DOCSLIB.ORG

Pros and Cons of Minibonds for International Investors and Smes in the Italian Market: a Systematic Literature Review

Total Page：16

File Type：pdf, Size：1020Kb

Download full-text PDF Read full-text
Pros and Cons of Minibonds for International Investors and Smes in the Italian Market: a Systematic Literature Review PROS AND CONS OF MINIBONDS FOR INTERNATIONAL INVESTORS AND SMES IN THE ITALIAN MARKET: A SYSTEMATIC LITERATURE REVIEW LAHTI UNIVERSITY OF APPLIED SCIENCES Bachelor of Business Administration Degree programme in International Business Autumn 2018 Ivan Klimentyev ABSTRACT Author(s) Type of publication Published Klimentyev, Ivan Bachelor’s thesis Autumn 2018 Number of pages 38 Title of publication PROS AND CONS OF MINIBONDS FOR INTERNATIONAL INVESTORS AND SMES IN THE ITALIAN MARKET: A SYSTEMATIC LITERATURE REVIEW Name of Degree Bachelor of Business Administration The core objective of this thesis was to help international investors understand the advantages and disadvantages of investing in Italian minibonds. The Minibond program was initiated by the Italian government in 2012 as an alternative debt finance for Italian SMEs. This is a new debt product and many international investors around the world are not familiar with it. In the same way, many Italian SMEs are not familiar with the benefits and limitations of raising debt finance through the minibond issuance. This study provides potential investors with an overview of such instruments as well as assesses the main features of minibonds. The study also helps the Italian SMEs to understand the pros and cons of raising debt finance through the minibond issuance. In recent years, the amount of publications in regard to the Italian mini-bonds has surged. However, the information available on this topic is very fragmented. Only separate studies have been done with the focus on particular aspects of the Italian mini-bonds. There is a need to summarize the information available in a clear way. In order to answer the research question, a systematic literature review was conducted. The secondary data was collected in a structured way and analyzed according to the guidelines for a systematic literature review. The findings of this thesis showed that under certain conditions, it is cheaper for Italian SMEs to raise debt finance through the minibond issuance. Minibonds provided a more desirable length of debt financing for Italian SMEs. However, for small companies, legal costs associated with the minibond issuance are too high. For the international investors, the biggest advantage of investing in minibonds is the high return on the investment and in some cases the exception from the withholding tax on the interest earned. However, minibond investors bear high credit risks. In addition, the minibond market in Italy greatly lacks liquidity. Keywords Italian minibonds, SMEs, International investors CONTENTS 1 INTRODUCTION ............................................................................................................ 1 1.1 Research background ........................................................................................... 1 1.2 Thesis objectives, research question and limitations ........................................... 2 1.3 Theoretical framework ........................................................................................... 3 1.4 Research methodology and data collection .......................................................... 3 1.5 Thesis structure ..................................................................................................... 4 2 THEORETICAL FRAMEWORK ..................................................................................... 6 2.1 Types of financial markets ..................................................................................... 7 2.2 Investment management ....................................................................................... 9 2.3 Italian economy after the financial crisis of 2007–2008 ...................................... 13 2.4 Minibond market in Italy. ..................................................................................... 14 2.5 Main characteristics of mini-bonds ...................................................................... 14 3 RESULTS OF THE SYSTEMATIC LITERATURE REVIEW ....................................... 17 3.1 Description of the methodology ........................................................................... 17 3.2 Systematic literature review process in this thesis ............................................. 18 3.2.1 Planning the structured literature review ......................................................... 18 3.2.2 Systematic literature review protocol .............................................................. 19 3.2.3 Development of a search strategy .................................................................. 20 3.2.4 Documenting the search ................................................................................. 21 3.2.5 Filtering data ................................................................................................... 21 3.2.6 Study selection ................................................................................................ 22 3.2.7 Data extraction................................................................................................. 23 3.2.8 Data analysis ................................................................................................... 25 3.2.9 Analysis of benefits of raising debt finance through minibond issuance for Italian companies. ........................................................................................................ 