State-owned listed beneficiaries, where the State invests under the same conditions as private

investors, who invest at least 30% of the new equity injected, the governance

conditions under letters (i) and (j) of recital 69 will be applied only for three

years, the governance conditions under letter (k) of the same recital, the dividend

ban, will not be applied for the holders of the new shares and for the holders of

the existing shares only if they are not altogether diluted to below 10%, in which

case the ban will only last three years, while the governance conditions under

letter (l) of the same recital will not apply.

(71) In addition, under Measure C, non-listed beneficiaries will set-up a “Debt Service Reserve Account” (DSRA) and deposit an amount equal to 6 months of interest

19

payment requirements into the DSRA, which may be closed if the beneficiary’s

rating is upgraded.

2.8.5. Measure D (Subordinated debt)

(72) Measure D concerns subordinated debt granted by the Patrimonio Rilancio. In case of insolvency, the subordinated debt ranks junior to senior debt, pari passu

with other subordinated instruments issued by the beneficiary and senior to

equity.

(73) Subordinated debt granted under Measure D relates to a beneficiary’s investment or working capital needs, must be granted by 31 December 2020 at the latest and

has a maturity of six years.

(74) The maximum amount of subordinated debt per beneficiary must not exceed both the following ceilings :

– Two thirds of the annual wage bill of the beneficiary for 2019;

– 8.4% of the beneficiary’s turnover for 2019.

(75) The annual interest rate for the subordinated debt granted under Measure D consists of a base rate equal to the 1-year IBOR applicable as of 1 January 2020,

plus a credit risk margin. The credit risk margin increases progressively based on

the margins given for large enterprises in point 27bis of the Temporary

Framework and thus amounts to 250 bps for the first year, 300 bps for years 2 and

3, and 400 bps for years 4 to 6.

(76) The coupon attached to the subordinated debt is mandatory and cannot be deferred.

2.9. Cumulation

(77) The Italian authorities confirm that aid granted under the measures may be cumulated with aid granted under other measures approved by the Commission

under other sections of the Temporary Framework, provided the provisions in

those specific sections are respected.

(78) The Italian authorities also confirm that if aid granted under the measures may be cumulated with aid under De Minimis Regulations29 or under the GBER, the

ABER and the FIBER, provided the provisions and cumulation rules of those

Regulations are respected.

29 Commission Regulation (EU) No 1407/2013 of 18 December 2013 on the application of Articles 107

and 108 of the Treaty on the Functioning of the European Union to de minimis aid (OJ L 352,

24.12.2013, p.1), Commission Regulation (EU) No 1408/2013 of 18 December 2013 on the

application of Articles 107 and 108 of the Treaty on the Functioning of the European Union to de

minimis aid in the agriculture sector (OJ L 352, 24.12.2013 p. 9), Commission Regulation (EU) No

717/2014 of 27 June 2014 on the application of Articles 107 and 108 of the Treaty on the Functioning

of the European Union to de minimis aid in the fishery and aquaculture sector (OJ L 190, 28.6.2014, p.

45) and Commission Regulation (EU) No 360/2012 of 25 April 2012 on the application of Articles

107 and 108 of the Treaty on the Functioning of the European Union to de minimis aid granted to

undertakings providing services of general economic interest (OJ L 114, 26.4.2012, p. 8).

20

(79) With respect to Measure D, the Italian authorities confirm that aid granted under section 3.2 of the Temporary Framework will not be cumulated with aid granted

for the same underlying loan principal under section 3.3 of that framework and

vice versa. Aid granted under section 3.2 and section 3.3 may be cumulated for

different loans provided the overall amount of loans per beneficiary does not

exceed the ceilings set out in points 25(d) or 27(d) of the Temporary Framework.

(80) With respect to Measure D, the Italian authorities confirm that a beneficiary may benefit in parallel from multiple schemes under section 3.3 provided the overall

amount of loans per beneficiary does not exceed the ceilings set out in point 27(d)

of the Temporary Framework.

