quaestio capital management sgr s.p.a. atlante … · atlante fund presentation 29 april 2016 ......

Quaestio Capital Management SGR S.p.A.

Atlante Fund Presentation

29 April 2016

Quaestio Capital Management SGR S.p.a. is an Asset Management Company authorized to operate as such by the Bank of Italy.

Enrolled in the register of UCITS Operators under registration No. 43 Enrolled in the register of AIF Operators under registration No. 149.

A. The Facts

B. Banking Sector Issues

C. Banks - How we intend to operate

D. NPLs - The Market in Italy

E. NPLs - How we intend to operate

F. Conclusions

Appendix – Quaestio

Contents List

2

A. THE FACTS

3

Characteristics of the Fund

4

• A closed-end alternative investment fund regulated by Italian law, reserved for professional investors.

• Fund Size: € 4,249,000,000.

• Investors: 67 Italian and foreign institutions which include banks, insurance companies, banking

foundations and the Cassa Depositi e Prestiti.

• Individual investment stakes are never greater than 20% of the size of the Fund.

• Fund closing date: 29 April 2016

• Fund Term of five years, plus three years, renewable each year.

• Investment period of 18 months, that can be extended by another six months to finalize on-going

transactions.

• Fund maximum leverage of 110% (commitment method) to satisfy temporary liquidity requirements.

• NAV each 6 months.

• Fund Administrator: Quaestio Capital Management SGR S.p.A.: 0.07% commission per annum.

• Custodian Bank: RBC Investor Services Bank S.A. (Milan Branch): 0.0125% commission per annum.

• Auditors: PriceWaterhouseCoopers.

• Asset Evaluators: Deloitte & Touche.

Fund Scope and Investment Policy

5

A. Up to 70% of the Fund: can be invested in banks with a lower capital ratio than the minimum

established in the context of the SREP and that therefore, upon request by the Supervisory Authority,

implement initiatives to reinforce capital by means of a share capital increase:

• by underwriting shares on offer in the market, by means of agreements with one or more members

of the underwriting syndicate or by private placement dedicated to the Fund or by means of co-

investments;

• the Fund does not underwrite more than 75% of an individual issue, unless the underwriting of a

higher stake is necessary for the purpose of the successful completion of the operation;

• further investments are possible for the share capital increase of banks in the Fund portfolio - if

requested by the Supervisor Authority - until 30 June 2019 provided that such investments do not

exceed the maximum limit of 70% that can be invested in bank shares and provided that there are

subscription commitments that are still “callable”;

• investments that involve a Mandatory Tender Offer are excluded.

B. At least 30% of the Fund: will be invested in Non-Performing Loans (NPLs) from several Italian

banks, even guaranteed by assets through:

• junior tranche, occasionally mezzanine, in the securitisation of NPLs even as a form of co-

investment;

• ad hoc vehicles (SPV), including investment funds with underlying NPLs;

• tangible or intangible assets or other rights (even non-guaranteed) for NPLs transactions;

• after 30 June 2017, all the portion of the Fund that is not invested in banks can be invested in NPLs.

Fund Scope and Investment Policy

6

The Fund’s Financial Objective: a return of approximately 6% per annum.

Investment time-frame: medium to long term, in any case within the 5 year term of the Fund, which can

be extended by another three years each year.

Equity Investments:

- the Fund does not carry out any direct management activity in relation to the banks in which it

invests;

- there is the possibility to carry out partnerships or co-investment operations of any type with other

investors.

Non-Performing Loans:

- mainly junior tranches with a lower IRR than that traditionally requested by specialized investors

but in any case adequate, and coherent with a IRR of a bond with an average rating of

approximately single B.

• As an example, it should be noted moreover, that the net median IRR achieved by investors of about

14,000 funds that are specialized in distressed debt is 12.2%*, which is equivalent to approximately

16% - 18% gross-of-fees.

• As an example, consider the performance of the High Yield Corporate Bond indices** shown below:

- BofA Merrill Lynch Euro High Yield Index BB (YTM): 3.15%

- BofA Merrill Lynch Euro High Yield Index B (YTM): 6.23%

- BofA Merrill Lynch Euro High Yield Index CCC (YTM): 18.98%

(*): source Preqin(2016).

(**): data as of 27 April 2016, source: Factset Research Systems.

Fund Governance

7

A fundamental principle of the Fund is the independence of the Asset Management Company

(the SGR) management from shareholders and investors.

• Investment decisions taken by the SGR for the Fund are subject to the prior non-binding opinion of the

Investors’ Committee (the “Committee”).

• The SGR has procedures in place aimed at preventing the insurgence of conflict of interest, managing

operations with related parties adequately and guaranteeing maximum transparency in the investment

process.

• The Committee is made up of nine members and it is elected by the Investors’ Meeting on the basis of

a list voting system.

