The search for lifelines in Italy Beyond the banks: Harry's Bar in Venice has taken a new approach to funding For decades tourists crowded out Harry's Bar, famous for its peach-and-prosecco bellini cocktails and visitors such as Ernest Hemingway. But a few years ago it ran into trouble as the tourists shrank in number and spent less money at the Venice drinking spot, while the owners, the Cipriani family, were unable to cut staff because of Italy's restrictive labour laws. It got so bad that Arrigo Cipriani, the 80-year old son of the bar's founder, was having to wait on tables himself. Now Salvatore Cerchione, co-founder of Blue Skye Investment, a distressed debt fund, sits on the board of Harry's Bar after being called in 18 months ago by Italian banks and PwC, the accountancy firm, who were concerned about the restructuring of the company's debt. The Cipriani family has remained in charge of the business, while Mr Cerchione and his co-founder Gianluca D'Avanzo have restructured the group's debts of more than €6m and cut costs. Blue Skye Investment also bought 16 per cent of the Cipriani holding company that controls the Venice bar. Harry's Bar is typical of many small Italian businesses as they seek new sources of funding. Amid the general freezing of bank funding in Europe, it is the small and medium-sized enterprises, which account for 80 per cent of Italy's economic output, that are bearing the brunt. Corporate finance in Italy is overwhelmingly raised through bank loans. Loan credit accounts for about 90 per cent of corporate funding in Italy, compared with 70 per cent in the UK and 45 per cent in the US. Banking loans to the private sector fell by €38bn in 2012, according to the Bank of Italy. Overall, banks are lending two-thirds less to Italian businesses than they were in 2006, the central bank says. Giorgio Squinzi, president of industry lobby Confindustria, calls the lack of credit "an emergency issue" for the country. Unleashing the potential of its SMEs is vital to reinvigorate the stagnant economy: "There is no time left. We are at the end, we are running out of oxygen," he says. Now some of Italy's smaller companies are looking at alternative ways of raising funds. Marco Giovannini, chairman and chief executive of Guala Closures, a manufacturer of premium bottle tops, was one of many Italian business leaders who found that the onset of the eurozone debt crisis meant bank funding had dried up. So he and Anibal Diaz, Guala's head of finance, found another option. The company issued two high-yield bonds worth a total of €475m to European and US institutional investors, including Pimco, Fidelity and Calpers. This allowed Milan-based Guala, which makes millions of decorative and anti-counterfeiting bottle tops for drinks companies such as Diageo and Pernod Ricard every year, to refinance its bank debt and expand, buying an aluminium bottletop plant in South Africa and opening an aluminium processing factory near Milan. "We took the risk to get ahead of the problem and give us the financial stability so we could develop our business," Mr Giovannini says, eyes bright with evident satisfaction. For us it has not been difficult. Without being arrogant, we have a good reputation and a good business and people wanted to invest. Corporate bonds are coming into fashion in Italy. The steady uptick in the issue of debt by smaller Italian businesses follows the loosening in corporate and tax legislation by Mario Monti's technocratic government that made it easier for them to tap debt markets. Luxury brands with designs on listing Despite the gloom surrounding Italian companies, its luxury goods businesses have outperformed the Milan blue-chip index by a substantial margin thanks to demand from consumers in fast-growing economies in Asia and also in the US. Raffaele Jerusalmi, chief executive of Borsa Italiana, expects to see 10 to 15 stock market listings this year, of which the majority would come from luxury and design companies because of their strong brands" appeal to foreign investors. Among those expected to hit the Milan bourse are down-jacket maker Moncler and lingerie company Carpisa-Yamamay. Moleskine, maker of premier notebooks, had it first day of trading yesterday after being the first IPO in Milan this year. The stake in the company, which manufactures writing pads said to have been used by Pablo Picasso, was sold by Syntegra, a private equity group. The stock exchange has also launched Elite, a three-year programme that identifies young companies in order to help them become more market-friendly. They market themselves as preparing for a stock market listing but are also allowed to be seen as open to other fundraising options such as venture capital, private equity or private bond sales including securitisations. Cerved, a data group, recently raised nearly €800m through three high-yield bonds maturing in six and eight years" time. Zobele, a maker of air fresheners and insecticides, placed a bond worth €180m last month. IVS Italia, which makes coffee vending machines, has just launched a roadshow to raise €200m. Mediobanca, the Milanese investment bank that sits at the centre of Italy's financial system, has been shepherding several Italian companies with strong export business to place bonds privately with US investors. Raising debt also appeals to Italian midsized companies, which traditionally shy away from raising equity as they dislike any move to extend power beyond minority investors who are not "friends and family." Dominic Griffiths, who heads the banking and finance group in London at int­ernational law firm Mayer Brown, says that, from the perspective of a foreign investor, there is still some interest in acquiring Italian assets. "The fundamentals of the Italian eco­n­omy are still strong," he says. There are a number of good SMEs with a strong export market. The challenge [for Italian business owners] is in obtaining the funding necessary for those companies to survive and expand," he says. For those companies less known outside Italy but with a sound business, Assogestioni, which lobbies on behalf of the country's asset managers, has proposed that they issue mini-bonds or equity to Italian investment funds. Italian SMEs are navigating between two rocks - lack of capital and, to a much greater extent, lack of credit. Italian funds should be allowed to invest a small proportion of their assets in these instruments even if they are illiquid," says Domenico Siniscalco, head of Assogestioni and a former finance minister. Nonetheless, raising debt is not an option for all. Companies must be pro­fitable and big enough to raise bonds worth at least €200m, say bankers. With funding costs for Italian companies already 50 per cent to 100 per cent higher than for their peers in Europe, some are even taking a new look at listing on the stock exchange - in a true break with their disinclination to share with small shareholders. Indeed, companies that would nev­er have considered looking to outside investors for funding are doing so now - and receiving unfamiliar advice as well as funds. Experts say the funding crisis is revealing that many SMEs need outside advice on management as much, if not more than, they need financing. Mr Cerchione says there are "hundreds of situations like Harry's Bar sitting on banks" balance sheets . . . They are solid businesses, they are very good franchises, but someone needs to do something to give them guidance. In the case of Harry's Bar, Mr Cerchione is upbeat about its future. with the debt restructuring behind it, the Cipriani family are back afloat and pulling in the tourists. And Mr Cipriani is back behind the bar every night.