Soluzioni Innovative: (Private) & Public Debt

Crediamo nella supremazia della Conoscenza. Dr. Edward Altman Crediamo nelle forza delle Idee. Co-Founder & Senior Advisor Classis Capital Sim SpA Crediamo nell’Ispirazione.

1 Turin, April 12, 2017 Agenda

. Current Conditions and Outlook in Global Credit Markets

. Assessing the Credit Health of the Italian SME Sector

. Issuers

2 Major Agencies Rating Categories

Moody's S&P/Fitch

Aaa AAA Aa1 AA+ Aa2 AA Aa3 AA- A1 A+ A2 A A3 A- Baa1 BBB+ Baa2 BBB Baa3 Grade BBB- Ba1 High BB+ Ba2 ("Junk") BB Ba3 BB- B1 B+ B2 B B3 B- High Yield Caa1 CCC+ Caa CCC Caa3 CCC- Ca CC C C D 3 Size Of High-Yield

1978 – 2017 (Mid-year US$ billions) $1.800 $1,624 $1.600 Source: NYU $1.400 Salomon Center $1.200 estimates US Market using Credit $1.000 Suisse, S&P $800 and Citi data

$ (Billions) $ $600 $400 $200

$-

1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

1994 – 2016 (Mid-year € billions)* 500 468€ 471 Western Europe Market 418

400 370 ) 300 283 Source: Credit

200 194 Suisse Billions

( ( 154

€ 108 100 81 61 70 89 84 81 79 80 77 0 2 5 9 14 27 45 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 *Includes non-investment grade straight corporate debt of issuers with assets located in or revenues derived from Western Europe, or the bond is denominated in a Western European . Floating-rate and convertible bonds and preferred are not included. 4 Market is growing also in Asia

5 Wall Street Journal by April 11, 2017 YTM & -Adjusted Spreads Between High Yield Markets & U.S. Treasury Notes

June 01, 2007 – March 08, 2017

Yield Spread (YTMS) OAS Average YTMS (1981-2016) Average OAS (1981-2016)

12/16/08 (YTMS = 2,046bp, OAS = 2,144bp) 2,200

2,000

1,800

S 1,600 p 1,400 r 1,200 e 1,000 800 a YTMS = 539bp, d 600 OAS = 544bp 400

6/12/07 (YTMS = 260bp, OAS = 249bp 3/08/17 (YTMS = 378bp, OAS = 379bp)

200

9/5/2016

2/8/2016

7/9/2015

5/2/2012

3/7/2011

8/9/2010

6/1/2007

5/23/2016

3/26/2015

12/9/2014

8/26/2014

5/13/2014

1/28/2014

6/28/2013

3/15/2013

8/15/2012

1/18/2012

10/3/2011

6/20/2011

4/26/2010

1/11/2010

9/24/2009

6/11/2009

2/26/2009

7/29/2008

4/15/2008

9/14/2007

12/19/2016

10/22/2015

10/11/2013

11/28/2012

11/22/2010

11/11/2008 12/31/2007

Sources: Citigroup Yieldbook Index Data and of America Merrill Lynch

6 High Yield Bonds - Yield To Vs. Yield To Worst

June 01, 2007 – March 08, 2017

25% High 12/12/08 (YTM = 23.03%) 12/15/08 (YTW = 22.65%)

20%

Y i 15% 3/08/17 (YTM = 6.33%) e 3/08/17 (YTW = 5.89%) l 10% d

5% Low 6/23/14 (YTM = 5.85%) 6/24/14 (YTW = 4.85%)

0%

6/1/2007 7/2/2009 8/1/2011 1/7/2014 2/4/2016 6/9/2016

2/12/2008 6/17/2008 7/19/2010 3/28/2011 4/26/2013 8/30/2013 5/27/2015 9/30/2015 10/5/2007 2/26/2009 11/5/2009 3/15/2010 12/5/2011 4/11/2012 8/15/2012 5/13/2014 9/15/2014 1/21/2015 2/20/2017

10/21/2008 11/22/2010 12/19/2012 10/13/2016 YTM YTW Sources: Citigroup Yieldbook Index Data

7 Default Rates On High-Yield Bonds

Quarterly Default Rate and Four-Quarter Moving Average 1989 – 2017 (3/08)