25 3.2.10 Analysis of challenges or limitations associated with the issuance of minibonds for Italian companies. ................................................................................. 27 3.2.11 Analysis of the benefits of investing in Italian minibonds for international investors. 28 3.2.12 Analysis of challenges or limitations associated with the investment in minibonds for International investors. .......................................................................... 30 4 CONCLUSIONS ........................................................................................................... 32 4.1 Answers to the research question ....................................................................... 32 4.2 Validity and reliability ........................................................................................... 34 5 SUMMARY ................................................................................................................... 35 REFERENCES .................................................................................................................... 36 1 1 INTRODUCTION In the first chapter of the thesis, the research topic of this thesis will be explained. The research background will be described first. After this, thesis objectives, research question and possible limitations will be covered. In a separate chapter, a sub chapter, main theories used in this thesis will be described. After that, the research methodology will be introduced. At the end of the chapter, the structure of the thesis will be explained. 1.1 Research background According to the 18th round of the Survey on the Access to Finance of Enterprises (SAFE), conducted between 12 March and 20 April 2018, more companies reported difficulties related to the availability of skilled labor and the difficulty in finding customers as the number one challenge they are facing. From 2009, Access to Finance was the biggest challenge faced by the enterprises. (Survey on the Access to Finance of Enterprises in the euro area 2018, 3.) Even though the situation with the Access to Finance has improved in Europe, enterprises in some markets are experiencing difficulties. For example, enterprises in Greece and Italy are still facing challenges and are stating that Access to Finance is still the biggest issue for them. (Survey on the Access to Finance of Enterprises in the euro area 2018, 12.) Business owners have multiple options when choosing a source of finance. A source of finance that is common in one industry, might not be suitable for companies in other industries. (Drake & Fabozzi 2010, 5.) Generally, financing can be divided into two categories: Debt financing and Equity financing. Business owners can rely on either one or on the combination of both in order to finance their projects. (Heerkens 2006, 23.) After the Economic Crisis in 2008, many Italian companies experienced challenges to finance their businesses through the traditional sources of finance like corporate bank loans. Banks were not willing to lend money to the Italian SMEs due to unstable market conditions. That is why Italian companies were searching for alternative sources of finance in order to support their operations. One of the options available for such enterprises are mini-bonds, corporate bonds that are issued by companies that have never been listed on a stock exchange before. There are some advantages and disadvantages involved when companies decide to finance their 2 businesses via minibonds. International investors are interested in minibonds because they can help them to diversify portfolios and to provide a good risk/return on investment. The Minibond program was initiated by the Italian government in 2012 as an alternative debt finance for Italian SMEs. This is a new debt product and many international investors around the world are not familiar with it. Italian SMEs are also lacking knowledge about it. This thesis is aiming to provide potential investors with an overview of such instruments as well as to assess their main features. There is only limited information available regarding the debt product world-wide. 1.2 Thesis objectives,
Load more

Recommended publications
  • On the Optionality and Fairness of Atomic Swaps
    On the optionality and fairness of Atomic Swaps Runchao Han Haoyu Lin Jiangshan Yu Monash University and CSIRO-Data61 [email protected] Monash University [email protected] [email protected] ABSTRACT happened on centralised exchanges. To date, the DEX market volume Atomic Swap enables two parties to atomically exchange their own has reached approximately 50,000 ETH [2]. More specifically, there cryptocurrencies without trusted third parties. This paper provides are more than 250 DEXes [3], more than 30 DEX protocols [4], and the first quantitative analysis on the fairness of the Atomic Swap more than 4,000 active traders in all DEXes [2]. protocol, and proposes the first fair Atomic Swap protocol with However, being atomic does not indicate the Atomic Swap is fair. implementations. In an Atomic Swap, the swap initiator can decide whether to proceed In particular, we model the Atomic Swap as the American Call or abort the swap, and the default maximum time for him to decide is Option, and prove that an Atomic Swap is equivalent to an Amer- 24 hours [5]. This enables the the swap initiator to speculate without ican Call Option without the premium. Thus, the Atomic Swap is any penalty. More specifically, the swap initiator can keep waiting unfair to the swap participant. Then, we quantify the fairness of before the timelock expires. If the price of the swap participant’s the Atomic Swap and compare it with that of conventional financial asset rises, the swap initiator will proceed the swap so that he will assets (stocks and fiat currencies).