• The independence of decisions made by the SGR is subject to continuous monitoring by the ECB.

Governance of the Fund’s significant investments:

• the SGR votes for the appointment of directors during the shareholders’ meetings of the banks in

which the Fund holds an investment, adhering to strict requirements of independence;

• the SGR does not exercise a management or co-ordination role with respect to the banks;

• the SGR does not intervene in the ordinary management of the bank.

Chronology and Next Steps

8

11 April Presentation of the project to investors and announcement of the Fund launch.

12 April The SGR instituted the Fund and approved the Fund’s Prospectus.

18 April Sub-underwriting agreement signed with Unicredit for Banca Popolare di Vicenza (BPVi).

20 April Consob authorization for the marketing of the Fund .

21 April Announcement to the effect that the minimum threshold of € 4 billion has been reached and Fund is activated.

25 April Sub-underwriting agreement with Unicredit is extended to apply in the case that Banca Popolare di Vicenza

(BPVi) does not achieve listing.

25 April ECB / Bank of Italy authorization to purchase a significant investment in BPVi.

29 AprilFund closing date: The Fund can be reopened at a later date following a change in the Prospectus that

requires the consent of 66.6% of the shares represented in the Shareholders’ Meeting.

16 May First Shareholders’ Meeting is convened and the Investors’ Committee is appointed.

17 May First Investors’ Committee Meeting is convened.

May 2016 -

June 2017

Maximum of 30% can be invested in NPLs.

The rest is available for investment in equity in accordance with the requirements of the Fund Regulations.

June 2017

Nov 2017

Remaining portion of the Investment Period when commitments can be freely undertaken in accordance with

the Fund Regulations, and of which at least 30% to be invested in NPLs.

Nov 2017 -

May 2018

The Investment Period has ended, but it is possible to finalize operations that were started during the

Investment Period.

Until

30 June 2019

The Fund can participate in share capital increases of banks that are already in the Fund’s portfolio that have

been requested by the Supervisory Authorities, within the limit of 70% of the Fund’s total assets.

Until

29 Apr 2021The Fund can only disinvest.

After

29 Apr 2021

The Fund term can be extended each year for three years with the consent of 66.6% of the shares represented

in the Shareholders’ Meeting.

B. BANKING SECTOR ISSUES

9

Banking Sector Issues

Comparison between Italian and European Bank Multiples

10Note: data as of 31 March 2016, source: Factset Research Systems.


Italian Bank Multiples and the BTP/Bund Spread

11Note: data as of 31 March 2016, source: Factset Research Systems.


Comparison of the discount between Italian and European Banks

12

RANKING BANK COUNTRY

PRICE/

TANGIBLE

BOOK VALUE

1 CYBG GB 1.91x

2 Ringkjoebing Landbobank DK 1.91x

3 Banque Cantonale Vaudoise CH 1.76x

4 Bankinter ES 1.73x

5 Swedbank SE 1.72x

6 Svenska Handelsbanken SE 1.71x

7 Skandinaviska Enskilda SE 1.41x

8 KBC Groupe BE 1.40x

9 Nordea Bank SE 1.27x

10 UBS CH 1.25x

11 Danske Bank DK 1.22x

12 Sydbank DK 1.19x

13 Erste Group Bank AT 1.17x

14 BBVA ES 1.13x

15 ABN AMRO NL 1.11x

16 St.Galler Kantonalbank CH 1.10x

17 Banco Santander ES 1.09x

18 Bank of Ireland IE 1.07x

19 Credito Emiliano IT 1.02x

20 Intesa Sanpaolo IT 1.02x

21 HSBC Holdings GB 0.92x

22 Banco de Sabadell ES 0.90x

23 BNP Paribas FR 0.87x

24 Bankia ES 0.83x

25 Valiant Holding CH 0.82x

RANKING BANK COUNTRY

PRICE/

TANGIBLE

BOOK VALUE

26 CaixaBank ES 0.81x

27 Credit Agricole FR 0.77x

28 Credit Suisse Group CH 0.75x

29 Royal Bank of Scotland GB 0.72x

30 Standard Chartered GB 0.67x

31 BPM IT 0.65x

32 Société Générale FR 0.64x

33 Banca Pop. di Sondrio IT 0.63x

34 Barclays GB 0.62x

35 Raiffeisen Bank AT 0.56x

36 BPER IT 0.56x

37 Banco Popular Espanol ES 0.55x

38 Banco Comercial Portugues PT 0.52x

39 UniCredit IT 0.51x

40 Deutsche Bank RESID. 0.44x

41 UBI Banca IT 0.42x

42 Alpha Bank GR 0.40x

43 Commerzbank RESID. 0.40x

44 National Bank of Greece GR 0.39x

45 Eurobank Ergasias GR 0.36x

46 Credito Valtellinese IT 0.36x

47 Banco Popolare SC IT 0.35x

48 Piraeus Bank GR 0.30x

49 Banca CARIGE IT 0.26x

50 Banca MPS IT 0.22x

Note: data as of 22 April 2016, source: Factset Research Systems. European Banks with a capitalization of at least € 800 million.

