Mini Bond: what they are, requirements, emissions, legislation
WHAT ARE THE MINIBOND
Minibonds are debt securities issued by small and medium-sized enterprises and underwritten by professional and qualified investors. The legislation does not refer specifically to the term minibonds, but this is the expression now widely used by journalists, experts, observers and lawyers to indicate these instruments. The issuance of bonds is historically known to companies listed in Piazza Business, but the crisis of 2008, the restriction of bank credit and the opportunity to provide Italian SMEs with alternative financing channels have prompted the Italian legislature to widen the audience of possible issuers of debt securities to smaller companies.
It should be noted, however, that the term minibond is not a strictly legal term, as it does not appear in the legislation, but is the name given by journalists, scholars, authorities and experts to the emissions that will be dealt with later.
The turning point was 2012 and the Development Decree that removed unlisted companies from the bond issue bond constraint that did not exceed twice the share capital, legal reserve and available reserves resulting from the last approved budget. This constraint, which did not already exist for listed companies, effectively blocked the possibility for SMEs to use the placement of bonds as leverage for development and investment plans. Subsequently, the legislature repeatedly returned to the subject, further encouraging the use of this credit access tool.
REFERENCE RULES
Essential for understanding the rules on minibonds, first of all art. 2412 of the Civil Code governing limits on the issuance of bonds. The Civil Code deals with the issuance of bonds in articles 2410-2420 for SpAs, and in Article 2483 for Srl. The specific reference regulations for minibonds are contained in the aforementioned Decree Law 22 June 2012 n. 83 ("Development Decree") and subsequent additions and changes made by the D.L. October 18, 2012 No. 179 ("Decreto Development Bis"), from the D.L. December 23, 2013 No. 145 (italy destination plan) and in D.L. June 24, 2014 No. 91 ("Competitiveness Decree"). To these could be added the changes of the Budget Law 2019 (Law 145/2018) that intervened on PIR and securitizations and gave the opportunity to equity crowdfunding platforms authorized by Consob to place minibonds at professional investors (in a dedicated section). It is also useful to refer to Consob's December 2018 legal notebook entitled "New industrial policy tools for the development and listing of SMEs" which also refers to "mini-bonds". It is also inevitable to make a reference to the ExtraMOT Market Regulations.
WHAT ARE MINIBOND ESPUTES AND WHAT THEY MUST DO
Minibonds can be issued by Limited Company (S.p.A.), Limited Liability Company (S.R.l.) and By Coperative Companies and Mutual Insurers.
In terms of size, small businesses (less than 50 employees and balance sheet or annual turnover of less than 10 million euros) and medium-sized enterprises (less than 250 employees and annual turnover under 50 million euros or assets of the eur 43 million).
Banking companies, SIM or SGR, and companies that are part of a bank group subject to Bank of Italy supervision or micro-enterprises (less than 10 employees and annual turnover or balance sheet under 2 million euros) cannot issue minibonds. This is based on Article 32 of the Development Decree mentioned, which does not exclude but widens the audience of bond issuers ("For the purposes of this article by company we mean non-issuers financial instruments listed on markets multilateral trading systems, other than banks and micro-enterprises, as defined in the European Commission's 2003/361/CE recommendation of 6 May 2003"). The article did not include subsequent interventions by the legislature. It is useful to point out that Articles 220 of the ExtraMOT Market Regulation (220.1, 220.2, 220.3, 220.4, 220.5) which define eligible financial instruments do not exclude micro-enterprises, nor banks and other prudential supervisors.
Also on the subject of minibonds it should be noted that the last two budgets must have been published and the last one must have been certified by a review company for admission to ExtraMOT (art. 220.5 of the ExtraMOT Regulations). The Development Decree provides for issuers of mini-bonds) only that "the issuer's last budget is subject to audit by a legal auditor or a legal review company registered in the Register of Legal Auditors and (letter b) of paragraph 2 of Article 2. 32).
It should be noted that in the case of s.r.l. It is necessary that the statute provides for the possibility of the issuance of debt securities and therefore indises the body to decide on the matter and the necessary majorities. Even without specific statutory forecasts, the S.p.A. they can instead issue minibonds on the decision of the administrative body.
Companies that want to issue and list a minibond on ExtraMOT (a market that also hosts, but not just minibonds) must establish a "Book of Bonds" (the S.p.A.) or an "Issuer's Register" (s.r.l.) that must include:
- the amount of minibond emesis;
- the name of the bearers of the minibonds (for the titles)
- transfers and constraints.
The issuer of minibonds must also draw up the "Loan Regulation", which is required by the ExtraMOT market, which includes the terms and conditions of the same, and then information such as nature, form, amount, face value of the securities of the and the manner and characteristics of the payment of interest and repayment of the principal, in addition to the rights of the bearers associated with the duties of the issuer.
TAXING SME: FISCAL VANTAGES
The substantial tax benefits associated with the issuance of minibonds are among the main reasons why an SME may decide to use this form of financing (taking into account the regulatory burdens mentioned above).
For issuers
In particular, issuers may deduct the interest expense linked to the financing (i.e. paid to minibond underwriters) in the limit of 30% of their gross operating income (Art. 96 TUIR) if the minibonds are listed in regulated markets or multilateral European trading systems or on a "white list" (which exchange tax information with Italy) or if they are held by professional investors who do not directly or indirectly (excluding trustees and person interposed) more than 2% of the issuer's capital or assets.
The Development Decree also stipulated that all issuance fees (e.g. compensation for consultancies, rating companies or arrangers in addition to listing fees) should be deductible regardless of the criterion of imputation in the budget.