    [Show full text]
  • Up to EUR 3,500,000.00 7% Fixed Rate Bonds Due 6 April 2026 ISIN
    Up to EUR 3,500,000.00 7% Fixed Rate Bonds due 6 April 2026 ISIN IT0005440976 Terms and Conditions Executed by EPizza S.p.A. 4126-6190-7500.7 This Terms and Conditions are dated 6 April 2021. EPizza S.p.A., a company limited by shares incorporated in Italy as a società per azioni, whose registered office is at Piazza Castello n. 19, 20123 Milan, Italy, enrolled with the companies’ register of Milan-Monza-Brianza- Lodi under No. and fiscal code No. 08950850969, VAT No. 08950850969 (the “Issuer”). *** The issue of up to EUR 3,500,000.00 (three million and five hundred thousand /00) 7% (seven per cent.) fixed rate bonds due 6 April 2026 (the “Bonds”) was authorised by the Board of Directors of the Issuer, by exercising the powers conferred to it by the Articles (as defined below), through a resolution passed on 26 March 2021. The Bonds shall be issued and held subject to and with the benefit of the provisions of this Terms and Conditions. All such provisions shall be binding on the Issuer, the Bondholders (and their successors in title) and all Persons claiming through or under them and shall endure for the benefit of the Bondholders (and their successors in title). The Bondholders (and their successors in title) are deemed to have notice of all the provisions of this Terms and Conditions and the Articles. Copies of each of the Articles and this Terms and Conditions are available for inspection during normal business hours at the registered office for the time being of the Issuer being, as at the date of this Terms and Conditions, at Piazza Castello n.
    [Show full text]
  • How Much Do Banks Use Credit Derivatives to Reduce Risk?
    How much do banks use credit derivatives to reduce risk? Bernadette A. Minton, René Stulz, and Rohan Williamson* June 2006 This paper examines the use of credit derivatives by US bank holding companies from 1999 to 2003 with assets in excess of one billion dollars. Using the Federal Reserve Bank of Chicago Bank Holding Company Database, we find that in 2003 only 19 large banks out of 345 use credit derivatives. Though few banks use credit derivatives, the assets of these banks represent on average two thirds of the assets of bank holding companies with assets in excess of $1 billion. To the extent that banks have positions in credit derivatives, they tend to be used more for dealer activities than for hedging activities. Nevertheless, a majority of the banks that use credit derivative are net buyers of credit protection. Banks are more likely to be net protection buyers if they engage in asset securitization, originate foreign loans, and have lower capital ratios. The likelihood of a bank being a net protection buyer is positively related to the percentage of commercial and industrial loans in a bank’s loan portfolio and negatively or not related to other types of bank loans. The use of credit derivatives by banks is limited because adverse selection and moral hazard problems make the market for credit derivatives illiquid for the typical credit exposures of banks. *Respectively, Associate Professor, The Ohio State University; Everett D. Reese Chair of Banking and Monetary Economics, The Ohio State University and NBER; and Associate Professor, Georgetown University. We are grateful to Jim O’Brien and Mark Carey for discussions.
    [Show full text]
  • Margin Requirements Across Equity-Related Instruments: How Level Is the Playing Field?
    Fortune pgs 31-50 1/6/04 8:21 PM Page 31 Margin Requirements Across Equity-Related Instruments: How Level Is the Playing Field? hen interest rates rose sharply in 1994, a number of derivatives- related failures occurred, prominent among them the bankrupt- cy of Orange County, California, which had invested heavily in W 1 structured notes called “inverse floaters.” These events led to vigorous public discussion about the links between derivative securities and finan- cial stability, as well as about the potential role of new regulation. In an effort to clarify the issues, the Federal Reserve Bank of Boston sponsored an educational forum in which the risks and risk management of deriva- tive securities were discussed by a range of interested parties: academics; lawmakers and regulators; experts from nonfinancial corporations, investment and commercial banks, and pension funds; and issuers of securities. The Bank published a summary of the presentations in Minehan and Simons (1995). In the keynote address, Harvard Business School Professor Jay Light noted that there are at least 11 ways that investors can participate in the returns on the Standard and Poor’s 500 composite index (see Box 1). Professor Light pointed out that these alternatives exist because they dif- Peter Fortune fer in a variety of important respects: Some carry higher transaction costs; others might have higher margin requirements; still others might differ in tax treatment or in regulatory restraints. The author is Senior Economist and The purpose of the present study is to assess one dimension of those Advisor to the Director of Research at differences—margin requirements.