• Comparison between Italian and European discount rates with respect to their Tangible Book Value


13

• The resolution of four Italian banks towards the end of 2015 was an unexpected event for the market

that introduced an additional risk premium for the whole banking system.

• A self-sustaining risk of: (1) low valuation multiples, (2) a need for share capital increases, (3) no

financing from the market, (4) bail-in fear (5) liquidity crisis, (6) solvency crisis.

• Behavioural Theory tells us that when totally unexpected events occur – an event with practically

zero probability of occurring – there is a sudden change in the general perception of risk (Herding

Behaviour).

UNEXPECTED

EVENT

55

60

65

70

75

80

85

90

95

100

105

nov-15 dic-15 gen-16 feb-16 mar-16 apr-16

Performance of Subordinated Bonds* of the Banca Popolare di Vicenza and Veneto Bank

Banca Popolare di Vicenza Veneto Banca


14(*): data as of 27 April 2016, Subordinated Bonds Tier 2 same coupon 9.5%, Veneto Banca (ISIN XS1327514045); BPVi (ISIN XS1300456420).

Source: Bloomberg.

Announcement of the launch of the

Atlante Fund on 11 April 2016

€ 90.77

€ 92.09

Price on 27 April

2016

dec-15 jan-16

C. BANKS - HOW WE INTEND TO OPERATE

15

Banks - How we intend to operate (I)

16

• In the initial phase Atlante will act as a back-stop facility, by eliminating excessive

supply with respect to the demand for shares, only for share capital increases of

banks facing problems related to capital requirements.

• Not all share capital increases qualify for potential investment by the Fund, but only

those that the market by itself (with or without an underwriting syndicate) cannot

secure and that can potentially involve the risk of a bail-in and/or induce a systemic

risk.

• The Fund intends to decide and sustain the most effective restructuring and

relaunching of the banks in its role as an anchor investor which has the interest of

investors as its sole objective.

• For share capital increases (as for NPLs) the principle is not “first come first served”,

but valuations are carried out solely based on the merit of the transaction taking into

account the objective of the Fund as set forth in the Prospectus.

• For the purpose of creating value for an investment and accelerating its divestiture,

the Fund can establish partnerships and/or co-investments with other investors

and/or financial institutions, and promote M&A transactions.

Banks - How we intend to operate (II)

17

• The SGR must assess and make investment decisions purely on the basis of merit,

in the sole interest of all investors in accordance with the objectives of the Fund.

• Investment in the Fund does not give the right to preferential treatment in the

evaluation process of investments.

• For the purpose of valuating an investment, the Fund can invest in a bank’s equity as

well as in the restructuring of NPLs.

• In the case of partnerships or co-investments, there must be a commonality of

interests between the Fund and the other partners.

• The Fund aims to generate interesting returns for all the Institutional Investors in a

scenario such as the current one that is characterized by low interest rates.

• Moreover, the Fund has the objective of intervening in critical situations (share

capital increases, NPLs) that can favour a re-rating of the entire banking sector.

• Given the composition of the Fund’s investors, the ECB will conduct careful and

continuous monitoring of the SGR governance, as well as of the opinions expressed

by the Investors’ Committee.

Banks - How we intend to operate (III)

18

• The banks’ restructuring / relaunch in which the Fund invests and the speed with which recovery is

achieved are key to the Fund’s success.

• The immediate re-rating of banks’ shares value as a consequence of the announcement reduces

systemic risk.

• The long term impact on the banks’ assessments however, will depend on the success of the

investment policy.

Note: data as of 27 April 2016, source: Factset Research Systems.

Investment Value Proposition

19

The medium to long term value proposition of the investment in the target banks is based on the

following expected effects, as a result of capital reinforcement:

• investments of “Private Investment in Public Equity” type in Italian banks characterized by a valuation

with a strong discount on net capital with respect to a “normalized” scenario, with the opportunity to

benefit from a general re-rating after the share capital increase operation, that is guaranteed by the

intervention of the Fund, thus mitigating the risk profile of the target banks themselves;

• the opportunity of a business turnaround and above average organic growth of the target banks

following recapitalization and the resulting increase in stability of banks as a whole;

• an expected positive impact of the capital increase operations on customer and investor trust, which

could in turn produce an increase in the deposit base and in funding flows;

• an opportunity to reduce the cost of all sources of funding for the target banks with the relative

improvement of the interest margin;

• the possibility to regain access to the capital markets on the basis of a reinforced capital position and

an improved market perception in terms of risk profile;

• the possibility to reinforce the capital profile and improve the asset quality risk profile of the target

banks;

• significant potential for the creation of value through sales, or M&A transactions, with other Italian

banks.