2.10. Monitoring and reporting

(81) The Italian authorities confirm that they will respect the monitoring and reporting obligations laid down in section 4 and point 84 of the Temporary Framework,

including the obligation to publish relevant information on each individual aid

granted under the measure on the comprehensive State aid website or

Commission’s IT tool within 12 months from the moment of granting.30

(82) The Italian authorities confirm that, in line with point 83 of the Temporary Framework, the beneficiaries of Measures A, B or C will make available on their

corporate portals information on the use of the aid received within 12 months

from the date on which the aid was granted and every 12 months thereafter, until

the full repayment of the aid. The information will include how the use of the aid

received supports their activities in line with the Union objectives and national

obligations related to the ecological and digital transformation, including the

Union’s objective of achieving climate neutrality by 2050. In case of

interventions of the Patrimonio Rilancio in favour of State-owned listed

beneficiaries where the State invests under the same conditions as private

investors, who invest at least equal to 30% of the new equity injected, the

reporting obligations under point 3 of the Temporary Framework will apply only

for three years.

(83) The Italian authorities confirm that the application of Measures A, B or C to a beneficiary is not conditioned on the relocation of a production activity or of

another activity of the beneficiary from another country within the EEA to the

territory of Italy, irrespective of the number of job losses actually occurred in the

initial establishment of the beneficiary in the EEA.

3. ASSESSMENT

3.1. Lawfulness of the measure

(84) By notifying the measure before putting it into effect, the Italian authorities have respected their obligations under Article 108(3) TFEU.

30 Referring to information required in Annex III to Commission Regulation (EU) No 651/2014 and

Annex III to Commission Regulation (EU) No 702/2014 and Annex III to Commission Regulation

(EU) No 1388/2014. For repayable subordinated debt and other forms of aid, the nominal value of the

underlying instrument will be inserted per beneficiary.

21

3.2. Existence of State aid

(85) The qualification of a State aid measure follows the conditions set out in Article 107(1) TFEU. First, the measure must be imputable to the State and financed

through State resources. Second, it must confer an advantage on its recipients.

Third, that advantage must be selective in nature. Fourth, the measure must distort

or threaten to distort competition and affect trade between Member States.

(86) The measure consists in the set-up of the Patrimonio Rilancio, established and funded by the Italian government based on several Law-Decrees and Decrees.

The measure is administered by CDP, an organ of the Italian State. As such, the

measure is imputable to the State and is financed through State resources.

(87) The measure confers an advantage on its beneficiaries in the form of equity and hybrid instruments as well as subordinated debt at preferential terms compared to

market terms, thus at terms that they would not have otherwise been able to

secure on the market.

(88) The advantage granted by the measure is selective, since it is awarded only to certain undertakings, in particular undertakings whose turnover exceeds EUR 50

million and which meet the specific conditions set out in the ex ante approach,

additionally excluding the financial sector (as regards Measures A, B and C) or

which meet the 10% revenue drop conditions set out in recital (26) as regards

Measure D.

(89) The measure is liable to distort competition, since it strengthens the competitive position of its beneficiaries. It also affects trade between Member States, since

those beneficiaries are active in sectors in which intra-Union trade exists.

(90) In view of the above, the Commission concludes that the measure constitutes aid within the meaning of Article 107(1) TFEU. The Italian authorities do not contest

that conclusion.

3.3. Compatibility

(91) Since the measure involves aid within the meaning of Article 107(1) TFEU, it is necessary to consider whether that measure is compatible with the internal

market.

(92) Pursuant to Article 107(3)(b) TFEU the Commission may declare compatible with the internal market aid “to remedy a serious disturbance in the economy of a

Member State”.

(93) By adopting the Temporary Framework on 19 March 2020, the Commission acknowledged (in section 2) that “the COVID-19 outbreak affects all Member

States and that the containment measures taken by Member States impact

undertakings”. The Commission concluded that “State aid is justified and can be

declared compatible with the internal market on the basis of Article 107(3)(b)

TFEU, for a limited period, to remedy the liquidity shortage faced by

undertakings and ensure that the disruptions caused by the COVID-19 outbreak

do not undermine their viability, especially of SMEs”.

22

(94) The measure aims at facilitating the access of undertakings to external finance and restore their capital at a time when the normal functioning of markets is

severely disturbed by the COVID-19 outbreak and that outbreak is affecting the

wider economy and leading to severe disturbances of the real economy of

Member States.