    [Show full text]
  • Chapter 06 - Bonds and Other Securities Section 6.2 - Bonds Bond - an Interest Bearing Security That Promises to Pay a Stated Amount of Money at Some Future Date(S)
    Chapter 06 - Bonds and Other Securities Section 6.2 - Bonds Bond - an interest bearing security that promises to pay a stated amount of money at some future date(s). maturity date - date of promised final payment term - time between issue (beginning of bond) and maturity date callable bond - may be redeemed early at the discretion of the borrower putable bond - may be redeemed early at the discretion of the lender redemption date - date at which bond is completely paid off - it may be prior to or equal to the maturity date 6-1 Bond Types: Coupon bonds - borrower makes periodic payments (coupons) to lender until redemption at which time an additional redemption payment is also made - no periodic payments, redemption payment includes original loan principal plus all accumulated interest Convertible bonds - at a future date and under certain specified conditions the bond can be converted into common stock Other Securities: Preferred Stock - provides a fixed rate of return for an investment in the company. It provides ownership rather that indebtedness, but with restricted ownership privileges. It usually has no maturity date, but may be callable. The periodic payments are called dividends. Ranks below bonds but above common stock in security. Preferred stock is bought and sold at market price. 6-2 Common Stock - an ownership security without a fixed rate of return on the investment. Common stock dividends are paid only after interest has been paid on all indebtedness and on preferred stock. The dividend rate changes and is set by the Board of Directors. Common stock holders have true ownership and have voting rights for the Board of Directors, etc.
    [Show full text]
  • Finance: a Quantitative Introduction Chapter 9 Real Options Analysis
    Investment opportunities as options The option to defer More real options Some extensions Finance: A Quantitative Introduction Chapter 9 Real Options Analysis Nico van der Wijst 1 Finance: A Quantitative Introduction c Cambridge University Press Investment opportunities as options The option to defer More real options Some extensions 1 Investment opportunities as options 2 The option to defer 3 More real options 4 Some extensions 2 Finance: A Quantitative Introduction c Cambridge University Press Investment opportunities as options Option analogy The option to defer Sources of option value More real options Limitations of option analogy Some extensions The essential economic characteristic of options is: the flexibility to exercise or not possibility to choose best alternative walk away from bad outcomes Stocks and bonds are passively held, no flexibility Investments in real assets also have flexibility, projects can be: delayed or speeded up made bigger or smaller abandoned early or extended beyond original life-time, etc. 3 Finance: A Quantitative Introduction c Cambridge University Press Investment opportunities as options Option analogy The option to defer Sources of option value More real options Limitations of option analogy Some extensions Real Options Analysis Studies and values this flexibility Real options are options where underlying value is a real asset not a financial asset as stock, bond, currency Flexibility in real investments means: changing cash flows along the way: profiting from opportunities, cutting off losses Discounted
    [Show full text]
  • 3. VALUATION of BONDS and STOCK Investors Corporation
    3. VALUATION OF BONDS AND STOCK Objectives: After reading this chapter, you should be able to: 1. Understand the role of stocks and bonds in the financial markets. 2. Calculate value of a bond and a share of stock using proper formulas. 3.1 Acquisition of Capital Corporations, big and small, need capital to do their business. The investors provide the capital to a corporation. A company may need a new factory to manufacture its products, or an airline a few more planes to expand into new territory. The firm acquires the money needed to build the factory or to buy the new planes from investors. The investors, of course, want a return on their investment. Therefore, we may visualize the relationship between the corporation and the investors as follows: Capital Investors Corporation Return on investment Fig. 3.1: The relationship between the investors and a corporation. Capital comes in two forms: debt capital and equity capital. To raise debt capital the companies sell bonds to the public, and to raise equity capital the corporation sells the stock of the company. Both stock and bonds are financial instruments and they have a certain intrinsic value. Instead of selling directly to the public, a corporation usually sells its stock and bonds through an intermediary. An investment bank acts as an agent between the corporation and the public. Also known as underwriters, they raise the capital for a firm and charge a fee for their services. The underwriters may sell $100 million worth of bonds to the public, but deliver only $95 million to the issuing corporation.