D. THE NPLs MARKET IN ITALY

20

The NPLs Problem

Comparison between Italy and Europe

21Note: data as of 22 April 2016, source: Factset Research Systems.

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

55%

Ratio between total NPLs of Italian banks and those of other Eurozone BanksFrom March 1992 to April 2016

Totali Crediti Deteriorati

• Disposal of NPLs is too slow compared with the rest of Europe.

• The objective of the Fund is to shorten the time of disposal.

• It is more like a marathon than a 100 m sprint.

Total impaired loans

NPLs – Market Conditions

Breakdown of Credit Categories

22

52,9%51,8%

48,2% 48,7%

54,0%

55,7%

2010 2011 2012 2013 2014 2015

Evolution of Gross and Net Bad Loans Evolution of the coverage ratio*

Source: Bank of Italy Statistical Bulletin and ABI Monthly Outlook.

(*): the coverage ratio refers only to the bad loans.

Impaired Loans – breakdown (Q4 - 2015)

Source: Banca d’Italia, Statistical Bulletin, Q1 – 2016.

Breakdown for Counterparties (Feb. 2015)

Source: Banca d’Italia, Statistical Bulletin, 11 April 2016 (Loans to public administrations and other residents are

excluded).

In Eur Billion

At 31 December 2015

Public

Administrations

Financials

Companies

Non-Financials

Companies

Producing

Families

Consuming

Families

(a) Gross Bad Loans 0.22 3.53 157.60 15.78 34.94

(b) of w hich: backed by real guarantees 0.08 1.85 69.59 7.96 21.00

(b)/(a) Ratio 36.36% 52.45% 44.15% 50.43% 60.10%

Source: Statistical Bulletin (B4.10) - Q1 2016.


Sale of NPLs in Italy

23

76

5.048

80 205

2.859

2.314

0

1.000

2.000

3.000

4.000

5.000

6.000

Italian Loan Sales2014–2016 YTD

€ MM

Secured

17%

REOs 6%

CRE Loans

16%

Resi Loans

4%

Resi / CRE

21%

Unsecured

35%

Others

1%

Italian Loan Sales by Type2014–2016 YTD

• The sale of NPLs in Italy is limited: approximately € 11 bn gross of NPLs sold in Italy between 2014

and 2016 YTD.

Source: C&W Loan Sales 2014–2016, Debtwire, CNBC, Apax, Deloitte NPL Outlook 2014–2015, Italy24, KPMG Loan Sales Feb 2016.


Example of an Inefficient Market

24

The problem of the “market price” being too low.

One afternoon of day X: 500 people in Italy go to the car dealer closest to their home to sell their

second hand car for cash by evening of that same day. Car dealers do not have the time to have each

car checked in the workshop before making an offer.

Car Dealer 1

Car Dealer 5

Car Dealer 2

Car Dealer 4

Car Dealer 3

Car Dealer 2

Car Dealer 1

Car Dealer 3Car Dealer 4

Car Dealer 5

Car Dealer 6

Car Dealer 2

Car Dealer 4

Car Dealer 1

The average price that the 500 people succeed in securing for their own car will be far less than the

average price at which the car dealer will sell their cars.

Car Dealer 3

MILANPALERMO

ROME

Car Dealer 5

BUYS

SELLS

KEY:

BUYS

SELLS

KEY:


Example of the Creation of an Efficient Market

25

One afternoon of dayX: what would happen if an online website is created to act as a single market in

Italy?

Sales ensue at a much higher price:

• in an efficient market information is distributed;

• demand meets supply in different places;

• the cost of information search is greatly reduced.


Bid-ask spread

26

There is never a single market price for financial assets.

In every transaction there are always 2 different prices:

• the bid price,

• the ask price.

There is always a difference between these two prices (bid/ask spread) in any

negotiation and it varies according to the characteristics of the object under

negotiation. For example*:

- liquid share: 0% - 1%

- corporate bond up to € 200 mln: 2.5% - 5%

- corporate bond HY over € 200 mln: 5% - 10%

- non-liquid share: 10% - 20%

- NPLs: 30% - 50%

The problem with Non-Performing Loans lies in understanding why the bid-ask

spread is so wide.

(*): approximate ranges.


Bid-ask spread

27

The factors that determine the bid/ask spread of NPLs are:

• Data quality: the quality of the process of archiving and maintaining information in

databases.

• Servicing: the efficiency and the cost of the credit collection services.

• Time to recovery: the time it takes to recover the credit.

• State Guarantee on the Securitisation of Bad Loans (GACS - Garanzia

Cartolarizzazione Sofferenze): the possibility to create a multiplier by using the

warranty scheme.

• Market conditions: prospective trends of the Italian economy and real estate

premiums.