6.0% 16.0%

14.0% 5.0%

12.0%

4.0% 10.0%

3.0% 8.0%

6.0%

2.0%

Quarter Average Moving Quarter -

Quarterly Default Rate Quarterly 4.0% 4 4 1.0% 2.0%

0.0% 0.0%

Quarterly Moving Source: Author’s Compilations

8 Historical Default Rates And Recession Periods In The U.S.

High-Yield Bond Market (1972 – 2016) 14.0%

12.0%

10.0%

8.0%

6.0%

4.0%

2.0%

0.0%

2 4 6 8 0 2 4 6 8 0 2 4 6 8 0 2 4 6 8 0 2 4 6

7 7 7 7 8 8 8 8 8 9 9 9 9 9 0 0 0 0 0 1 1 1 1 Periods of Recession: 11/73 - 3/75, 1/80 - 7/80, 7/81 - 11/82, 7/90 - 3/91, 4/01 – 12/01, 12/07 - 6/09 *All rates annual Source: E. Altman (NYU Salomon Center) & National Bureau of Economic Research 9 Z-Score Component Definitions and Weightings

Variable Definition Weighting Factor

X1 Working Capital 1.2 Total Assets

X2 Retained Earnings 1.4 Total Assets

X3 EBIT 3.3 Total Assets

X4 Market Value of Equity 0.6 Book Value of Total Liabilities

X5 Sales 1.0 Total Assets

10 Comparing Financial Strength of High-Yield Bond Issuers in 2007& 2012/2014/3Q 2016

Number of Firms Z-Score Z”-Score 2007 294 378 2012 396 486 2014 577 741 2016 (3Q) 581 742

Average Z-Score/ Median Z-Score/ Average Z”-Score/ Median Z”-Score/ Year (BRE)* (BRE)* (BRE)* (BRE)* 2007 1.95 (B+) 1.84 (B+) 4.68 (B+) 4.82 (B+)

2012 1.76 (B) 1.73 (B) 4.54 (B) 4.63 (B)

2014 2.03 (B+) 1.85 (B+) 4.66 (B+) 4.74 (B+)

2016 (3Q) 1.97 (B+) 1.70 (B) 4.44 (B) 4.63 (B)

*Bond Rating Equivalent Source: Authors’ calculations, data from Altman and Hotchkiss (2006) and S&P Capital IQ/Compustat

11 Assessing the Credit Worthiness of Italian SMEs and Mini-bond Issuers

Dr. Edward I. Altman Dr. Gabriele Sabato Maurizio G. Esentato

12 The Italian Mini-bond Market

 Europe High-yield bond market is still lagging behind the US one, but the growth has accelerated in the last 3 years.

 In Italy, the market for SME bonds is known as Extra- MOT PRO “Mini-bond” market.

 The new segment of the Extra-MOT market dedicated to listing of bonds, , and project finance bonds started in February 2013.

 The total amount of listed issuances since February 2013 is 177, for a total issued amount of about Euro 7,146bn. As of March 2016, there is Euro 4.491bn outstanding, from 130 issues.

 In Q2 2016, 13 new issues have been launched.

We believe “Mini-bonds” can be a success in Italy as long as the market supplies an attractive risk/return tradeoff to investors as well as affordable and flexible financing for borrowers.

wiserfunding Ltd 13 What are the constraints to the success of the Italian ExtraMOD PRO Mini-bond market?

 All bond face three main risks (Market, Liquidity and Credit), but it is that is perhaps most critical for relatively unknown, smaller enterprises.

 Since the ExtraMOT PRO market is still quite young, there are not as yet aggregate default and recovery statistics. We prefer, therefore, to concentrate on issuer default & return analytics based on Italian SME experience.

The objective of our model is to help:

 Italian SMEs to grow and succeed by assessing their risk profile and suggesting what would be the best funding option for them  Lenders and investors to assess the risk-return trade offs in investing in either individual or portfolios of Italian SME mini-bonds

wiserfunding Ltd 14 SME ZI-Score: Summary of Results

 We segmented the Italian SMEs by industrial sectors and developed four default prediction models for Manufacturing, Services, Retail and Real Estate firms.

 Models have been developed on a representative sample of more the 14.500 SMEs located in the north of Italy and then certified for their relevance at national level.

 Prediction power of the models is significantly high due to the use of informative variables and appropriate techniques applied.

 In addition to the Score, Firms/Analysts/Investors also receive an estimated Bond Rating Equivalent and Probability of Default.