Another important novelty came instead with the Decree Destination Italy which provided for the applicability to these types of financing by issuing bonds of the replacement tax of 0.25%, previously reserved for banks. In practice, it is a tax which replaces stamp duty, register, hypopocatasal and the tax on government concessions. The tax is provided for financing guaranteed by third parties or mortgages and in the case of bonds can be applied when there is any guarantee related to the issue, a possible surrogacy, a credit transfer, a transfer of guarantee in bond or acts that change or extinguish such transactions. Of course this must be provided in the bond issue resolution, the tax is still applied by the bank in charge of the placement. It is an incentive that lightens the cost of providing an additional guarantee to protect the issuance of a minibond capable, of course to make it more palatable.
For subscribers
Also with the aim of an incentive to use these alternative forms of business financing, there are also benefits for underwriters of the same minibonds.
In particular, with the Growth Decree and competitiveness decree for minibonds listed in regulated markets or multilateral trading systems of EU countries or in "white lists" and for those unlisted but held by qualified investors provides for the exemption of the withholding tax regime of 26% at source on interest and other income. This is a major advantage for pension funds, banks and insurance companies.
They can invest up to 3% of technical reserves in minibonds or shares of specialized funds.
The investment in minibonds has also been opened over time to Special Purpose Vehicles (SPv), i.e. vehicle companies specialising in securitisations that can therefore also involve these debt securities.
Bank covered bonds can also be secured by minibonds.
Finally, it was envisaged that banks, financial intermediaries and managers, in the face of individual minibond subscriptions or minibond portfolios, could ask the Central Guarantee Fund for up to 50% of the face value of the (if there is an installment refund based on a depreciation plan) or up to 30% in the case of minibond bullets (i.e. with a single due repayment).
THE QUOTE
The aforementioned art. 2412 of the Civil Code, which sets limits on the company's bond issuance, actually maintains the limit of double the social capital, legal reserve and available reserves resulting from the last approved budget and for highlights cases where this limit can be exceeded.
The limit may be exceeded in particular by bonds intended for the underwriting of professional investors subject to prudential supervision under special laws. It should be noted that the article specifies that "In the event of subsequent bond circulation, those who transfer them are liable for the company's solvency towards buyers who are not professional investors."
Another key forecast in the same article indicates that the above limits (double the social capital, etc.) do not apply to the issuance of bonds intended to be listed in regulated markets or multilateral trading systems. that is, bonds that give the right to acquire or to subscribe to shares (so convertible bonds and convertible ndr).
In practice, the two characteristics necessary to make minibonds attractive to SMEs are typical of the ExtraMOT PRO segment of the Italian Stock Exchange, which is aimed, in fact, at the institutions and is defined as a multilateral trading system.
WHAT THE MARKET IS ASKING FOR
Clearly, there are several non-regulatory requirements to attract professional investors and convince them to invest in the debt of an unlisted SME. Typically among these are a turnover of at least 5 million euros growing in the last 3 years at least, competent and reliable management, an ebitda that reaches at least 10% of turnover, a PFN/Ebit ratio from below 4x and possibly a public rating (with investment grade credit) issued by an agency.
THE BIRTH OF EXTRAMOT PRO
The listing of minibonds is not strictly mandatory, but several factors make it in many cases advisable. In February 2013, the ExtraMOT PRO market of the Italian Stock Exchange was born, aimed at alternative channels to bank loans such as project bonds, financial promissory notes, ABS (asset backed securities), equity instruments and bonds: price list to which minibonds are ideally aimed. ExtraMOT PRO is not strictly a regulated market but a multilateral trading system dedicated to professional investors, the only ones who can invest in minibonds.
THE MINIBOND MARKET
An overview certainly reliable, although necessarily not fully exhaustive, is that provided by the Polytechnic of Milan in its "Mini-Bond Observatory". The annual report focuses on emissions of less than 500 million euros (and especially those below 50 million). The latest "census" published in 2019 shows that even in 2018 the minibond industry has confirmed its continued development.
In particular, the number of emissions has increased and the average value of placements has decreased over the period, so these instruments are being disseminated. In practice, the minibond, the Observatory points out, confirms an alternative financing tool to the banking channel but simpler than transactions such as listing on the stock exchange or opening up capital to a private equity. At the end of 2018 on the ExtraMOT Pro, the record of 207 listed securities is reached.
As many as 498 Italian companies had placed minibonds at the end of the year, 260 were SMEs. The Observatory still has 176 broadcasters in 2018 and a doubling of the Srl on the 2017 figure (45 compared to 21 the year before). However, the most represented segment of companies remains that of companies with revenues of between 100 and 500 million euros. The manufacturing sector alone covers 41% of the total sample, but the variety has grown in 2018. The most predominantly regions of northern Italy, with 50 broadcasters in Lombardy alone. The Polytechnic's analysis highlights among the reasons for the placement of instruments the willingness of companies to promote internal growth, followed by that of restructuring financial liabilities, to grow by external lines to feed the working capital. However, the situations highlighted by the budgets appear to be diversified.
The Observatory has 746 mini-bond issues since 2012, 636 were less than 50 million euros. The total face value is 25.2 billion euros.
There were 198 minibond issues in 2018 (up on 2017) for a value of 4.3 billion euros (down).
The average emission expiry is 5.2 years, but a certain variety is observed.
50.5% of emissions are bullet-like, with a maturity repayment that prevails slightly over amortizing solutions. The average value of the fixed coupon is 5.10%. The mini-bonds screened are 30% screened by authorised rating agencies. Call and put options on capital repayments are frequent.
Another useful landscape in the minibond market is the one provided annually by Aifi and Deloitte, which counts in 2018 116 companies that have launched a total of 142 minibonds and debt instruments, amounting to more than one billion euros. 63% of the securities would be purchased by international investors. 66% of emissions would come from companies with fewer than 250 employees, 12% of broadcasters would have fewer than 20 workers.