Contrary to all other financial assets, NPLs do not generate cash flows. The cash

flow associated with NPLs coincides with the recovered credit, whose value is

difficult to assess and has an uncertain schedule.


Data Quality

28

• Data quality: low visibility of individual NPLs, due to the lack of well organized,

homogeneous and complete data available in the banks’ databases.

• The main problem is that investors do not have clear data that is organized in digital

format in order to assess portfolios of NPLs in a short time-frame.

• In many cases the documentation related to NPLs is still:

- on paper,

- incomplete,

- on platforms that are incompatible with those of the external servicer,

- cannot be easily obtained.

• Lack of accurate historical data on recovery times associated with various

procedures, districts and courts.

• Lack of accurate historical data on servicing activities for the agency rating process.

• Rating agencies check for any discrepancies between credit recovery plans and

objective credit recovery times.


Servicing

29

• Servicing: market fragmentation, lack of competence, lack of critical mass, low efficiency in recovery

processes.

• Some banks have internal servicing teams with limited competence and a lack of technology and

critical mass, others avail themselves of independent servicers.

• Not all servicers provide all round services: independent servicers are focused on specific NPLs

segments and/or are more active in certain geographic areas.

• Servicing costs prove to be higher than they would have been in a market made up of efficient

operators with an adequate critical mass (in terms of staff, services and contract, legal and IT skills).

• Recovery times and recovery rate are strongly influenced by the quality of the servicer.

NPL Types Managed (% of the nominal value)

Managed NPLs by Geographic Exposure (% of the nominal

value)

BANKING

GROUPSERVICING STRUCTURES

Group 1 Servicer 1 + Servicer 2

Group 2 In house

Group 3 In house

Group 4 In house

Group 5 Servicer 2



Group 8 In house + Servicer 1 + … + Servicer 6

Source: PWC - The Italian NPL market - June 2015.


Time to Recovery

30Source: Ministry of Justice statistics (2013).

• Time to Recovery: uncertainty in the time of recovery and a wide divergence among the various

procedures and courts.

• Investors must take into account various hypotheses as applicable to the various procedures to

estimate recovery times.

• Only a few operators have access to a sufficiently detailed database that enables an accurate forecast

of the potential cash flows that can be generated by each NPL.

Without a GACS Scheme, it would be complex to predict the

actual development of a market for the securitisation of NPL

receivables in Italy.

The Fund may invest in securitisations of the equity tranches

in order to exploit the multiplier effect* of this type of vehicle.

Example of a generic securitisation with the GACS scheme:

• an SPV created ad hoc for the transaction issues tranches

with different seniorities;

• the Italian Government will only guarantee the senior

tranches, which must have an Investment Grade rating;

• the cost of the guarantee is market-based and relates to

the basket of Credit Default Swaps (CDS) with the same

rating and increases based on the recovery time of the

underlying assets (increases in 3, 5 and 7 years);

• the guarantee is subject to the use of an external and

independent servicer for the recovery of the transferred

assets;

• the purchase of the equity tranches by a third-party

investor allows the deconsolidation of the NPLs;

• the State guarantee enables a reduction in the senior

tranche coupon and consequently its cost.


Securitisation of NPLs and GACS

Securitisation with GACS

(*): ratio between gross (nominal) value of impaired loans and the amount invested in the equity tranche. 31

TrancheSenior

(rating

Investment

Grade)

Tranche

Mezzanine

(optional)

Issuer

(SPV)

Tranche

Equity

Originator

Sale of NPLs

Guarantee

Investors

Sale price

of NPLs to

the SPV

NPL ABS

Guarantee

Cost

Assets Liabilities

Italian

Republic

32

Example of a generic securitisation*: let us assume an investment in an equity tranche of € 100.

• Example 1: assuming an equity tranche equal to 35–40%* of the total securitised assets, the

vehicle may acquire between € 250 and € 280 of the net impaired loans from one or more originator

banks.

• Based on the purchase price, one obtains a multiplier of between 7x and 10x * compared to the

gross value of the impaired loans sold.

• Example 2: the use of any mezzanine tranches, dependent on the actual demand from investors

other than the Fund, would allow an increase in the multiplier to between 18x and 20x * compared

to the gross value of the impaired loans sold.

• The multiplier associated only with the Fund increases if the equity tranche is the object of co-

investment with other investors.


Securitisation of NPLs and GACS

Example 1* Example 2*

(*): the values and characteristics of the securitisation may vary considerably depending on the type and composition of the sold portfolio

and the market conditions.

