pirelli & c. s.p.a. · j500,000,000 5.125 per cent. guaranteed notes due 2016 guaranteed by pirelli...

PIRELLI & C. S.p.A.(incorporated with limited liability in the Republic of Italy)

J500,000,000 5.125 per cent. Guaranteed Notes due 2016

guaranteed by

Pirelli Tyre S.p.A.(incorporated with limited liability in the Republic of Italy)

Issue price: 99.626 per cent.

The F500,000,000 5.125 per cent. Guaranteed Notes due 2016 (the Notes) are issued by Pirelli & C. S.p.A. (theIssuer). The Notes are unconditionally and irrevocably guaranteed by Pirelli Tyre S.p.A. (the Guarantor), subject to thecontractual and legal limitations set out herein. The Notes are constituted by a trust deed dated on or about 22February 2011 (as amended or supplemented from time to time) (the Trust Deed) between the Issuer, the Guarantorand Deutsche Trustee Company Limited in its capacity as trustee (the Trustee). The Guarantor may, under certaincircumstances, be released from its obligation to guarantee the Notes, as described under ‘‘Conditions of the Notes –Release and Reappointment of Pirelli Tyre as Guarantor’’.

The Issuer may, at its option, redeem all, but not some only, of the Notes on 22 August 2012 or at any time thereafter(the Optional Redemption Date) at an amount equal to their principal amount plus (if applicable) a premium,together with any accrued interest, as described under ‘‘Conditions of the Notes – Redemption at the Option of theIssuer’’. The Issuer may also, at its option, redeem all, but not some only, of the Notes at any time at par plus accruedinterest, in the event of certain tax changes as described under ‘‘Conditions of the Notes – Redemption for TaxationReasons’’. The Notes mature on 22 February 2016.

Application has been made to the Commission de Surveillance du Secteur Financier (the CSSF) in its capacity ascompetent authority under the Luxembourg Act dated 10 July 2005 (the Luxembourg Act) on prospectuses forsecurities to approve this document as a prospectus and to the Luxembourg Stock Exchange for the listing of theNotes on the Official List of the Luxembourg Stock Exchange and admission to trading on the Luxembourg StockExchange’s regulated market.

The Notes will initially be represented by a temporary global note (the Temporary Global Note), without interestcoupons, which will be deposited on or about 22 February 2011 (the Closing Date) with a common depositary forEuroclear Bank SA/NV (Euroclear) and Clearstream Banking, société anonyme (Clearstream, Luxembourg). Interestsin the Temporary Global Note will be exchangeable for interests in a permanent global note (the Permanent GlobalNote and, together with the Temporary Global Note, the Global Notes), without interest coupons, on or after, 3 April2011 (the Exchange Date), upon certification as to non-U.S. beneficial ownership. Interests in the Permanent GlobalNote will be exchangeable for definitive Notes only in certain limited circumstances – see ‘‘Summary of Provisionsrelating to the Notes while represented by the Global Notes’’.

An investment in the Notes involves certain risks. Prospective investors should have regard to the factorsdescribed under the section headed ‘‘Risk Factors’’ on pages 5 to 11. This Prospectus does not describe all of therisks involved in an investment in the Notes.

Global CoordinatorBarclays Capital

Joint Lead Managers and Bookrunners

Banca IMI Barclays Capital Mediobanca

Société Générale UniCredit BankCorporate & Investment Banking

The date of this Prospectus is 18 February 2011.

This Prospectus comprises a prospectus for the purposes of Article 5.3 of Directive 2003/71/EC (theProspectus Directive) and for the purposes of the Luxembourg Act.

The Issuer and the Guarantor accept responsibility for the information contained in this Prospectus. Tothe best of the knowledge of the Issuer and the Guarantor (each having taken all reasonable care toensure that such is the case) the information contained in this Prospectus is in accordance with the factsand does not omit anything likely to affect the import of such information.

This Prospectus is to be read in conjunction with all documents which are deemed to be incorporatedherein by reference (see ‘‘Documents Incorporated by Reference’’). This Prospectus should be read andconstrued on the basis that such documents are incorporated and form part of the Prospectus.

Neither the Managers (as described under ‘‘Subscription and Sale’’, below) nor the Trustee haveindependently verified the information contained herein. Accordingly, no representation, warranty orundertaking, express or implied, is made and no responsibility or liability is accepted by the Managers orthe Trustee as to the accuracy or completeness of the information contained or incorporated in thisProspectus or any other information provided by the Issuer or the Guarantor in connection with theoffering of the Notes. No Manager or the Trustee accepts any liability in relation to the informationcontained or incorporated by reference in this Prospectus or any other information provided by the Issueror the Guarantor in connection with the offering of the Notes or their distribution.

No person is or has been authorised by the Issuer, the Guarantor, any of the Managers or the Trustee togive any information or to make any representation not contained in or not consistent with thisProspectus or any other information supplied in connection with the offering of the Notes and, if given ormade, such information or representation must not be relied upon as having been authorised by theIssuer, the Guarantor, any of the Managers or the Trustee.

Neither this Prospectus nor any other information supplied in connection with the offering of the Notes(a) is intended to provide the basis of any credit or other evaluation or (b) should be considered as arecommendation by the Issuer, the Guarantor, any of the Managers or the Trustee that any recipient ofthis Prospectus or any other information supplied in connection with the offering of the Notes shouldpurchase any Notes. Each investor contemplating purchasing any Notes should make its ownindependent investigation of the financial condition and affairs, and its own appraisal of thecreditworthiness, of the Issuer and/or the Guarantor. Neither this Prospectus nor any otherinformation supplied in connection with the offering of the Notes constitutes an offer or invitation byor on behalf of the Issuer, the Guarantor, the Managers or the Trustee to any person to subscribe for or topurchase any Notes.