(95) The measure is one of a series of measures conceived at national level by the Italian authorities to remedy a serious disturbance in their economy. Italy has

explained the importance of the measure to safeguard the productive capacity of

Italian firms and ensure that they have to means to respond to renewed aggregate

demand. Moreover, the measure is of a scale which can be reasonably anticipated

to produce effects across the entire Italian economy.

(96) The Commission further notes that the implementation of the measure, in particular the exercise of the powers secured by the State, has to comply with

fundamental freedoms, in particular the free movement of capital and the freedom

of establishment. Italy has designed an ex ante approach in order to ensure that

only those undertakings most affected by the COVID-19 outbreak are eligible and

to allocate the Patrimonio Rilancio’s scarce resources as effectively as possible to

the undertakings that need it most. As part of that approach, Italy outlines the

sectors of the economy most affected by the COVID-19 outbreak and, according

to the Commission, is based on reasonable criteria which directly reflect the

financial difficulties faced by the relevant undertakings. The ex ante approach

thereby establishes a clear link between the eligible companies and the objective

of the Temporary Framework.

(97) The Commission also notes that, in line with point 16ter of the Temporary Framework, the measure is not conditioned on the relocation of a production

activity or of another activity of the beneficiary from another country within the

EEA to the territory of Italy (see recital (83)). In that respect, the Commission

also understands that the eligibility criteria applied by the Patrimonio Rilancio,

especially as concerns enterprises with a strategic or systemic importance to the

Italian economy (see recital (20)), cannot be construed or applied so as to make

conditional the granting of aid on the relocation of activities to Italy.

(98) The Commission will assess the measure in two parts. First, it will assess the aid in the form of recapitalisation instruments granted under Measures A, B and C. It

will then assess the aid granted under Measure D.

3.3.1. Aid granted under Measures A, B and C

(99) Italy designed Measures A, B and C to meet the requirements of aid in the form of recapitalisation measures described in section 3.11 of the Temporary

Framework. Those measures consists of equity and hybrid instruments (see recital

(9) in line with points 52 and 53 of the Temporary Framework. This is true not

only of Measures A and B – which are clearly equity instruments – but also the

subordinated convertible bonds to be issued under Measure C. Even though the

latter concerns a subordinated debt instrument it is convertible and thus has a

clear equity component. In addition, its maximum amount is not capped at the

limits set out in point 27bis of the Temporary Framework.

(100) The Commission will therefore assess whether the measure meets the requirements of the Temporary Framework, in particular its section 3.11.

23

3.3.2. Entry conditions for Measures A, B and C

(101) Measures A, B and C provided by the Patrimonio Rilancio are to be granted at the latest by 30 June 2021 (recital (14)). Therefore, they comply with point 48 of the

Temporary Framework.

(102) Measures A, B and C further comply with the eligibility criteria in point 49 of the Temporary Framework.

(103) The Commission observes first that, only companies for which the debt:equity or debt:EBITDA ratios are higher than the median of their normalized sector are

potentially eligible. Next, only potentially eligible companies for which those

ratios have deteriorated since the end of 2019 are considered. The Commission

considers that approach compliant with point 49(a) of the Temporary Framework,

ensuring that only companies that would go out of business or would face serious

difficulties to maintain their operations are eligible for Measures A, B and C.

(104) The Commission observes further that all companies seeking support under Measure A, B or C in their written application will need to declare that they were

not able to find financing on the markets at affordable terms and that the

horizontal measures existing in Italy are insufficient to cover their capital and

liquidity needs to ensure viability (see recital (19)). The Commission considers

therefore considers Measures A, B and C compliant with point 49(c) of the

Temporary Framework.

(105) The Commission observes also that beneficiaries will only be eligible if they appear on either the Strategic Infrastructure List or form part of the Strategic

Sector List (see recital (20)). The Commission accepts that for companies

included in those lists, the loss of the financial stability or market exit may lead to

loss of innovative or systemically important operators or disrupt the provision of

an important service which can be considered critical for the functioning and

stability of the Italian economy and society. In addition, companies that represent

the top 30% of number of employees per province (see recital (20)) will be

eligible. The Commission accepts that this concerns companies with a relatively

large number of employees in the region concerned for which a market exit will

cause a regionally significant loss of employment leading to social hardship. The

Commission considers therefore considers that Measures A, B and C are in the

common interest in compliance with point 49(b) of the Temporary Framework.