Tranche Senior

(rating Investment

Grade)

Tranche Equity

Investors

Tranche Senior

(rating Investment

Grade)

Tranche Mezzanine

Tranche Equity

Investors Assets


Buyers and Vendors

33

5.535

1.1801.000 1.000

408 400 353 314 220 172

0

1.000

2.000

3.000

4.000

5.000

6.000

Italian Loan Vendors2014–2016 YTD

€ MM

2.000

1.800

1.200

1.000

778

600 600 600 565505

400314

220

0

500

1.000

1.500

2.000

2.500

Italian Loan Buyers (3)

2014–2016 YTD

€ MM

(1) Cassa di Risparmio di Cesena, Iccrea Bancalmpresa, Cassa di Risparmio di Ravenna, Creval, BTO Saraleasing, MS/Prelios.

(2) Algebris Investments, Morgan Stanley, Poste Vista, BAML, GS, Beni Stabili, Ares Management.

(3) For Consortium operations the notional amount of the transactions was assigned 50/50 for graphic requirements.



(1) (2)

• The market currently consists of a large number of forced sellers and a low number of specialist large

scale buyers.

• The investor cost structure: high structural costs and high management fees increase the minimum IRR

level acceptable to the investors.

• Excess IRR: Private Equity funds generally have higher yield expectations than an Institutional Investor.


Hypothetical example of pricing construction

34

The graph takes as its starting point the direct sale of a portfolio of NPLs to a specialist operator and shows the development in prices obtainable

through the intervention of the Atlante Fund, to which various hypotheses are added, in order to arrive at a potentially obtainable final price.

The incremental path is divided as follows:

1. Straight sale: example of a sale to a hypothetical investor, who has an IRR target of 15%, of a portfolio with 65% secured and 35% unsecured.

2. Securitisation*: structuring of an un-guaranteed securitisation

- tranching: 65% senior, 35% junior

- yield of senior notes = 5%

- IRR required on the junior tranche equal to 15%

3. GACS Effect: structuring a securitisation including State guarantee on the senior tranche

- cost of senior notes = Italy risk + guarantee fee (CDS spread at 5/6/7 years on the BBB+ baskets identified under the regulations)

4. Atlante Effect:

- sale of a junior tranche of an ABS GACS to the Atlante Fund (IRR = 6%)

5. Analysis of incremental sensitivity:

a) reduction of the costs associated with servicing activities from 8% to 7%

b) reduction of the Time to Recovery from 7 to 5 years

c) increase in the Recovery Rate from 35% to 40%

(*): the values and characteristics of the securitisation may vary considerably depending on the type and composition of the sold portfolio

and the market conditions.

E. NPLs – HOW WE INTEND TO OPERATE

35

NPLs – How we intend to Operate (l)

36

• Purpose of the Fund is to promote the creation and development of an efficient market of distressed

assets in Italy.

• This does not mean “replacing” the market, but making it work better, so achieving lower costs,

bid/ask spreads and increased liquidity.

• The Fund aims to provide “seed money” with a modest capital cost for the best proposals for NPLs.

• Quaestio intends to make use of the best resources, professional skills and knowledge in the Italian

and international markets as regards management of NPLs, promoting cooperation with banks while

keeping the strategic direction and control over investments internally.

• The Fund does not aim to replace specialist funds, service providers or Investment Banks, but:

- invests (or co-invests) in securitisation structures that are under construction that can meet its

performance requirements, in order to reduce the impact on banks’ balance sheets and accelerate

the disposal of NPLs;

- promotes the organisation of securitisation transactions by combining the best proposals from

banks, funds and service providers where it finances (co-finances) the equity tranche;

- if a bank independently finds a market solution, the Fund does not interfere but the presence of the

Fund nevertheless should reduce yields.

• The Fund optimises its own resources to solve the problems of banks by financing (or co-financing)

the equity tranche of the securitisations, promoting such transactions not on its own, but in

cooperation and in coordination with other parties.

• The SGR aims at co-investments and partnerships in order to prevent the risk of an NPL operation

staying solely with the Fund and/or to prevent the Fund not being able to benefit from the upside of

the equity following the transaction.

NPLs – How we intend to Operate (ll)

37

• The multiplier effect by investing primarily in the equity tranches, produces a much larger investment

potential, but in order for the leverage to exist, the GACS insurance is essential to allow the placement

of the senior tranches.

• The amount to be invested in NPLs may increase if:

a. the investments of the Fund in banks are quickly enhanced in value and disposed of;

b. the Fund can operate in partnership and/or by co-financing other funds and/or specialised

operators;

c. the Fund could be reopened to new subscribers in the event of success.

• It is in the interests of the Fund to promote and participate in the construction of an efficient

infrastructure for the servicing of NPLs.

• The objective is to facilitate the revival of the Italian market of NPLs, by accelerating the process of

their disposal, but without expecting to solve all the problems of the market immediately.

• The disposal of the NPLs also depends on the profitability of banks in the near future: the greater the

buffer compared to capital ratios, the easier it will be to absorb losses from the sale of the NPLs and

the faster will be the disposal, which will lead to lower required capital ratios (virtuous circle).