Neither the delivery of this Prospectus nor the offering, sale or delivery of the Notes shall in anycircumstances imply that the information contained herein concerning the Issuer and/or the Guarantor iscorrect at any time subsequent to the date hereof or that any other information supplied in connectionwith the offering of the Notes is correct as of any time subsequent to the date indicated in the documentcontaining the same. The Managers and the Trustee expressly do not undertake to review the financialcondition or affairs of the Issuer or the Guarantor during the life of the Notes or to advise any investor orpotential investor in the Notes of any information coming to their attention. The Notes have not been andwill not be registered under the United States Securities Act of 1933, as amended, (the Securities Act)and are subject to U.S. tax law requirements. Subject to certain exceptions, the Notes may not be offered,sold or delivered within the United States or to U.S. persons, as defined in Regulation S of the SecuritiesAct. For a further description of certain restrictions on the offering and sale of the Notes and ondistribution of this document, see ‘‘Subscription and Sale’’ below.

This Prospectus does not constitute an offer to sell or the solicitation of an offer to buy the Notes in anyjurisdiction to any person to whom it is unlawful to make the offer or solicitation in such jurisdiction. Thedistribution of this Prospectus and the offer or sale of Notes may be restricted by law in certainjurisdictions. The Issuer, the Guarantor, the Managers and the Trustee do not represent that thisProspectus may be lawfully distributed, or that the Notes may be lawfully offered, in compliance with anyapplicable registration or other requirements in any such jurisdiction, or pursuant to an exemptionavailable thereunder, or assume any responsibility for facilitating any such distribution or offering. Inparticular, no action has been taken by the Issuer, the Guarantor, the Managers or the Trustee which isintended to permit a public offering of the Notes or the distribution of this Prospectus in any jurisdictionwhere action for that purpose is required. Accordingly, no Notes may be offered or sold, directly orindirectly, and neither this Prospectus nor any advertisement or other offering material may bedistributed or published in any jurisdiction, except under circumstances that will result in compliance with

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any applicable laws and regulations. Persons into whose possession this Prospectus or any Notes maycome must inform themselves about, and observe, any such restrictions on the distribution of thisProspectus and the offering and sale of Notes. In particular, there are restrictions on the distribution ofthis Prospectus and the offer or sale of Notes in the United States and the European Economic Area(including the United Kingdom and the Republic of Italy), see ‘‘Subscription and Sale’’.

IN CONNECTION WITH THE ISSUE OF THE NOTES, BARCLAYS BANK PLC AS STABILISING MANAGER(THE STABILISING MANAGER) (OR PERSONS ACTING ON BEHALF OF THE STABILISING MANAGER)MAY OVER-ALLOT NOTES OR EFFECT TRANSACTIONS WITH A VIEW TO SUPPORTING THE MARKETPRICE OF THE NOTES AT A LEVEL HIGHER THAN THAT WHICH MIGHT OTHERWISE PREVAIL.HOWEVER, THERE IS NO ASSURANCE THAT THE STABILISING MANAGER (OR PERSONS ACTING ONBEHALF OF THE STABILISING MANAGER) WILL UNDERTAKE STABILISATION ACTION. ANYSTABILISATION ACTION MAY BEGIN ON OR AFTER THE DATE ON WHICH ADEQUATE PUBLICDISCLOSURE OF THE TERMS OF THE OFFER OF THE NOTES IS MADE AND, IF BEGUN, MAY BE ENDEDAT ANY TIME, BUT IT MUST END NO LATER THAN THE EARLIER OF 30 DAYS AFTER THE ISSUE DATEOF THE NOTES AND 60 DAYS AFTER THE DATE OF THE ALLOTMENT OF THE NOTES. ANYSTABILISATION ACTION OR OVER-ALLOTMENT MUST BE CONDUCTED BY THE STABILISINGMANAGER (OR PERSONS ACTING ON BEHALF OF THE STABILISING MANAGER) IN ACCORDANCEWITH ALL APPLICABLE LAWS AND RULES.

All references in this document to euro, Euro and J refer to the currency introduced at the start of thethird stage of European Economic and Monetary Union pursuant to the Treaty on the functioning of theEuropean Union, as amended.

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TABLE OF CONTENTS

Page

RISK FACTORS......................................................................................................................................................... 5

DOCUMENTS INCORPORATED BY REFERENCE ............................................................................................. 12

CONDITIONS OF THE NOTES.............................................................................................................................. 14

SUMMARY OF PROVISIONS RELATING TO THE NOTES WHILE REPRESENTED BY THE GLOBALNOTES ........................................................................................................................................................................ 31

USE OF PROCEEDS ................................................................................................................................................. 33

DESCRIPTION OF THE ISSUER, THE GUARANTOR AND THE PIRELLI GROUP..................................... 34

OVERVIEW OF THE CONSOLIDATED FINANCIAL INFORMATION OF THE ISSUER AND THEGUARANTOR ............................................................................................................................................................ 54

TAXATION................................................................................................................................................................. 64

SUBSCRIPTION AND SALE ................................................................................................................................... 69

GENERAL INFORMATION ..................................................................................................................................... 71

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RISK FACTORS

Each of the Issuer and the Guarantor believes that the following factors may affect its ability to fulfil itsobligations under the Notes. Most of these factors are contingencies which may or may not occur andneither the Issuer nor the Guarantor is in a position to express a view on the likelihood of any suchcontingency occurring.

In addition, risk factors which are specific to the Notes and factors which the Issuer and the Guarantorbelieve may be material for the purpose of assessing the market risks associated with the Notes aredescribed below.

Each of the Issuer and the Guarantor believes that the factors described below represent the principalrisks inherent in investing in the Notes, but the inability of the Issuer or the Guarantor to pay interest,principal or other amounts on or in connection with any Notes may occur for other reasons which may notbe considered significant risks by the Issuer and the Guarantor based on information currently available tothem or which they may not currently be able to anticipate. Neither the Issuer nor the Guarantorrepresents that the statements below regarding the risks of holding any Notes are exhaustive. Prospectiveinvestors should also read the detailed information set out elsewhere in this Prospectus and reach theirown views prior to making any investment decision.

