Identifying the value in promising small and medium-sized businesses by leveraging our specialist funding approach is a high-growth area
While the Covid-19 pandemic has brought challenges, it has also brought opportunities. We see this in many ways in the businesses we deal with, from a new determination to “build back better” in order to help reach sustainable development goals, to the emergence of new business models from the disruptive effects of the crisis.
The same is true in lending to SMEs. illimity was created to support the growth of Italian small and medium-sized businesses that demonstrate potential based not only on their past financial performance and the state of their balance sheets, but also their future promises. We want to help SMEs emerge stronger and fitter from the pandemic, which we achieve by means of innovative underwriting approaches. These we believe will stand the test of time, long after the pandemic is over. It’s a strategy that in the third quarter of 2020 resulted in a 12 percent rise in the value of lending within our SME Division to €685 million, compared with Q2.
Many of these businesses are either distressed or in need of creative solutions if they are to emerge stronger. Generally, this means working with SMEs with annual turnover of more than €30 million.
In our turnaround business, we focus on companies that face a default scenario, but where there is still a viable business. These may also be classified as so-called “unlikely-to-pay” (UTP) cases. We then structure financial arrangements for relaunching the company or redefining its financing structure, allowing it to repay over a longer period of time and thrive again.
Our crossover business, meanwhile, focuses on companies that are successful in their respective industries and have broadly solved their strategic issues but need financing to secure growth.
In one recent example, we were proud to agree a six-year, €14 million financing facility for Be Power Group, a company founded in 2017 that specializes in electric-vehicle charging infrastructure. Such technology is in the sweet spot of building back better as adoption of electric vehicles gathers pace in the push towards creating a low-carbon world.
The financing will help Be Charge, Be Power’s electric vehicle-charging unit, expand its network of charging stations in Italy to meet a national goal of 30,000 over the next few years, from an installed base now of 2,500.
Our assets in the crossover segment are widely diversified, and our exposure to the economic sectors most affected by the current economic crisis (hotels, restaurants, leisure, retail distribution, the automotive sector and its supply chain) is limited to about 15 percent of illimity’s total lending to SMEs.
illimity also provides factoring solutions for funding working capital needs, for supply chain financing, and securing short-term liquidity.
In February, we set-up illimity SGR, a unit that in the next few months will launch its first alternative investment fund focused on distressed corporate loans.
Asking the right questions
The difficult economic conditions we face calls for the banking system to work particularly closely with businesses—and sometimes at speed, given the urgency of the situation many SMEs find themselves in.
Our approach is to look closely at the industrial realities facing SMEs in terms of their different credit needs. Not all lenders do this, and some of the larger commercial banks are not as focused as they could be on developing a deep understanding of what their clients do.
Quite simply, they may not be asking the right questions. Our starting point is: you can’t pose the same generic question to a pasta maker and a tile maker; you need to know what questions to ask. I think this is unique to how we work.
The other unique aspect of our approach is the use of expert advisers—a role called “tutors.” These are usually former business executives with years of specialist experience. They bring deep understanding to the businesses we are trying to help, and know which questions to ask. This makes them much more than consultants.
To illustrate what I mean, illimity this year started working with a well-known brand of extra virgin olive oil. It has a good-quality product, but the company is weighed down by debt and weak earnings.
We identified as a tutor the former general manager of a food company, who was previously the olive oil buyer at a chain of food stores. We tasked him with testing out the recovery plans that management and an equity investor had already proposed.
illimity’s involvement typically follows one of three scenarios. The first sees illimity buying out the existing lending bank’s loan portfolio at a discount and then redefining the SME’s capital structure—all with the involvement of a tutor and company management. The second involves refinancing for a SME that is already midway through an industrial and financial turnaround, while a third sees illimity granting new finance to corporates classified as UTP, as part of a plan to relaunch the business.
Looking ahead to 2021
While each SME faces its own particular challenges, a common theme across the sector is dealing with digitalization. Many SMEs were revealed during the pandemic as having been under-prepared for this trend, and are now rushing to adopt digital ways of working—with our financial help.
The digital theme extends to our own operations. Our factoring offering is available to SMEs on an easy-to-use platform that can be brought into operation immediately. This was especially beneficial during the initial pandemic lockdown period, when clients were engaged quickly through the bank’s fully-digital, remote onboarding process.
With output in the Italian economy in the third quarter rebounding quite strongly from Q2, SMEs’ needs for credit are expected to remain significant well into 2021. Indeed, I am encouraged by the fact that activity in the SME Division has accelerated since the summer and into October, with no deterioration in the loan book.
This has created the conditions for illimity’s unique approach to be beneficial to an increasing number of SMEs—and to the Italian economy as it emerges, building back better, from the pandemic. This is our mission.