• The time for the creation of an efficient market of NPLs in Italy and the success of the Fund in

encouraging it, also depend on:

- the trends in the Italian economy over the coming years and the absence of deflation and

stagnation;

- the re-rating in the values of banks which facilitates the disposal of NPLs and vice versa;

- the ability of banks to return to high profitability levels;

- the real estate cycle in Italy.

NPLs – How we intend to Operate

Bad and Substandard Loans

38

Aggregate Transition Matrices – 2014/2015 **

(*): re-processed by Quaestio SGR based on data in the Bank of Italy Statistical Report for the 1st quarter 2016, values in € billions.

(**): re-processed by SDA-Bocconi based on data from the Bank of Italy.

1,1 2,5 3,0

104,3122,6

136,6

13,3

13,7

14,9

29,7

29,4

32,2148,3

168,2

186,6

0

20

40

60

80

100

120

140

160

180

200

2013 2014 2015

Trend in Gross Bad Loans* 2013-2015

Financial Companies Non-Financial Companies Producer Households

Consumer Households Total

155,3183,4 200,3

106,7

130,6126,818,4

12,313,9

280,4

326,2341,1

0

50

100

150

200

250

300

350

400

2013 2014 2015

Trend in Impaired Loans* 2013-2015

Bad Debts Likely Defaults Non-performing past due loans/exposures Total

F. CONCLUSIONS

39

False Myths

40

• That Atlante holds up the world: perhaps it is a real overstatement in its choice of name.

• The idea is to win a marathon, not the 100-metres sprint.

• For the re-rating of Italian banks, there is no need to solve all the problems of profitability and the

NPLs: just a few success stories and the removal of tail risk is enough to change overall perception.

Markets function like this:

Conclusions (l)

41

• The Fund is a distressed securities fund (banks and NPLs), but its aim is not to

create ex novo a competitor with other well-established operators or a low cost

operator for internal use and consumption in Italy. It does not have the time nor the

large investments that would be required.

• The Fund’s intention is to create a large, efficient market, that is open to international

capital, and not to destroy what little there is.

• The SGR can leverage on its internal and external resources to:

1. leverage the abilities currently available in the world and in Italy to work on the

Italian financial institutions market;

2. promote the development of a non-banking credit market that does not exist in

Italy (in the US it took 80 years from the financing of the railways to the beginning

of the last century);

3. mobilise resources for the re-rating of the system, not only via the multiplier

effect in the NPLs, but also by drastically reducing the tail risks of the bail-ins and

promoting effective restructuring;

4. acts as a positive shock for reversing the market trend.

Conclusions (II)

42

Finally, the success of the Fund also depends on at least three crucial external factors:

1. the State must promptly change the procedures for the collection of credit and for bankruptcy

procedures because the legal system is one of the pillars of any financial system;

2. the ability of banks to quickly return to operating profitability, because the time for disposing of

NPLs depends on the ability to generate new profits that absorb the old losses, without

causing increases in capital and risks of bail-in. In addition, as profits gradually increase and

NPLs are reduced, the required regulatory capital is reduced, triggering a virtuous circle;

3. the absence of negative shocks over the next two years (geopolitical or Eurozone crisis,

stagnation and/or deflation), since the amount of bad loans is not just a question of the status

quo, but also depends on the rate at which other impaired loans become bad loans and those

performing loans become impaired. We must not, therefore, just look at stock of current bad

loans but also at the prospective ones. In the absence of a positive scenario in the economy

and taking into account that bad loans reach their maximum even three years after the

minimum in a recession: it is the future dynamic that must be monitored more closely than the

existing stock.

But, even the best ideas are worth nothing if they do not produce concrete results.

And a little luck helps, as with any investment.

APPENDIX – QUAESTIO

43

Quaestio

Key People

44

KEY PEOPLE

Alessandro Penati

years of experience: 39

Chairman

• He founded Quaestio SGR.

• He founded Epsilon Associati SGR.

• He has been a professor of Finance at the Catholic University of Milan, at the Wharton School, University of

Pennsylvania, Bocconi University, University of Padua and the FAME in Geneva.

• Economist at the Research Department of the International Monetary Fund.

• He has been a columnist for the Repubblica, for the Corriere della Sera and Il Sole-24 Ore.

• Ph.D in Economics from the University of Chicago.

Paolo Petrignani


Chief Executive Officer

• He has been Managing Director of UBS and JP Morgan.

• He worked with Salomon Brothers in New York and London.

• He holds an MBA from The Wharton School, University of Pennsylvania.

• Diploma of Certified European Financial Analyst (CEFA).

Christian Prinoth


Head of Equities, Senior Portfolio Manager

• He has been Stock Manager with Epsilon SGR and Duemme SGR, and has also served as Quantitative Research

manager at BPL Fondicri SGR.

• Graduated from Bocconi University in Milan.