Factors that may affect the Issuer’s ability to fulfil its obligations under the Notes or the Guarantor’sability to fulfil its obligations under the Notes

Risks associated with the Pirelli Group’s businesses

Overview

The businesses of the Pirelli Group (as defined under ‘‘Description of the Issuer, the Guarantor and thePirelli Group’’) are affected by global economic and other conditions over which it has no control. ThePirelli Group’s earnings and financial position are influenced by various macroeconomic factors –including increases or decreases in gross national product, the level of consumer and businessconfidence, changes in interest rates on consumer loans, the cost of raw materials and the rate ofunemployment – existing in the various countries in which it operates. As a result, the Issuer is unable tooffer any assurances about future trends in the demand for, or supply of, the products that the PirelliGroup sells in any of the markets in which it operates. Furthermore, any event adversely affecting activityin the automotive industry, such as increases in energy prices, fluctuations in the prices of other keycommodities or raw materials, or adverse shifts in government policies (including environmentalregulation) or infrastructure spending could have a material adverse effect on the Pirelli Group’s businessprospects, results and financial condition.

Tyre business

Despite ongoing widespread macroeconomic difficulties, the tyre business’ 2009 results met the PirelliGroup’s expectations. However, there is a risk that the tyre business will not meet the Pirelli Group’sexpectations in the future. In particular, if the global economy does not recover as expected, or recoversmore slowly than expected, this may have a negative effect on turnover in the tyre sector. The fact thatthe Pirelli Group’s tyre business focuses on ‘‘high end’’ consumer products and sales of commercial andindustrial products in emerging markets mitigates this risk, as these segments and geographical areashave been, are and are expected to be particularly resilient in periods of financial instability.

Separately, to the extent it cannot be recovered through price increases or cost efficiencies, a significantincrease in the cost of raw materials, in particular natural rubber, may have a negative effect on theprofitability of the Pirelli Group’s tyre business.

Filter business

Demand for products produced by the Pirelli Group’s filter business is affected by (amongst other things)(i) the introduction and enforcement of air quality regulations by governments and governmental bodiesand (ii) the ability of the filter business to obtain approvals for its products from the relevant authorities.

Financial risks

The Pirelli Group is exposed to risks of a financial nature, associated mainly with trends in exchange rates,the procurement of financial resources in the market, the fluctuation of interest rates, and the ability of itscustomers to fulfil their obligations towards the Pirelli Group.

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Management of financial risks is an integral part of management of the Pirelli Group’s businesses and iscarried out centrally in accordance with guidelines from Pirelli Group’s General Management. Theseguidelines define risk categories for, and specify certain procedures and operational limits in relation to,transactions and instruments relevant to the Pirelli Group.

Banking relationships are negotiated and managed centrally, in order to ensure coverage of short- andmedium-term financial needs at the lowest possible cost. The procurement of medium- and long-termresources on the capital market is also managed through central management.

Exchange rate risk

Due to the geographic distribution of its manufacturing and sales activities, the Pirelli Group is subject tocurrency exchange rate risk in the ordinary course of its business. This risk is managed by the PirelliGroup’s Treasury, which collects information on currency positions subject to exchange rate risk andassesses the net position for each currency. The Pirelli Group seeks to manage these risks through theuse of financial hedging instruments. However, despite these hedging transactions, sudden exchange ratefluctuations could have a material adverse effect on the Pirelli Group’s earnings and financial position.

Liquidity risk

The Pirelli Group’s future performance depends upon, inter alia, its ability to meet funding requirementsrelated to debt maturities and planned investments with cash flow from operations, liquidity on hand,renewal or refinancing of existing bank loans and facilities or recourse to the capital markets. The maininstruments used by the Pirelli Group to manage this risk are annual and three-year financial plans, whichenable it to monitor and assess cash in-flows and out-flows. Any inconsistency between the plans andfinal cash balances are noted and analysed.

Although the Pirelli Group has taken steps to protect its working capital and liquidity positions (forexample by (i) maintaining cash equivalents and easily-cashable short-term securities, (ii) obtainingcommitted credit facilities and (iii) having the ability to close out open positions on the market) any futuredecline in sales volumes could have a negative impact on the cash-generating capacity of operatingactivities, which in turn could have a material adverse effect on the Pirelli Group’s ability to meet itsfunding requirements related to debt maturities.

The Pirelli Group has a centralised system for the management of collection and payment flows, whichtakes into account the various local currency and tax laws relevant to the Pirelli Group.

Interest rate risk

The Pirelli Group endeavours to maintain a balance between indebtedness at fixed interest rates andindebtedness at variable interest rates.

The Pirelli Group manages the risk associated with borrowing at variable rates of interest through the useof ‘‘plain vanilla’’ interest rate derivative contracts. However, despite these derivative contracts, suddeninterest rate fluctuations could have a material adverse effect on the Pirelli Group’s earnings and financialposition.

Price risk associated with financial assets

The Pirelli Group is exposed to price risk as regards the volatility of financial assets such as listed andunlisted shares and bonds and unlisted closed-end real estate funds.

Credit risk

The Pirelli Group may incur losses as a result of the non-performance of obligations owed to it by tradeand financial counterparties.

In order to limit this risk where trade counterparties are concerned, the Pirelli Group has put in placeprocedures for evaluating its customers’ creditworthiness, monitoring expected incoming cash flows andrecovering credit.

The aim of this procedure is to establish customer credit limits, which, if exceeded, result in a suspensionof further sales to the relevant customer.

In some cases, customers are asked to provide guarantees. These are normally bank guarantees, issuedby institutions with strong credit ratings. Occasionally, security may be required.

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Insurance policies are also used to manage credit risk. Under these policies, the insurance companyundertakes to compensate the Pirelli Group if one of Pirelli Group’s counterparties becomes insolvent andan amount is due to the Pirelli Group.