(106) Moreover, the Commission observes that companies applying for support under the measure that were already in difficulty on 31 December 2019 within the

meaning of the criteria set out in the GBER are excluded from the measure. The

Commission therefore considers Measures A, B and C compliant with point 49(d)

of the Temporary Framework.

(107) Finally, the measure requires a written request by each individual beneficiary and therefore complies with point 50 of the Temporary Framework. Italy confirmed

that it will separately notify individual aid above the threshold of EUR 250

million (see recital (23)). Therefore, Measures A, B and C comply with point 51

of the Temporary Framework.

24

3.3.3. Proportionality of the aid for Measures A, B and C

(108) The scheme provides also sufficient safeguards that the cumulative amount of the recapitalisation under Measures A, B and C is proportionate and does not exceed

the minimum needed to ensure viability of the beneficiary in line with point 54 of

the Temporary Framework. The maximum amount of recapitalisation will be

calculated as the lowest resulting from the following three tests.

(109) Two of the three tests – notably Test 1 and Test 3 – ensure that “the amount of the COVID-19 recapitalisation must not exceed the minimum needed to ensure the

viability of the beneficiary”. Test 1 consists in comparing the beneficiary’s two-

year forecast of the debt:equity ratio to the average median of that ratio in the

beneficiary’s sector over the years 2017 – 2019. Test 3 consists in comparing the

beneficiary’s two-year forecast of the net debt:EBITDA ratio to a value of three

(see recital (24)). The Commission considers that both tests, in conjunction, are

appropriate to assess the viability of beneficiaries. In particular, Test 3 is a

standard metric that rating agencies use to assess a company’s creditworthiness.

The flexibility to adjust that ratio by 10 %, which Italy can apply for Test 3 is

reasonable given the variety of sectors and the heterogeneity of the potential

beneficiaries of the scheme. Overall, considering ratings depend on multiple

factors in addition to the net debt:EBITDA ratio, allowing a 10% flexibility on the

relevant threshold of that ratio does not seem out of line with what rating agencies

accept.

(110) The final test, Test 2 (see recital (24)), ensures the amount of recapitalisation does not go beyond restoring the capital structure of the beneficiary to the one

predating the COVID-19 outbreak, i.e. the situation on 31 December 2019. In

particular that test ensures that the amount of the recapitalisation does not exceed

the minimum needed to restore the beneficiary’s two-year forecast of the

debt:equity ratio to the debt:equity ratio per 31 December 2019.

(111) Finally, if the net debt:EBITDA ratio is not meaningful due to a beneficiary having a negative forecasted EBITDA, Italy committed to assess proportionality

on the basis of Test 2 and a modified Test 1. The modification consists in

comparing the beneficiary’s debt:equity ratio to the third quartile, instead of the

median, of the average of that ratio in the beneficiary’s sector over the period

2017-19. This is a more conservative test than Test 1, which the Commission

considers appropriate considering viability is only assessed on the basis of one

test if the net debt:EBITDA ratio is not meaningful.

3.3.4. Remuneration and exit for Measures A, B and C

(112) Section 3.11 of the Temporary Framework sets out several conditions pertaining to the entry price of the State into equity, the remuneration of the financial

instruments and the exit of the State in order to ensure that the distortion of

competition created by the aid is proportionate to the objectives that the aid

serves.

3.3.4.1. Measure A (Capital Contributions)

(113) Measure A is an equity instruments whose remuneration needs to comply with point 60 et seq of the Temporary Framework. This comprises the entry price, a

step up, and an exit price of the equity instrument.

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(114) First, as regards the entry price, the scheme requires the determination of a so-called Initial Reference Price of Measure A, which reflects the price listed on the

stock market or, in case of non-listed beneficiaries, is derived from a valuation by

an independent expert (see recital (30)). The Commission considers that the

valuation methods prescribed for both listed and non-listed companies are

reasonable and sufficiently robust to ensure that the State obtains shares at their

market value and that the entry price does not exceed the average share price of

the beneficiary over the 15 days preceding the request for the capital injection.

