1 | P a g e BMBA711 – MBA Dissertation

Short extract from my dissertation:

Will Minibonds help Italian SMEs to

grow after the financial crisis?

Clabo Spa: a case study

FRANCESCO MERONE

MBA 2016

2 | P a g e BMBA711 – MBA Dissertation

DECLARATION

I declare that no portion of the work referred to in the dissertation has been submitted in support of an application for another degree or qualification of this or any other university or other institute of learning. Further, all the work in this dissertation is entirely my own, unless referenced in the text as a specific source and included in the bibliography.

3 | P a g e BMBA711 – MBA Dissertation

Abstract

This dissertation aims to understand if Minibonds could contribute to help Italian

SMEs to strive in the coming years. The author starts describing how unbalanced

are the Italian SMEs in terms of capital structures (too much short term debts versus

long term debts and equity) and what are the main implications of that situation.

Then, the paper will describe the impact of Minibonds for SMEs using both a

qualitative researches method (though making some interviews and explaining a real

case) and quantitative one (Italian and European’s statistics relate to the last four

years since their introduction). The dissertation will end with the conclusions of the

author, his suggestions for who wants to invest in Minibonds and his short reflections

regarding what he has learnt working on this paper.

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Contents

Table of Contents

Introduction .............................................................................................................. 5

Literature review...................................................Errore. Il segnalibro non è definito.

What are Minibonds? ...........................................Errore. Il segnalibro non è definito.

Research design...................................................Errore. Il segnalibro non è definito.

Data collection and analysis ...............................Errore. Il segnalibro non è definito.

Analysis (findings) ...............................................Errore. Il segnalibro non è definito.

Case study: Clabo SpA ........................................Errore. Il segnalibro non è definito.

Questions, answers and statistics......................Errore. Il segnalibro non è definito.

Minibonds in Europe, and in particular in the German and UK markets . Errore. Il

segnalibro non è definito.

Conclusions ..........................................................Errore. Il segnalibro non è definito.

Recommendations ...............................................Errore. Il segnalibro non è definito.

Reflections on learning ........................................Errore. Il segnalibro non è definito.

Bibliography ............................................................................................................. 9

APPENDIX 1 ............................................................................................................ 14

APPENDIX 2 ............................................................................................................ 16

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Introduction

This dissertation explores the challenges that the Italian Government made in 2012, issuing a new financial tool in order to find a way to contribute in helping SMEs to start growing after the financial crisis. This paper will try to explain why the Government made this decision, and if this new law has achieved its goal. It is fundamental to start the paper describing the depth, the length, and danger posed by the financial crisis for Italian SMEs since 2008 (see data in Appendix 1). Secondly, it is necessary to state how much indebted SMEs are to banks1 and it is fundamental to highlight that these debts, in Italy more than everywhere in Europe, are, in particular, short term debts. The difference between a financial “short” term debt compared with a “long” term debt, acquired with banks, is represents huge problems in terms of risk. In Italy, a firm who has short term debts with a bank, can be called on at anytime and without any reason, by the bank, who can ask repayment of debts within 48 hours. These unjustified (but absolutely correct by law) requests have been multiplied in the last years, since the financial crisis began, and have pushed many firms, in particular, SMEs who have less possibility to find alternative financial resources close to bankruptcy. This problem has been also amplified in the recent years because many banks operated themselves through a difficult period, and were not able to find the necessary resources on the markets, so, the only way of finding cash was to ask for repayment of money owed from SMEs. It is clear that a long term debt is less risky because banks cannot ask for repayment before the agreed deadlines, and so, firms cannot receive a surprise in the form of receiving a call from a bank in order to pay back the debts in 2 days. This is why it is very important to create new or additional ways that can help SMEs to acquire new finance. Yet, the goal, is to push SMEs to find new long term finance for future investments or for switching from their short term debts. To sum up, the main aims of the Italian government for SMEs were (and are still are) to push them:

1. to switch from short term debts to long term debts 2. to reduce the SMEs dependence from banks 3. to create a new market where SMEs easier could find

new investors interested in finance new SMEs projects

1 rapporto cerved pmi 2015 - The Visual Agency http://www.thevisualagency.com/site2014/wp-

content/uploads/2015/11/Rapporto-Cerved-PMI-2015_web.pdf

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4. to open and to improve their organization in order to attract more investors

5. to increase their equity in addition to search new finance in order to attract additional investors