Other risks

The Pirelli Group is subject to risks relating to international sales and exposure to changing localconditions

A significant portion of the Pirelli Group’s current operations is conducted and located outside theRepublic of Italy. The Pirelli Group expects that revenues from sales outside of Italy, and more generallyoutside of the European Union, will continue to account for a material portion of its total revenues for theforeseeable future. The Pirelli Group is subject to risks inherent in operating on a global basis, includingrisks related to:

. exposure to local economic and political conditions;

. export and import restrictions;

. multiple tax regimes, including regulations relating to transfer pricing and withholding and othertaxes on remittances and other payments to or from subsidiaries;

. foreign investment restrictions or requirements, foreign exchange controls and restrictions onrepatriation of funds; and

. local laws and other regulatory requirements.

The degree of risk and the potential magnitude of the effects of unfavourable developments in any one ofthese areas vary from country to country, and, depending on the circumstances, could have a materialadverse effect on the Pirelli Group’s business prospects, results and financial condition.

The Pirelli Group is subject to environmental and other governmental regulation

The Pirelli Group’s products and operations are subject to increasingly stringent environmental laws andregulations in many of the countries in which it operates. Such regulations govern, among other things,the type and level of pollutants generated by industrial production facilities – with requirements foremissions, treatment of waste and water and prohibitions on soil contamination.

In addition, an increasing number of countries have adopted regulations that require tyre manufacturersto recover used tyres. Pirelli complies with such regulations and participates in consortia of tyremanufacturers which have been established for this purpose.

Risks associated with legal proceedings

The Issuer and its subsidiaries may from time to time be involved in civil, labour, administrative, tax orcriminal proceedings arising in the ordinary course of business. The Pirelli Group adopts measures tomitigate possible damages or penalties that may result from such proceedings, including establishingcash reserves and entering into insurance contracts. It is not possible to predict the potential for, or theultimate outcomes of, such proceedings, some of which may be unfavourable to the Pirelli Group. In sucha case, the Pirelli Group may incur costs and the mitigating measures adopted to protect against suchcosts may not be sufficient to cover such costs in full. As is customary, claims under insurance contractsmay also be subject to an excess depending on the terms of the insurance contract. Legal proceedingsmay also harm the Pirelli Group’s reputation and brands.

The Pirelli Group faces risks associated with its relationships with employees and suppliers

In many countries where the Pirelli Group operates, Pirelli Group employees are protected by various lawsand/or collective labour agreements which entitle them, through local and national representatives, tothe right of consultation on specific matters including downsizing or closure of production units andreductions in personnel. The laws and/or collective labour agreements applicable to the Pirelli Groupcould impair its flexibility in reshaping and/or strategically repositioning its business activities. The PirelliGroup’s ability to reduce personnel or implement other permanent or temporary redundancy measuresmay be subject, inter alia, to the agreement of the labour unions. Industrial action by employees couldhave an adverse impact on the Pirelli Group’s business activities.

Furthermore, the Pirelli Group purchases raw materials from a large number of suppliers and relies onother services and products provided by other companies outside the Pirelli Group. Some of these

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companies are highly unionised. The Pirelli Group is exposed to the risk that suppliers could experiencedifficulties (whether they are attributable to internal or external factors) and that these difficulties couldhave negative effects on the Pirelli Group.

The Pirelli Group’s success is largely dependent on the ability of its current management team to operateand manage effectively

The Pirelli Group’s success depends in large part on the ability of its executive officers and other membersof senior management to operate and manage effectively, both independently and as a group. The loss ofthe services of any executive officer, senior manager or other key employee without adequatereplacement or the inability to attract and retain new qualified personnel could have a material adverseeffect upon the Pirelli Group’s business prospects, results and financial condition. To guard against thisrisk, the Pirelli Group has adopted remuneration and bonus policies which are regularly reviewed.

The Pirelli Group operates in highly competitive industries

The majority of the Pirelli Group’s net revenues are generated in the highly competitive tyre industry. ThePirelli Group faces strong competition from other global and regional tyre manufacturers. It competes inthe industry in terms of product quality and features, innovation and development time, pricing, reliability,safety, fuel economy, customer service and price.

Factors which are material for the purpose of assessing the market risks associated with the Notes

The Notes may not be a suitable investment for all investors

Each potential investor in the Notes must determine the suitability of that investment in light of its owncircumstances. In particular, each potential investor should:

. have sufficient knowledge and experience to make a meaningful evaluation of the Notes, the meritsand risks of investing in the Notes and the information contained or incorporated by reference inthis Prospectus or any applicable supplement;

. have access to, and knowledge of, appropriate analytical tools to evaluate, in the context of itsparticular financial situation, an investment in the Notes and the impact the Notes will have on itsoverall investment portfolio;

. have sufficient financial resources and liquidity to bear all of the risks of an investment in the Notes,including where the currency for principal or interest payments is different from the potentialinvestor’s currency;

. understand thoroughly the terms of the Notes and be familiar with the behaviour of any relevantfinancial markets; and

. be able to evaluate (either alone or with the help of a financial adviser) possible scenarios foreconomic, interest rate and other factors that may affect its investment and its ability to bear theapplicable risks.

The Issuer may redeem the Notes prior to maturity

The Notes contain an optional redemption feature, which may limit their market value. During any periodwhen the Issuer may elect to redeem the Notes, the market value of the Notes generally will not risesubstantially above the price at which they can be redeemed. This also may be true prior to anyredemption period.

The Issuer may be expected to redeem the Notes when its cost of borrowing is lower than the interestrate on the Notes. At those times, an investor generally would not be able to reinvest the redemptionproceeds at an effective interest rate as high as the interest rate on the Notes being redeemed and mayonly be able to do so at a significantly lower rate. Potential investors should consider reinvestment risk inlight of other investments available at that time.

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Risks related to the Notes generally

Set out below is a brief description of certain risks relating to the Notes generally:

The claims of Noteholders are structurally subordinated with respect to entities that are not guarantors ofthe Notes

The operations of the Pirelli Group are principally conducted through subsidiaries of the Issuer and, inparticular, through the Guarantor and its subsidiaries. Noteholders will not have a claim against anysubsidiaries of the Issuer (or any subsidiaries of the Guarantor) that are not guarantors of the Notes. Theassets of the Issuer’s non-guarantor subsidiaries, and the assets of the Guarantor’s subsidiaries, will besubject to prior claims by creditors of those subsidiaries, whether such creditors are secured orunsecured.