The Commission therefore considers that those methods comply with the

determination of the entry price foreseen in point 60 of the Temporary

Framework.

(115) Second, Measure A comprises a step-up mechanism ensuring a 10% increase in shareholding after 4 and 6 years (for listed beneficiaries) or after 5 and 7 years

(for non-listed beneficiaries) in case of insufficient redemption (see recital (31)).

Measure A therefore complies with point 61 of the Temporary Framework. This

conclusion is not affected by the fact that the step-up may be performed in cash,

at the option of the beneficiary (see recital (32)), which the Commission considers

equivalent and thus also compliant with point 61 of the Temporary Framework.31

(116) Third, regarding the exit of the State, the scheme allows that shares issued under Measure A may be bought back by the beneficiary at any time at a set minimum

price (see recital (34)). Alternatively, the State can dispose of the shares obtained

under Measure A at any time on the market (see recital (35)). In the event that the

Patrimonio Rilancio sells its equity stake derived under Measure A at a price

below the minimum buy-back price of recital (34), Italy confirmed that the

applicable governance conditions set out in recital (69) continue to apply for four

years after the capital increase. Measure A therefore complies with points 63 and

64 of the Temporary Framework.

(117) Additionally, the Patrimonio Rilancio has several other rights under Measure A, including the right to immediately terminate the investment agreement in the

event of breach of covenants and to claim a price for redeeming its equity stake

no less than the minimum buy-back price in such event (see recital (38)), (ii) the

rights embedded in the anti-embarrassment provision detailed in recital (36) and

certain additional rights in respect of non-listed beneficiaries (see recital (37)).

The Commission considers those elements as additional incentives for the

beneficiary to redeem the capital contribution in line with the objective of the

Temporary Framework.

(118) The Commission therefore concludes that Measure A complies with section 3.11.5 of the Temporary Framework.

3.3.4.2. Measure B (Mandatory Convertible Bonds)

(119) Measure B is also an equity instrument whose remuneration needs to comply with points 60 et seq of the Temporary Framework, although at first sight it may

appear to be a hybrid. In fact, the bonds issued under Measure B have a limited

maturity (of 4 years for listed companies and 5 years for non-listed companies,

31 A step-up effectuated in cash is economically equivalent to a step-up in shares immediately followed

by a buy-back under point 63 of the Temporary Framework.

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see recital (40)), and are remunerated with an annual coupon reflecting the

minimum margins for hybrid instruments applicable to large companies set out in

point 66 of the Temporary Framework.32

(120) However, upon maturity, the mandatory convertible bonds can be converted into shares of the beneficiary. Unlike the situation covered by point 67 of the

Temporary Framework – which assumes a dynamic conversion ratio that depends

essentially on the value of the shares at maturity (plus a 5% discount) – the

conversion ratio in Measure B is determined upon issuance of the instrument (see

recital (43)). If upon maturity the value of the underlying shares based on the

conversion ratio exceeds the nominal value of the bonds, the State will receive an

amount above the nominal value of the bonds (either in shares or cash). If that

value is less than the nominal value of the bonds, the State will receive less. Thus

the State will fully share in all benefits if the value of the underlying shares

increases, but also will bear the full risk equal to shareholders if the value of the

underlying shares decreases between issue and maturity. This is a risk element

that is characteristic for an equity instrument and not for a hybrid instrument,

which is only converted and thus participates in the risk in case of certain

conversion triggers. The Commission therefore considers that the measure must

be assessed under points 60 et seq of the Temporary Framework. Measure B must

therefore comply in principle with the relevant rules for entry price, a step up, and

an exit price of the equity instrument.

(121) First, as regards the entry price, similar to Measure A the entry price is determined on the basis of an initial reference price, which reflects the price listed

on the stock market and complies with point 60 of the Temporary Framework.

(122) Second, as regards remuneration, while Measure B does not comprise a step-up mechanism ensuring a 10% increase in shareholding after 4 and 6 years (for listed

beneficiaries) or after 5 and 7 years (for non-listed beneficiaries), it does contain a

coupon in line with point 66 of the Temporary Framework. The Commission

considers those two forms of remuneration equivalent. In line with point 62, as

well as point 68, of the Temporary Framework, the Commission may accept

alternative step-up mechanisms provided they have the same incentive effect and

a similar overall impact on the State's remuneration. The increasing rates foreseen

for Measure B, as for point 66, ensure that there is an in-built incentive for exit.