Before the paper goes into more detail to those points, it is also important to describe how the combination of the capital structure and any changes to it will impact on the definition of the new plants/projects of SMEs, and eventually an SME’s value. New Plants/Projects are planned by a firm to earn additional revenue, but they should give a rate of return higher than the Weighted Average Cost of Capital (WACC) otherwise instead of creating value, a firm realizes a loss of revenue. WACC is directly connected with the capital structure because it is a combination between “the weight and the value” of the long and short term debts, and the equity. Each firm presents a different combination that produces a different value of the WACC. Hence, the same new Project/Plan will be profitable for one firm and not profitable for another, it will depend on their single capital structure and the WACC value. The Italian government was interested in helping SMEs to have a more equilibrate capital structure because it represents a solid starting point for a firm to plan new investments for the future and so, to begin growing again. The financial crisis The financial crisis, which started in late 2007, has deeply changed the Italian economy. According to the International Monetary Fund (IMF), Italy can’t expect to regain its 2007 level of GDP (Gross Domestic Product) before 2019. In 2007, Italy’s public debt was 104% of GDP and this grew to over 132% by 2014. The unemployment rate increased from 6% in 2008 to 13.4% in 2015. The Italian economy is heavily reliant on small and medium-sized enterprises (SMEs). They account for 99.9% of the total number of companies, 79.6% of people employed, and 69.5% of Italian GDP. The European Commission (2014) stated that the Italian economic system needs to make it easier for SMEs to access finance2 in order to boost the economy. Financial debts Further, according to the Italian central bank Governor's Concluding Remarks 2015, the main issues limiting SME’s growth are:

financial imbalances

the necessity of hiring more professional staff with higher skills

a corporate governance with more professionals and less members of families and/or friends3.

2 Enterprise and Industry ITALY 2014 SBA Fact Sheet http://ec.europa.eu/enterprise/policies/sme/facts-figures-analysis/performance-review/files/countries-sheets/2014/italy_en.pdf 3 https://www.bancaditalia.it/pubblicazioni/relazione-annuale/2014/en_cf_2014.pdf?language_id=1

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In a recent paper (2013), the European Central Bank (ECB) stated that Italian firms

are characterised by higher leveraging than firms in other European countries4..

Anxiety about this exposure, has also been voiced by the European Commission and

the IMF (2009).

Given the above, it’s clear that Italy needs a strategic plan to get SMEs financially on

track if the country is going to improve its growth, public debts and unemployment

problems.

Minibonds There are many different variables that impact SME growth but this research will

focus specifically on one of them.

The Minibond is a financial tool that was introduced by the Italian government in 2012 and legislated with by the “Destination Italy” Decree in 2013. The Decree introduced the possibility for SMEs to issue Minibonds.

The research in this paper will explore whether Minibonds can help Italian SMEs to

achieve their growth goals.

Firstly, this dissertation will demonstrate how important it is for a firm to define its

capital structure and why this should concern the Italian government. This will

include an analysis of how the issuing of Minibonds impact a firms’ capital structure.

Secondly, I explain Clabo Spa’s (see appendix 2) experience of Minibonds. This will

cover the company’s capital structure before issuing the Minibond, its planned future

investments, and it is situation after issuing Minibonds.

Thirdly the views of relevant financial professionals about Minibonds will be

presented, before a discussion on the experience of Minibonds in countries beyond

Italy. Following this, I present a list of issues that companies should consider before

investing in Minibond

Finally, I will highlight statistics related to Minibonds in Italy, since they have been

issued, and analyse what the main opinions are about this financial innovation,

specifically, have they helped Italian SMEs to restart growing after the 2008 financial

crisis? I will present several questions to professionals who work in the financial field,

and have direct experience of issuing Minibonds.

To sum up, this research would try to find an answer to these questions:

4 Corporate Finance and Economic activity in the Euro Area, occasional paper ECB 08/2013 (https://www.ecb.europa.eu/pub/pdf/scpops/ecbocp151.pdf)

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Have Minibonds helped Italian SMEs to achieve their goals, in particular in

terms of growth, during the four years since the new law was established

in 2012?

Are Minibonds always a good option for SMEs or do they also have

disadvantages?

What are the main differences between Minibonds and other types of long

term financial tools?

Are there any similar financial tools in Europe that can be compared to

Minibonds and how are they considered and used in Europe?

Have Minibonds created problems for issuers and subscribers?

…

….

….

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Bibliography

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www.investmenteurope.net/regions/italy/mini-bonds-give-good-italian-smes-easier-

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www.pmi.it/tag/minibond

www.minibond.eu

http://minibonditaly.it/approfondimento/minibond-scorecard-market-trends-main-

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www.moneywise.co.uk/investing/first-time-investor/should-you-invest-mini-bonds

www.osservatoriocrowdinvesting.it

http://startups.co.uk/mini-bonds-ripe-for-the-picking/

http://telegraph.co.uk/finance/personalfinance/investing/10615429/Retail-bonds-and-

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http://ukinvestormagazine.co.uk/should-i-invest-in-mini-bonds/

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APPENDIX 1

Source: IMF World Economic Outlook

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APPENDIX 2

Short presentation of Clabo Spa by Eidos partners

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Refrigerator showcases pic 1

Refrigerator showcases pic 2

Refrigerator showcases pic 3

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