The conditions of the Notes do not contain limitations on the Issuer’s or the Guarantor’s incurrence ofadditional debt in the future

The conditions of the Notes do not prohibit either the Issuer or the Guarantor from issuing, providingguarantees or otherwise incurring further debt ranking pari passu with its existing obligations. If theIssuer or the Guarantor incurs significant additional debt ranking equally with the Notes, it will increasethe number of claims that would be entitled to share rateably with Noteholders in any proceedsdistributed in connection with an insolvency, bankruptcy or similar proceeding.

The Guarantee may be limited by applicable laws or subject to certain defences that may limit its validityand enforceability

The Guarantee provides Noteholders with a direct claim against the Guarantor in respect of the Issuer’sobligations under the Notes. Enforcement of the Guarantee would be subject to certain generally availabledefences in the Republic of Italy, including defences relating to corporate benefit, fraudulent conveyanceor transfer, voidable preference, corporate purpose, and capital maintenance or similar laws, as well asregulations or defences which affect the rights of creditors generally. If a court were to find the Guaranteevoid or unenforceable as a result of such defences or laws, Noteholders would cease to have any claim inrespect of the Guarantor and would be creditors solely of the Issuer.

Enforcement of the Guarantee is subject to the detailed provisions contained in the Trust Deed (and anysupplemental Trust Deed).

The Notes are not rated

Neither the Notes nor the long-term debt of the Issuer is rated. To the extent that any credit ratingagencies assign credit ratings to the Notes, such ratings may not reflect the potential impact of all risksrelated to structure, market, additional factors discussed above, and other factors that may affect thevalue of the Notes. A rating or the absence of a rating is not a recommendation to buy, sell or holdsecurities.

Modification, waivers and substitution

The conditions of the Notes contain provisions for calling meetings of Noteholders to consider mattersaffecting their interests generally. These provisions permit defined majorities to bind all Noteholdersincluding Noteholders who did not attend and vote at the relevant meeting and Noteholders who voted ina manner contrary to the majority.

The conditions of the Notes (Condition 15.3) also provide that the Trustee may, without the consent ofNoteholders, agree to (i) any modification of, or to the waiver or authorisation of any breach or proposedbreach of, any of the provisions of the Notes or (ii) determine without the consent of the Noteholders thatany Event of Default or potential Event of Default shall not be treated as such, in the circumstancesdescribed in Condition 10.

In addition, the conditions of the Notes contain provision for the substitution of another company asprincipal debtor under any Notes in place of the Issuer, in the circumstances described in Condition 14.

EU Savings Directive

Under EC Council Directive 2003/48/EC on the taxation of savings income, Member States are requiredto provide to the tax authorities of another Member State details of payments of interest (or similarincome) paid by a person within its jurisdiction to an individual resident in that other Member State or to

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certain limited types of entities established in that other Member State. However, for a transitional period,Luxembourg and Austria are instead required (unless during that period they elect otherwise) to operatea withholding system in relation to such payments (the ending of such transitional period beingdependent upon the conclusion of certain other agreements relating to information exchange withcertain other countries). A number of non-EU countries and territories including Switzerland haveadopted similar measures (a withholding system in the case of Switzerland).

The European Commission has proposed certain amendments to the Directive, which may, ifimplemented, amend or broaden the scope of the requirements described above.

If a payment were to be made or collected through a Member State which has opted for a withholdingsystem and an amount of, or in respect of, tax were to be withheld from that payment, neither the Issuer,the Guarantor nor any Paying Agent nor any other person would be obliged to pay additional amountswith respect to any Note as a result of the imposition of such withholding tax. The Issuer is required tomaintain a Paying Agent in a Member State that is not obliged to withhold or deduct tax pursuant to theDirective or any law implementing or complying with or introduced to conform to the Directive.

Change of law

The conditions of the Notes and the terms of the Guarantee are governed by English law. No assurancecan be given as to the impact of any possible judicial decision or change to English law or administrativepractice after the date of the issue of the Notes.

Denominations involve integral multiples: definitive Notes

The Notes have denominations consisting of a minimum of F100,000 plus one or more higher integralmultiples of F1,000. It is possible that the Notes may be traded in amounts that are not integral multiplesof F100,000. In such a case a holder who, as a result of trading such amounts, holds an amount which isless than F100,000 in his account with the relevant clearing system at the relevant time may not receive adefinitive Note in respect of such holding (should definitive Notes be printed) and would need to purchasea principal amount of Notes such that its holding amounts to F100,000.

If definitive Notes are issued, holders should be aware that definitive Notes which have a denominationthat is not an integral multiple of F100,000 may be illiquid and difficult to trade.

Risks related to the market generally

Set out below is a brief description of the principal market risks, including liquidity risk, exchange rate risk,interest rate risk and credit risk:

The secondary market generally

The Notes may have no established trading market when issued, and one may never develop. If a marketdoes develop, it may not be liquid. Therefore, investors may not be able to sell their Notes easily or atprices that will provide them with a yield comparable to similar investments that have a developedsecondary market.

Exchange rate risks and exchange controls

The Issuer will pay principal and interest on the Notes and the Guarantor will make any payments underthe Guarantee in euro. This presents certain risks relating to currency conversions if an investor’s financialactivities are denominated principally in a currency or currency unit (the Investor’s Currency) other thaneuro. These include the risk that exchange rates may significantly change (including changes due todevaluation of the euro or revaluation of the Investor’s Currency) and the risk that authorities withjurisdiction over the Investor’s Currency may impose or modify exchange controls. An appreciation in thevalue of the Investor’s Currency relative to the euro would decrease (1) the Investor’s Currency-equivalent yield on the Notes, (2) the Investor’s Currency-equivalent value of the principal payable on theNotes and (3) the Investor’s Currency-equivalent market value of the Notes.

Government and monetary authorities may impose (as some have done in the past) exchange controlsthat could adversely affect an applicable exchange rate. As a result, investors may receive less interest orprincipal than expected, or no interest or principal.