Moreover, the State receives cumulatively 14.5% remuneration over the first 4

years. Therefore, this alternative mechanism leads to a similar outcome with

regard to the incentive effects on the exit of the State and a similar overall impact

on the State's remuneration as point 61 of the Temporary Framework. Moreover,

compared to the mechanism in point 61 of the Temporary Framework, the step-up

mechanism in the form of coupons has the additional advantage of being

unconditional and payable already in years 1 to 3 (4 for non-listed companies),

while the mechanism envisaged in point 61 is only payable if in years 4 (or 5 for

32 Given the fact that the bonds issued under Measure B share the same risk profile as equity except for

not having voting rights (see recital (120)), one could argue that the step-up mechanism of point 61 of

the Temporary Framework should apply. Nevertheless, the Commission considers that the minimum

remuneration for hybrid instruments laid down in point 66 of the Temporary Framework and applied

under Measure can be considered as equivalent to the 10% step-up in point 61 of the Temporary

Framework.

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non-listed companies) “the State has not sold at least 40 percent of its equity

participation resulting from the COVID-19 equity injection”.

(123) One disadvantage is that mandatory convertible bonds do not have voting rights until conversion. Italy submitted evidence that the value of voting rights in Italy is

around 2%, based on comparison of ordinary and preferred shares with no voting

rights. It is understood that Measure B compensates for that difference by setting

the reference (and conversion) price at 95% of the market value, effectively

giving CDP a 5% discount. The Commission considers this an appropriate

adjustment adequately reflecting the characteristics of the instrument in the light

of the principles underpinning the Temporary Framework. First, the Commission

notes that legally, the mandatory convertible bonds issued under Measure B

remain subordinated debt until conversion. This means that the insolvency risk is

less than for an equity instrument. Second, the Commission notes that the State is

not entitled to voting rights only during the period before conversion into equity.

(124) Moreover, in case of conversion, the mandatory convertible bonds incorporate also a second step-up post conversion (the first one being represented by the

ordinary coupon payments), which occurs 2 years after conversion, whose entry

price is at market value (see recitals (47) and (48)). Measure B thus complies with

point 61 of the Temporary Framework.

(125) Third, regarding the exit of the State, the scheme gives the beneficiary at maturity the option to repay the bond at its market value in cash and terminate the aid or to

convert the upside part into shares in case of an increase in the market value of

the shares or to convert all the bond into shares in case of an decrease of the

value. In the case of a conversion the beneficiary will have to comply with the

conditions for COVID shares including point 61 of the Temporary Framework.

(126) In addition, the beneficiary has the option to repay the mandatory convertible bonds before maturity. Early repayment must be in cash, for the full amount of

the mandatory convertible bonds and at the at the higher of (i) the nominal value

increased by an annual interest remuneration 200 basis points higher than the

Table in point 63 of the Temporary Framework; or (ii) the value of underlying

shares (see recital (45)(a). Therefore, Measure B complies with point 63 of the

Temporary Framework on the buyback by the aid beneficiary.

(127) Post conversion, the beneficiary may buy back the shares at any point, for a price that is the higher of the (i) the market value of the shares and (ii) the conversion

price increased by an internal rate of return equal to the margins set out in Table 2

plus an additional 200 bps, taking into account the potential dividends distributed

(see recital (46)(a)). Post conversion, Measure B therefore also complies with

point 63 of the Temporary Framework.

(128) Alternatively, post conversion the Patrimonio Rilancio may, at any time, dispose of its stake on the market or to other investors. The market price must be

established through an open consultation and existing shareholders may be given

priority rights. If the market price received is less than the minimum buy-back

price set out in recital (46)(a)), the pro-competitive governance conditions laid

down in section 3.11.6 of the Temporary Framework continue to apply until the

fourth year from the intervention (see recital (46)(b)). Additionally, any sales

price might be adjusted upward as a result of an anti-embarrassment (see recital

(49)). Measure B therefore complies with point 64 of the Temporary Framework.

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(129) Further, the scheme also gives the Patrimonio Rilancio the right to request a