    [Show full text]
  • Beauty Is Not in the Eye of the Beholder
    Insight Consumer and Wealth Management Digital Assets: Beauty Is Not in the Eye of the Beholder Parsing the Beauty from the Beast. Investment Strategy Group | June 2021 Sharmin Mossavar-Rahmani Chief Investment Officer Investment Strategy Group Goldman Sachs The co-authors give special thanks to: Farshid Asl Managing Director Matheus Dibo Shahz Khatri Vice President Vice President Brett Nelson Managing Director Michael Murdoch Vice President Jakub Duda Shep Moore-Berg Harm Zebregs Vice President Vice President Vice President Shivani Gupta Analyst Oussama Fatri Yousra Zerouali Vice President Analyst ISG material represents the views of ISG in Consumer and Wealth Management (“CWM”) of GS. It is not financial research or a product of GS Global Investment Research (“GIR”) and may vary significantly from those expressed by individual portfolio management teams within CWM, or other groups at Goldman Sachs. 2021 INSIGHT Dear Clients, There has been enormous change in the world of cryptocurrencies and blockchain technology since we first wrote about it in 2017. The number of cryptocurrencies has increased from about 2,000, with a market capitalization of over $200 billion in late 2017, to over 8,000, with a market capitalization of about $1.6 trillion. For context, the market capitalization of global equities is about $110 trillion, that of the S&P 500 stocks is $35 trillion and that of US Treasuries is $22 trillion. Reported trading volume in cryptocurrencies, as represented by the two largest cryptocurrencies by market capitalization, has increased sixfold, from an estimated $6.8 billion per day in late 2017 to $48.6 billion per day in May 2021.1 This data is based on what is called “clean data” from Coin Metrics; the total reported trading volume is significantly higher, but much of it is artificially inflated.2,3 For context, trading volume on US equity exchanges doubled over the same period.
    [Show full text]
  • Understanding the Z-Spread Moorad Choudhry*
    Learning Curve September 2005 Understanding the Z-Spread Moorad Choudhry* © YieldCurve.com 2005 A key measure of relative value of a corporate bond is its swap spread. This is the basis point spread over the interest-rate swap curve, and is a measure of the credit risk of the bond. In its simplest form, the swap spread can be measured as the difference between the yield-to-maturity of the bond and the interest rate given by a straight-line interpolation of the swap curve. In practice traders use the asset-swap spread and the Z- spread as the main measures of relative value. The government bond spread is also considered. We consider the two main spread measures in this paper. Asset-swap spread An asset swap is a package that combines an interest-rate swap with a cash bond, the effect of the combined package being to transform the interest-rate basis of the bond. Typically, a fixed-rate bond will be combined with an interest-rate swap in which the bond holder pays fixed coupon and received floating coupon. The floating-coupon will be a spread over Libor (see Choudhry et al 2001). This spread is the asset-swap spread and is a function of the credit risk of the bond over and above interbank credit risk.1 Asset swaps may be transacted at par or at the bond’s market price, usually par. This means that the asset swap value is made up of the difference between the bond’s market price and par, as well as the difference between the bond coupon and the swap fixed rate.
    [Show full text]
  • Economic Quarterly
    Forecasting the Effects of Reduced Defense Spending Peter Irel’and and Chtitopher Omk ’ I. INTRODUCTION $1 cut in defense spending acts to decrease the total demand for goods and services in each period by $1. The end of the Cold War provides the United Of course, so long as the government has access to States with an opportunity to cut its defense the same production technologies that are available spending significantly. Indeed, the Bush Administra- to the private sector, this prediction of the tion’s 1992-1997 Future Years Defense Program neoclassical model does not change if instead the (presented in 1991 and therefore referred to as the government produces the defense services itself.’ “1991 plan”) calls for a 20 percent reduction in real defense spending by 1997. Although expenditures A permanent $1 cut in defense spending also related to Operation Desert Storm have delayed the reduces the government’s need for tax revenue; it implementation of the 199 1 plan, policymakers con- implies that taxes can be cut by $1 in each period. tinue to call for defense cutbacks. In fact, since Bush’s Households, therefore, are wealthier following the plan was drafted prior to the collapse of the Soviet cut in defense spending; their permanent income in- Union, it seems likely that the Clinton Administra- creases by $b1. According to the permanent income tion will propose cuts in defense spending that are hypothesis, this $1 increase in permanent income even deeper than those specified by the 1991 plan. induces households to increase their consumption by This paper draws on both theoretical and empirical $1 in every period, provided that their labor supply economic models to forecast the effects that these does not change.