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Interest rate risks

Investment in the Notes involves the risk that subsequent changes in market interest rates may adverselyaffect the value of them.

Legal investment considerations may restrict certain investments

The investment activities of certain investors are subject to legal investment laws and regulations, orreview or regulation by certain authorities. Each potential investor should consult its legal advisers todetermine whether and to what extent (1) the Notes are legal investments for it, (2) the Notes can beused as collateral for various types of borrowing and (3) other restrictions apply to its purchase or pledgeof the Notes. Financial institutions should consult their legal advisers or the appropriate regulators todetermine the appropriate treatment of the Notes under any applicable risk-based capital or similar rules.

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DOCUMENTS INCORPORATED BY REFERENCE

The information set out in the cross-reference tables below, which is contained in the followingdocuments which have previously been published and have been filed with the CSSF, shall beincorporated in, and form part of, this Prospectus. Any information contained in the followingdocuments, but not included in the cross-reference tables set out below, is not incorporated by referencein this Prospectus and should be read for information purposes only.

(a) the audited consolidated financial statements of the Issuer for the year ended 31 December 2009:

Balance Sheet....................................................................................................................... Page 170Income Statement .............................................................................................................. Page 171Statement of Comprehensive Income .......................................................................... Page 172Statement of Changes in Equity..................................................................................... Page 173Statement of Cash Flows ................................................................................................. Page 174Explanatory Notes............................................................................................................... Pages 175 to 278Independent Auditors’ Report......................................................................................... Pages 280 to 281

(b) the audited consolidated financial statements of the Issuer for the year ended 31 December 2008:

Balance Sheet....................................................................................................................... Page 312Income Statement .............................................................................................................. Page 313Statement of Recognised Income and Expenses ...................................................... Page 314Statement of Cash Flows ................................................................................................. Page 315Explanatory Notes............................................................................................................... Pages 316 to 417Independent Auditors’ Report......................................................................................... Page 419

(c) the unaudited interim consolidated financial statements of the Issuer for the nine months ended30 September 2010:

Balance Sheet....................................................................................................................... Page 43Income Statement .............................................................................................................. Page 44Statement of Comprehensive Income .......................................................................... Page 45Statement of Changes in Equity..................................................................................... Page 46Statement of Cash Flows ................................................................................................. Page 48Explanatory Notes............................................................................................................... Pages 49 to 53

(d) the unaudited interim consolidated financial statements of the Issuer for the six months ended30 June 2010:

Balance Sheet....................................................................................................................... Page 57Income Statement .............................................................................................................. Page 58Statement of Comprehensive Income .......................................................................... Page 59Statement of Changes in Equity..................................................................................... Page 60Statement of Cash Flows ................................................................................................. Page 61Explanatory Notes............................................................................................................... Pages 62 to 133Independent Auditors’ Review Report ........................................................................ Page 136

(e) the unaudited interim consolidated financial statements of the Issuer for the six months ended30 June 2009:

Balance Sheet....................................................................................................................... Page 70Income Statement .............................................................................................................. Page 71Statement of Comprehensive Income .......................................................................... Page 72Statement of Changes in Equity..................................................................................... Page 73Statement of Cash Flows ................................................................................................. Page 74Explanatory Notes............................................................................................................... Pages 75 to 164Independent Auditors’ Review Report ........................................................................ Page 168

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(f) the audited consolidated financial statements of the Guarantor for the year ended 31 December2009:

Balance Sheet....................................................................................................................... Page 27Profit and Loss Account ................................................................................................... Page 28Statement of Comprehensive Income .......................................................................... Page 29Statement of Changes in Equity..................................................................................... Page 29Cash flow Statement.......................................................................................................... Page 30Notes to the financial statements.................................................................................. Pages 31 to 111Auditors’ Report .................................................................................................................. Separate

(g) the audited consolidated financial statements of the Guarantor for the year ended 31 December2008:

Balance Sheet....................................................................................................................... Page 3Profit and Loss Account ................................................................................................... Page 4Statement of Recognized Income and Expense ........................................................ Page 5Cash flow Statement.......................................................................................................... Page 6Notes to the financial statements.................................................................................. Pages 7 to 67Auditors’ Report .................................................................................................................. Separate

(h) the English translation filed with the SEC and the CSSF of the information document, dated 3 July2010, on the transaction for the separation of Pirelli & C. Real Estate S.p.A. from the Pirelli Groupthrough the proportional assignment to the shareholders of the Issuer of 487,231,561 of theordinary shares of Pirelli & C. Real Estate S.p.A. held by the Issuer in a ratio of one Pirelli & C. RealEstate S.p.A. share for every Issuer ordinary or savings share held, including:

Balance Sheet....................................................................................................................... Page 75Profit and Loss Account ................................................................................................... Page 76Explanatory notes ............................................................................................................... Pages 77 to 84

Any information not listed in the cross reference list but included in the documents incorporated byreference is given for information purposes only.

The documents referred to above shall be incorporated in, and form part of, this Prospectus, save thatany statement contained in a document which is incorporated by reference herein shall be deemed to bemodified or superseded for the purpose of this Prospectus to the extent that a statement containedherein modifies or supersedes such earlier statement (whether expressly, by implication or otherwise).Any statement so modified or superseded shall not, except as so modified or superseded, constitute apart of this Prospectus.

Following the publication of this Prospectus a supplement may be prepared by the Issuer and approvedby the CSSF in accordance with Article 13 of the Luxembourg Act. Statements contained in any suchsupplement (or contained in any document incorporated by reference therein) shall, to the extentapplicable (whether expressly, by implication or otherwise), be deemed to modify or supersedestatements contained in this Prospectus or in a document which is incorporated by reference in thisProspectus. Any statement so modified or superseded shall not, except as so modified or superseded,constitute a part of this Prospectus.

Copies of documents incorporated by reference in this Prospectus can be obtained from the registeredoffice of the Issuer, from the specified office of the Paying Agent for the time being in London and fromthe website of the Luxembourg Stock Exchange at www.bourse.lu.