Alessandro Potestà


Equities, Senior Portfolio Manager

• He has been CIO at Exor SpA.

• He previously worked as an analyst with Credit Suisse and as Chief Equity Analyst with Actinvest in London.

• Graduated in Economics (summa cum laude) from the University of Turin.

Giovanni Boscia


Head of Fixed Income and Credit, Senior Portfolio Manager

• He has worked in investment banking for Citigroup, Salomon Brothers and Lehman Brothers and in hedge funds such as

Endeavour Capital and Trafalgar Asset Managers.

• Graduated in Economics (summa cum laude) at the Bocconi University in Milan.

• MSc in Finance and an Executive MBA from the London School of Business.

Lorenzo Gallenga


Head of Global Macro, Senior Portfolio Manager

• He has been in charge of Fixed Income with Inter Fund Management (Family Office of Ikea).

• Previously, he was Bond Manager with Newton, Lombard Odier, Société Generale and Man-GLG.

• Degree from University College London.

Quaestio

Key People

45

Mario Baronci


Institutional Clients, Senior Portfolio Manager

• He has been Manager of Fixed Income and Multi-Manager Funds at Sella Gestioni.

• Previously he dealt with market making and proprietary trading of financial derivative portfolios with Manufacturers

Hanover Trust, Chemical Bank and Banca IMI.

• Degree in Economics from Bocconi University in Milan, MSc in Risk and Investment Management from Edhec Business

School (London - Nice).

Massimo Marzeglia


Institutional Clients, Senior Portfolio Manager

• He has been Lead Portfolio Manager in London dealing with Global MultiAsset Strategy and Managed Accounts.

• He previously held the position of Managing Director Fixed Income, Equity Currency & Commodities at Credit Suisse

and Executive Director with Goldman Sachs International.

• He graduated with honours from the Bocconi University in Milan.

Marco Filagranayears of experience: 20

Head of Risk Management

• From 1999 to 2015, he was with the Bank of Italy; he also gained extensive experience at international level in the field

of market, credit, interest rate and liquidity risk analyses, and the validation and monitoring of internal models.

• He has written several papers specialising in the field of market risk.

• Degree in Economics from the University of Trento, where he was also Professor of Financial Engineering.

Alberto Massa


Head of Sales

• Previously he was Head of Relations with Institutional Clients for Lyxor in Paris and then in Milan.

• He worked as Head of Fixed Income Sales in Banca IMI and Fortis Bank.

• Graduated from Bocconi University in Milan.

Quaestio Group

46

Authorised by the CSSF for:

• Management of UCITS

and AIF Funds.

QUAESTIO

INVESTMENTS S.A.

Management Company

Authorised by the Bank of Italy and

Consob for:

• Collective and individual

management;

• Authorised UCITS and AIF.

QUAESTIO HOLDING SA

100%

100% 100%

QUAESTIO CAPITAL

MANAGEMENT SGR

S.p.A.

Investment Manager

Investments holding Company, with

tax residency in Italy.

FONDAZIONE

CARIPLO

CASSA

GEOMETRILOCKE SRL

FONDAZIONE

FORLI’OPERA DON

BOSCO

37.65% 18% 6.75% 15.6% 22%

SGR founded in 2009

Assets under management: ~ € 14 billion

More than 80 Institutional Customers

36 employees

36 third-party delegated AM companies

B2B Services for management companies

Dynamic Pooling

Look-through technology

QUAESTIO CAPITAL MANAGEMENT SGR S.p.A.

Corso Como 15, 20154 Milan

Tel. +39 02 3676 5220

Fax +39 02 7201 6207

email [email protected]

www.quaestiocapital.com

Contacts

47

The information contained herein is provided by Quaestio Capital Management SGR S.p.A. and is intended only for

institutional investors.

The information contained herein does not constitute an offer to the public and is not intended for the public.

Although due diligence has been taken to ensure that the information contained herein is reliable, Quaestio Holding SA

and its subsidiaries cannot guarantee its absolute accuracy and completeness. Opinions and assessments contained

herein are subject to change without notice.

Quaestio Holding SA and its subsidiaries cannot be held liable for any damages, direct or indirect, that may arise from the

use of the information contained in this presentation. Consequently this same information should only be disseminated to

persons authorised to receive it or to persons subject to different legal forms but without this implying a violation of the

laws or regulations applicable thereto.

This presentation cannot be reproduced or distributed to third parties. Investment activities are subject to risk and any

subscription shall be subject to pre-contractual informative statements. Past performance is not indicative of

future results. Changes in exchange rates and other financial variables can increase or decrease the value of the

investment.

The Fund Regulations must be read in order to acquire all the detailed information. Additional risk factors are

described in the Regulations.

Disclaimer

48

quaestio capital management sgr s.p.a. atlante … · atlante fund presentation 29 april 2016 ......

Documents