What are the requirements for Italian SMEs to issue minibonds?

12/06/2024
APPROFONDIMENTI

Minibonds are medium- to long-term debt financial instruments issued by SMEs that are not listed on regulated markets, mainly intended for institutional investors. These securities offer companies the opportunity to raise funds on the capital market without having to resort exclusively to traditional banking channels.

Difference between Risk Capital and Debt

The distinction between venture capital and debt remains fundamental to understanding the different forms of financing available, both for companies in need of new capital and for potential investors. When one buys a share in a company, one becomes a partner (shareholder, in fact) in the company and thus participates in the risk capital and consequently subjects oneself to greater uncertainty, in exchange for likely higher returns.

On the other hand, whoever buys a bond buys part of the debt of a company (or a state) represented by a security, and becomes merely its creditor. Theoretically, therefore, barring a default (i.e. bankruptcy) of the company in question, the creditor must get back the subscribed capital plus the interest stipulated in the contract at a fixed maturity.

Requirements for issuing minibonds

Access to the capital market is very important to finance the growth of Italian SMEs, and requires compliance with certain governance requirements, including transparency, which are key to attracting investors. Below we list some of the main requirements that a company must meet in order to issue minibonds.

1. Legal Form

To be able to issue minibonds, an SME must have a legal form that falls within those recognised by Italian commercial law. Usually, it is a joint-stock company (S.p.A.) or a limited liability company (S.r.l.).

2. Certified Balance Sheet

A fundamental requirement for the issuance of minibonds is the certification of the financial statements. The SME must have prepared and filed its financial statements with the Commercial Register, and these financial statements must have been certified by an auditing firm. This provides investors with greater transparency and reliability of the issuer's financial information.

3. Credit Rating

Although not mandatory, having a credit rating can significantly increase the chances of a successful issue. The rating provides an assessment of the credit risk associated with the company and can influence the market conditions of the minibond.

4. Business Plan and Prospectus

The company must draw up a detailed business plan and a prospectus. These documents must provide comprehensive information on the intended use of the funds raised, the company's economic and financial situation, and future business strategies. This is essential to attract investors and to demonstrate the soundness and growth prospects of the company.

5. Debt Sustainability

The SME must demonstrate its ability to service the debt resulting from the minibond issue. This implies an accurate assessment of the current and future cash flow to ensure that the company is able to meet the maturities of interest and principal payments.

6. Legal Documentation

The issuance of minibonds requires the preparation of a number of legal documents, including the bond regulation and the placement agreement. These documents must be drafted in accordance with applicable regulations and must be legally audited to ensure their validity and enforceability.

7. Placement and Distribution

Finally, the SME must organise the placement of the minibonds. This can take place through a private placement, aimed at institutional investors, or through a crowdfunding platform, if the collection is also aimed at retail investors. In any case, it is crucial that the issuance is done in compliance with market regulations and that the company relies on qualified intermediaries to manage the process.

8. General Guidelines

The following are general guidelines for understanding whether a company might embark on the path of minibond issuance:

  • Turnover: the company's turnover should be over EUR 5 million and have grown strongly in the last three years.
  • EBITDA: the company's gross operating margin (EBITDA) should represent at least 10% of turnover.
  • Net financial position (NFP) and EBITDA: the ratio of net financial position (NFP) to EBITDA must be less than 4. This indicates the company's ability to manage its debt versus operating profitability.
  • Rating: the company must certify its rating through a rating company recognised and certified by the EBA (European Banking Authority) and ESMA (European Securities and Markets Authority). A high rating increases the attractiveness of the issue and conveys the sought-after solidity to investors.

Differences between Minibonds and Bank Financing

Bank financing and the issuance of minibonds are two forms of financing with different characteristics and approaches. Here are the main differences between the two systems:

1. Dependence on the Bank

  • Bank financing: in bank financing, SMEs are dependent on banking institutions to obtain loans. The decision to grant financing is based on the company's collateral and credit history.
  • Minibond Issuance: Less Banking Dependence The issuance of minibonds enables SMEs to reduce their dependence on the banking system. It opens up new financing opportunities by involving a variety of investors such as financial intermediaries, pension funds and insurance companies.

2. Evaluation Systems

·       Bank financing: evaluation based on collateral and history. The bank evaluates the loan request primarily on the basis of the collateral offered by the company and its credit history.

  • Minibond issuance: evaluation based on capital strength, profitability and cash flow. The minibond issuance process is based on the evaluation of the company's capital strength, profitability and cash flow. These factors are decisive in attracting investors and ensuring the sustainability of the issue.

Conclusions

The issuance of minibonds represents a great opportunity for Italian SMEs to access alternative sources of financing, thus diversifying their capital mix and improving their competitiveness. However, it is essential that companies meet all the necessary requirements, ensuring transparency and reliability to attract investors and ensure the success of the operation.

SMEs interested in issuing minibonds should therefore carefully assess their financial and legal situation, and consider relying on experienced advisors to successfully navigate this complex process.



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