 The SME ZI-Score improves the matching of demand and supply in the capital markets between SMEs looking for funding options and investors.

wiserfunding Ltd

15 The Results

wiserfunding Ltd 16 Mortality Rates By Original Rating Mortality Rates by Original Rating All Rated Corporate Bonds* 1971-2016 Years After Issuance

1 2 3 4 5 6 7 8 9 10

AAA Marginal 0.00% 0.00% 0.00% 0.00% 0.01% 0.02% 0.01% 0.00% 0.00% 0.00% Cumulative 0.00% 0.00% 0.00% 0.00% 0.01% 0.03% 0.04% 0.04% 0.04% 0.04%

AA Marginal 0.00% 0.00% 0.20% 0.06% 0.02% 0.01% 0.01% 0.01% 0.02% 0.01% Cumulative 0.00% 0.00% 0.20% 0.26% 0.28% 0.29% 0.30% 0.31% 0.33% 0.34%

A Marginal 0.01% 0.03% 0.11% 0.12% 0.09% 0.05% 0.02% 0.24% 0.07% 0.04% Cumulative 0.01% 0.04% 0.15% 0.27% 0.36% 0.41% 0.43% 0.67% 0.74% 0.78%

BBB Marginal 0.32% 2.34% 1.24% 0.98% 0.49% 0.22% 0.25% 0.16% 0.17% 0.33% Cumulative 0.32% 2.65% 3.86% 4.80% 5.27% 5.48% 5.71% 5.86% 6.02% 6.33%

BB Marginal 0.92% 2.04% 3.85% 1.95% 2.42% 1.56% 1.44% 1.10% 1.41% 3.11% Cumulative 0.92% 2.94% 6.68% 8.50% 10.71% 12.11% 13.37% 14.32% 15.53% 18.16%

B Marginal 2.86% 7.67% 7.78% 7.75% 5.74% 4.46% 3.60% 2.05% 1.73% 0.75% Cumulative 2.86% 10.31% 17.29% 23.70% 28.08% 31.29% 33.76% 35.12% 36.24% 36.72%

CCC Marginal 8.11% 12.40% 17.75% 16.25% 4.90% 11.62% 5.40% 4.75% 0.64% 4.26% Cumulative 8.11% 19.50% 33.79% 44.55% 47.27% 53.40% 55.91% 58.01% 58.28% 60.05% *Rated by S&P at Issuance – Based on 3280 issues . Source: Standard & Poor’s (New York) and Author’s Compilation

wiserfunding Ltd 17 Risk Profile of Mini-bond issuers (2015)

Bond Rating Equivalent # SMEs % SMEs Avg. Yield AA 2 2% 0,057 A 4 4% 0,062 Applying our SME ZI-Score on the BBB 24 25% 0,065 mini-bond issuers as of 2015, we find BB 18 19% 0,055 that: B 31 32% 0,059 CCC 14 14% 0,065  Risk profile of SMEs doesn’t CC 2 2% 0,030 seem to influence the bond C 2 2% 0,060 pricing; Source: Firms listed on Borsa Italiana Extra MOT, calculations by the authors  Majority of existing mini- bond issuers classified as non-investment grade;

 The risk profile of the mini- bond issuers is better (i.e. less risky) than total SME sample.

Source: Firms listed on Borsa Italiana Extra MOT, calculations by the authors

wiserfunding Ltd 18 Wiserfunding Ltd.: Helping Italian SMEs to Succeed

 Mission is to support small business growth by reducing information asymmetry by providing a common set of information to all market participants.

 The SME ZI-Score should not to be used in isolation. Other factor (e.g. debt capacity, cash flow, recovery profile, market outlook, directors’ experience) are assessed when evaluating SMEs’ financial strength.

 We believe that by providing lenders/investors and small businesses with the same set of information, we can help them speak the same language.

 We are working with Classis Capital, Borsa Italiana, Confindustria, several PMI organizations and SMEs to apply our model effectively

wiserfunding Ltd

19 Disclaimer

The information in this document is neither verified nor updated. This document is provided for informational purposes only and is not intended as investment advice or as an offer or solicitation for the purchase or sale of any . The authors make no express or implied warranties relating to the information, provided herein or as to the consequences to the recipient from any use whatsoever of this document of the information provided herein. The authors will not be liable in any way for inaccuracies, errors in, or omissions of, or in the transmission of, any use of, information provided in this document, of for any damages arising there from. The information contained herein regarding prices and statistical data, if any, has been obtained from sources which we believe to be reliable but in no way are warranted by us to accuracy or completeness. Copyright, all rights reserved. Classis (classem, classì, classis) è il termine Latino che indica la Flotta.

Classis era conosciuta come la flotta navale della marina dell’impero Romano. La sua funzione era quella di controllare le acque attorno alle province di Roma. Il suo compito era quello di dare supporto logistico, tenendo aperte le rotte di comunicazione marittime.

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