Any documents themselves incorporated by reference in the documents incorporated by reference in thisProspectus shall not form part of this Prospectus.

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CONDITIONS OF THE NOTES

The following is the text of the Conditions of the Notes which (subject to modification) will be endorsed oneach Note in definitive form (if issued):

The F500,000,000 5.125 per cent. Guaranteed Notes due 2016 (the Notes, which expression shall in theseConditions, unless the context otherwise requires, include any further notes issued pursuant toCondition 17 and forming a single series with the Notes) of Pirelli & C. S.p.A. (P&C or, unless and until aSubstitution occurs under Condition 14, the Issuer) are constituted by a Trust Deed dated 22 February2011 (the Trust Deed) made between the Issuer, Pirelli Tyre S.p.A. (Pirelli Tyre) as guarantor andDeutsche Trustee Company Limited (the Trustee, which expression shall include its successor(s), anyother trustee or any additional trustee) as trustee for the holders of the Notes (the Noteholders) and theholders of the interest coupons appertaining to the Notes (the Couponholders and the Couponsrespectively). Guarantor shall mean, as the context requires, each of Pirelli Tyre (but only if the PirelliTyre Guarantee is in place in accordance with Condition 3) and P&C (but only if P&C has executed theAdditional Guarantee pursuant to Condition 14(c)).

The statements in these Conditions include summaries of, and are subject to, the detailed provisions ofand definitions in the Trust Deed. Copies of the Trust Deed and the Agency Agreement dated 22 February2011 (the Agency Agreement) made between P&C, Pirelli Tyre, Deutsche Bank AG, London Branch (thePrincipal Paying Agent and, together with any successor or additional paying agents appointed fromtime to time in connection with the Notes, the Paying Agents) and the Trustee are available for inspectionduring normal business hours by the Noteholders and the Couponholders at the registered office for thetime being of the Trustee, being at the date of issue of the Notes at Winchester House, 1 Great WinchesterStreet, London EC2N 2DB, United Kingdom and at the specified office of each of the Paying Agents. TheNoteholders and the Couponholders are entitled to the benefit of, are bound by, and are deemed to havenotice of, all the provisions of the Trust Deed and the Agency Agreement applicable to them.

1. FORM, DENOMINATION AND TITLE

1.1 Form and Denomination

The Notes are in bearer form, serially numbered, in the denominations of F100,000 and integralmultiples of F1,000 in excess thereof up to and including F199,000. No Notes in definitive form willbe issued with a denomination above F199,000. Each Note will be issued with Coupons attached.Notes of one denomination may not be exchanged for Notes of another denomination.

1.2 Title

Title to the Notes and to the Coupons will pass by delivery.

1.3 Holder Absolute Owner

The Issuer, each Guarantor, any Paying Agent and the Trustee may (to the fullest extent permittedby applicable laws) deem and treat the bearer of any Note or Coupon as the absolute owner for allpurposes (whether or not the Note or Coupon shall be overdue and notwithstanding any notice ofownership or writing on the Note or Coupon or any notice of previous loss or theft of the Note orCoupon or of any trust or interest therein) and shall not be required to obtain any proof thereof oras to the identity of such bearer.

2. STATUS OF THE NOTES

The Notes and the Coupons are direct, unconditional and (subject to the provisions of Condition 4)unsecured obligations of the Issuer and (subject as provided above) rank and will rank pari passu,without any preference among themselves, with all other outstanding unsecured andunsubordinated obligations of the Issuer, present and future, but, in the event of insolvency, onlyto the extent permitted by applicable laws relating to creditors’ rights.

3. GUARANTEE

3.1 Guarantee

The payment of the principal and interest in respect of the Notes and all other moneys payable bythe Issuer under or pursuant to the Trust Deed has been, subject to Condition 3.3, unconditionallyand irrevocably guaranteed by Pirelli Tyre (the Pirelli Tyre Guarantee) in the Trust Deed. Unless the

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context otherwise requires, Guarantee shall mean the Pirelli Tyre Guarantee (but only if the PirelliTyre Guarantee is in place in accordance with this Condition 3) and the Additional Guarantee (butonly if P&C has executed the Additional Guarantee pursuant to Condition 14(c)).

3.2 Status of the Guarantee

The obligations (if any) of each Guarantor under its Guarantee constitute direct, (subject to theprovisions of Condition 3.3) unconditional and (subject to the provisions of Condition 4) unsecuredobligations of the relevant Guarantor and (subject as provided above) rank (in the case of the PirelliTyre Guarantee) and will rank pari passu with all other outstanding unsecured and unsubordinatedobligations of the relevant Guarantor, present and future, but, in the event of insolvency, only to theextent permitted by applicable laws relating to creditors’ rights.

3.3 Release and Reappointment of Pirelli Tyre as Guarantor

(a) Subject to Condition 3.3(c)(iii), Pirelli Tyre shall be automatically released from its obligations underthe Pirelli Tyre Guarantee upon delivery of a notice in writing to the Trustee signed by twoauthorised signatories of the Issuer and two authorised signatories of Pirelli Tyre attaching each ofthe following documents, and the Issuer may request that the Trustee confirm the release of PirelliTyre from its obligations under its Guarantee pursuant to this Condition 3.3(a) and the Trustee shallgrant such request within 5 Business Days in London of the request being received if the Trusteehas received such notice and each of the following documents:

(i) a certificate, in or substantially in the form set out in the Trust Deed, signed by two authorisedsignatories of the Issuer, confirming that the consolidated gross financial indebtedness of thePirelli Tyre Group represented not more than 20 per cent. of the consolidated gross financialindebtedness of the P&C Group as at the date of, and as calculated by reference to, the thenlatest annual or semi-annual consolidated financial statements of the Pirelli Tyre Group andthe P&C Group, respectively;

(ii) a certificate, in or substantially in the form set out in the Trust Deed, signed by two authorisedsignatories of the Issuer, confirming that no Event of Default or Potential Event of Default(as defined in the Trust Deed) has occurred and is continuing or would result from the releaseof Pirelli Tyre as Guarantor; and

(iii) a certificate, in or substantially in the form set out in the Trust Deed, signed by two authorisedsignatories of the Issuer and by two authorised signatories of Pirelli Tyre, confirming that noamount owed by Pirelli Tyre under the Pirelli Tyre Guarantee is due and unpaid.

