Italy's Late Bill Payments Open New Market for Hedge Funds

(Bloomberg) -- Deloitte LLP is offering Italy’s builders a way to get billions of euros in unpaid bills from public works projects off their balance sheets -- selling them at a discount to hedge funds.

Construction companies that say they incurred costs in excess of agreed terms of public infrastructure projects have to pursue the difference in what can be a lengthy legal process. The consultancy firm has set up a platform for them to sell those claims on Italian state entities and municipalities to investors, according to people familiar with the matter who asked not to be identified because it’s private.

The disputed cases relate to infrastructure works that go over budget because of unforeseen circumstances, such as having to foot the bill for archaeologists to excavate ancient ruins discovered during construction, a common event for the Italian construction sector. A spokeswoman for Deloitte in Milan declined to comment on the project.

Toll Roads

Highway toll operator Autostrade per l’Italia SpA, had 1.4 billion euros of such claims against it as of 2017, according to its last annual report. Though it’s difficult to estimate, the market for contested charges in the Italian public sector may amount to as much as 50 billion euros ($58.5 billion), the people said.

Deloitte has already gathered claims worth as much as 1 billion euros from mid-sized contractors with annual revenue of about 400 million euros on the platform, they said.

Some of these cases are related to highways operator Anas SpA. The company has cleared 2.5 billion euros of disputes since 2015 out of about 13 billion euros in total, according to an emailed statement sent by the company to Bloomberg News.

Salini Impregilo SpA, a listed Italian contractor, reported 92 million euros of claims in its 2017 accounts. Salini is due to report results Wednesday.

Selling the rights to any payout from a successful lawsuit allows construction firms to avoid the cost of going to court while boosting cash reserves with the sale proceeds. Italian civil suits last 460 days on average, according to data for 2016 from the Italian Justice Ministry.

Extra Cost

“Litigation in Italy is eternal, frequent and linked to cost incurred during the works which is unaccounted for in the original budget,” said Marco Monaco Sorge, a counsel at Italian law firm Tonucci & Partners who advised clients including construction companies. “For example, the extra cost if you find ancient ruins while building a road.”

Contractors are also reeling from a decade-long squeeze on public finances since the global financial crisis that’s forced governments to rein in infrastructure spending. Societa Italiana per Condotte d’Acqua is embroiled in disputes with state entities over expenses from carrying out public works and filed for insolvency last week.

New accounting rules that came into force last year have added pressure on builders to step up the pace of disposals. The so-called “IFRS 15” principles state claims can be booked as revenues only when a company is reasonably certain their collection won’t be reversed in future.

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