Mini-bonds: a new opportunity for enterprises and professional investors in the Italian market

July 2016 | EXPERT BRIEFING | FINANCE & INVESTMENT

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Mini-bonds are medium-long term debt instruments which were launched on the Italian market in 2012 in reaction to restraints in traditional bank financing and to provide small and medium-sized enterprises with an alternative source of capital to sustain competitiveness.

As of April 2016, 164 issuances of mini-bonds were listed on the ExtraMOT Pro dedicated market segment, with an aggregate face value of more than €5.8bn. At the end of 2015, the aggregate market of mini-bonds increased by 15 percent compared to 2014, issuances of mini-bonds with face value of less than €50m having principally contributed to such growth; as confirmation of this trend, in the first quarter of 2016, 15 out of 16 issuances of mini-bonds had an average face value of less than €10m. Data also shows that issuers of mini-bonds are concentrated in certain industries (mainly power, utilities, financial services and food and beverage) and geographic areas (mainly the north of Italy).

Main characteristics of mini-bonds

Mini-bonds may be issued by unlisted Italian companies (other than banks) with more than 10 employees and an annual turnover and/or assets in excess of €2m. Issuers may be organised as cooperatives, mutual insurance companies and corporations (with regard to limited liability companies, to the extent the by-laws provides for issuance of debt instruments).

Mini-bonds may only be subscribed by professional investors, which are private or public investors with the experience, knowledge and expertise to make their own investment decisions and accurately assess the risks that they incur (such investors to include, consistent with Directive 2004/39/EC, credit institutions, investment firms, insurance companies, collective investment schemes and their management companies, pension funds and their management companies, other institutional investors, including, under certain circumstances, individuals, etc.). Subscribers may not hold, directly or indirectly, more than 2 percent in the equity capital of the issuer.

There are no minimum requirements as to the main terms and conditions of mini-bonds, including face value, maturity date, interest rate and repayment. As at the end of the first quarter of 2016, for issues of less than €50m, average figures were released in respect of face value (€9.3m), maturity date (five years four months), interest rate (5.6 percent) and terms of repayment: amortisation plan (54 percent) bullet at maturity (46 percent).

General benefits

Mini-bonds offer a number of potential advantages; issuers benefit from access to capital markets, debt diversification, reduction of dependence on bank’s financing, brand promotion, better balance sheets (lengthening average maturity of financing sources and stability of credit) and tax incentives (in particular, accrued interests may be deducted up to 30 percent of gross operating profits; also, costs and expenses incurred by the issuer in connection with the issue of mini-bonds may be deducted in the financial year in which such costs and expenses are incurred).

Investors in mini-bonds benefit from an innovative medium-long debt instrument characterised by stable returns, low risk profiles (under certain circumstances, issues benefit from a partial State guarantee) and tax benefits, the most important being the exemption from withholding tax on interest payments, including for non-resident investors. This is based on certain requirements being met, including that the investor: (i) is resident in certain ‘white-listed’ countries; (ii) deposited the mini-bonds with a financial intermediary in Italy; and (iii) made a full disclosure as to the ultimate beneficial owner. Non-resident collective investment schemes qualify for the exemption if more than 50 percent of their net assets has been invested in mini-bonds and all the investors of the entity qualify as professional investors.

Trading mini-bonds on the Italian regulated market (ExtraMOT Pro)

Mini-bonds may be traded on the ‘ExtraMOT Pro’ market, a segment active from February 2013 and dedicated to the listing of bonds, promissory notes, participative financial instruments and projects bonds.

The listing process is flexible both in terms of admission and disclosure requirements; no formal listing prospectus is required. An admission document must be prepared, providing for the main financial information on the issuer, the relevant risk factors and the main terms and conditions of the debt instrument. Some other minimum requirements apply (mainly that the issuer must have prepared financial statements for two financial years, the latter being fully audited).

Disclosure requirements include publishing audited financial statements, disclosing rating (if any), and providing all relevant information on any changes to the rights of bond holders or in the terms and conditions of the debt instrument.

A private debt market is indeed taking shape in Italy. Mini-bonds today are ea viable solution for sustaining growth and development, particularly for small and medium-sized enterprises with skilled management and solid business plans, with a valuable position in the market and a strong inclination toward internationalisation.

Maria Pia Carretta is a lawyer at CP-DL Capolino Perlingieri & Leone. She can be contacted on +39 02 8905 0320 or by email: mpcarretta@cp-dl.com.

Maria Pia Carretta

CP-DL Capolino Perlingieri & Leone