    [Show full text]
  • Implied Volatility Modeling
    Implied Volatility Modeling Sarves Verma, Gunhan Mehmet Ertosun, Wei Wang, Benjamin Ambruster, Kay Giesecke I Introduction Although Black-Scholes formula is very popular among market practitioners, when applied to call and put options, it often reduces to a means of quoting options in terms of another parameter, the implied volatility. Further, the function σ BS TK ),(: ⎯⎯→ σ BS TK ),( t t ………………………………(1) is called the implied volatility surface. Two significant features of the surface is worth mentioning”: a) the non-flat profile of the surface which is often called the ‘smile’or the ‘skew’ suggests that the Black-Scholes formula is inefficient to price options b) the level of implied volatilities changes with time thus deforming it continuously. Since, the black- scholes model fails to model volatility, modeling implied volatility has become an active area of research. At present, volatility is modeled in primarily four different ways which are : a) The stochastic volatility model which assumes a stochastic nature of volatility [1]. The problem with this approach often lies in finding the market price of volatility risk which can’t be observed in the market. b) The deterministic volatility function (DVF) which assumes that volatility is a function of time alone and is completely deterministic [2,3]. This fails because as mentioned before the implied volatility surface changes with time continuously and is unpredictable at a given point of time. Ergo, the lattice model [2] & the Dupire approach [3] often fail[4] c) a factor based approach which assumes that implied volatility can be constructed by forming basis vectors. Further, one can use implied volatility as a mean reverting Ornstein-Ulhenbeck process for estimating implied volatility[5].
    [Show full text]
  • Evidence from SME Bond Markets
    Temi di discussione (Working Papers) Asymmetric information in corporate lending: evidence from SME bond markets by Alessandra Iannamorelli, Stefano Nobili, Antonio Scalia and Luana Zaccaria September 2020 September Number 1292 Temi di discussione (Working Papers) Asymmetric information in corporate lending: evidence from SME bond markets by Alessandra Iannamorelli, Stefano Nobili, Antonio Scalia and Luana Zaccaria Number 1292 - September 2020 The papers published in the Temi di discussione series describe preliminary results and are made available to the public to encourage discussion and elicit comments. The views expressed in the articles are those of the authors and do not involve the responsibility of the Bank. Editorial Board: Federico Cingano, Marianna Riggi, Monica Andini, Audinga Baltrunaite, Marco Bottone, Davide Delle Monache, Sara Formai, Francesco Franceschi, Salvatore Lo Bello, Juho Taneli Makinen, Luca Metelli, Mario Pietrunti, Marco Savegnago. Editorial Assistants: Alessandra Giammarco, Roberto Marano. ISSN 1594-7939 (print) ISSN 2281-3950 (online) Printed by the Printing and Publishing Division of the Bank of Italy ASYMMETRIC INFORMATION IN CORPORATE LENDING: EVIDENCE FROM SME BOND MARKETS by Alessandra Iannamorelli†, Stefano Nobili†, Antonio Scalia† and Luana Zaccaria‡ Abstract Using a comprehensive dataset of Italian SMEs, we find that differences between private and public information on creditworthiness affect firms’ decisions to issue debt securities. Surprisingly, our evidence supports positive (rather than adverse) selection. Holding public information constant, firms with better private fundamentals are more likely to access bond markets. Additionally, credit conditions improve for issuers following the bond placement, compared with a matched sample of non-issuers. These results are consistent with a model where banks offer more flexibility than markets during financial distress and firms may use market lending to signal credit quality to outside stakeholders.
    [Show full text]