Upon receipt by the Trustee of such notice and documents, Pirelli Tyre shall be automatically,immediately and effectively released from its obligations under the Pirelli Tyre Guarantee.

(b) If Pirelli Tyre is at any time released from its obligations under the Pirelli Tyre Guarantee pursuant toCondition 3.3(a) above, the Issuer shall thereafter (unless and until the occurrence of a PirelliMerger (as defined in Condition 7.4(b)(vi))) be required, subject to Condition 3.3(c) below, within20 days of the date of publication of each of (i) the P&C Group’s annual audited consolidatedfinancial statements, as approved by a meeting of its shareholders and (ii) the P&C Group’ssemi-annual consolidated financial statements, as approved by P&C and reviewed by its auditors, todeliver to the Trustee a certificate (a Compliance Certificate) substantially in the form set out in theTrust Deed and upon which the Trustee may rely absolutely and without further enquiry, signed bytwo authorised signatories of the Issuer and stating that the consolidated gross financialindebtedness of the Pirelli Tyre Group represented not more than 20 per cent. of the consolidatedgross financial indebtedness of the P&C Group as at the date of, and as calculated by reference to,the then latest annual or semi-annual consolidated financial statements (whether audited orunaudited) of the Pirelli Tyre Group and of the P&C Group, respectively.

(c) If the Issuer is unable to make the statement required by and set out in Condition 3.3(b) in theCompliance Certificate in respect of the accounting period to which its then latest annual orsemi-annual consolidated financial statements relate, or if the Issuer otherwise fails to deliver theCompliance Certificate to the Trustee in accordance with Condition 3.3(b) in respect of any suchaccounting period:

(i) the payment of principal and interest in respect of the Notes and all other moneys payable bythe Issuer under or pursuant to the Trust Deed shall immediately be unconditionally and

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irrevocably guaranteed again by Pirelli Tyre as Guarantor on the terms set out in the TrustDeed;

(ii) the Issuer shall be released from its obligations under Condition 3.3(b); and

(iii) Pirelli Tyre may not at any time thereafter be released from its obligations as Guarantorpursuant to the mechanism set out in Condition 3.3(a) above.

(d) Notice of any release or re-appointment of Pirelli Tyre as Guarantor pursuant to this Condition 3 willbe given by the Issuer to the Noteholders in accordance with Condition 13.

4. NEGATIVE PLEDGES

4.1 Negative Pledges

So long as any Note or Coupon remains outstanding (as defined in the Trust Deed), neither theIssuer nor any Guarantor will, and each of the Issuer and each Guarantor shall procure that none ofits Material Subsidiaries will, create or permit to subsist any Security Interest (other than a PermittedSecurity Interest) upon the whole or any part of its present or future business, undertakings, assetsor revenues (including any uncalled capital) to secure Relevant Indebtedness (other than anyRelevant Indebtedness owed by any member of the P&C Group to another member of theP&C Group), without:

(a) at the same time or prior thereto securing the obligations of the Issuer under the Notes, theCoupons and the Trust Deed or, as the case may be, the obligations of the Guarantors underthe Guarantees (if any such obligations exist at such time), equally and rateably therewith tothe reasonable satisfaction of the Trustee; or

(b) providing such other security, guarantee, indemnity or other arrangement for the obligationsof the Issuer under the Notes, the Coupons and the Trust Deed or, as the case may be, theobligations of the Guarantors under the Guarantees (if any such obligations exist at suchtime), as the Trustee may in its absolute discretion consider to be not materially less beneficialto the interests of the Noteholders.

4.2 Interpretation

For the purposes of these Conditions:

(a) Business Day means, in relation to any place, a day on which commercial banks and foreignexchange markets settle payments and are open for general business (including dealing inforeign exchange and foreign currency deposits) in that place;

(b) Material Subsidiary means at any time a Subsidiary of the Issuer or any Guarantor whose totalassets or total revenues (in each case, consolidated in the case of a Subsidiary which itself hasSubsidiaries) equals or exceeds 10 per cent. of the consolidated total assets or consolidatedtotal revenues of the P&C Group, as calculated by reference to the then latest audited annualfinancial statements (consolidated in the case of a Subsidiary which itself has Subsidiaries) ofsuch Subsidiary and the then latest audited annual consolidated financial statements of theP&C Group. For this purpose:

(i) the total revenues and total assets of a Subsidiary will be determined from its then latestaudited annual financial statements (consolidated in the case of a Subsidiary which itselfhas Subsidiaries) and, if applicable, upon which the then latest audited annualconsolidated financial statements of the P&C Group have been based;

(ii) if a Subsidiary becomes a member of the P&C Group after the date on which the thenlatest audited annual consolidated financial statements of the P&C Group have beenprepared, the total revenues and total assets of that Subsidiary will be determined fromits latest audited financial statements (consolidated in the case of a Subsidiary whichitself has Subsidiaries); and

(iii) the consolidated total revenues and consolidated total assets of the P&C Group will bedetermined from its then latest audited annual consolidated financial statementsadjusted (where appropriate) to reflect the total revenues or total assets of any companyor business subsequently acquired or disposed of,

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and so that any Person in respect of which any Material Subsidiary is a Subsidiary shall also bea Material Subsidiary.

Notwithstanding the above, any Subsidiary of the Issuer or any Guarantor to which the Issuer,any Guarantor or a Material Subsidiary disposes of all or substantially all of its assets will betreated as a Material Subsidiary, but only until it is demonstrated (by reference to the accountsof that Subsidiary referred to in paragraphs (i) and (ii) above and the audited consolidatedfinancial statements of the P&C Group referred to in paragraph (iii) above for a period endedafter that transfer) not to be a Material Subsidiary according to the tests set out above.

A report by two authorised signatories of the Issuer, addressed to the Trustee, that in theiropinion a Subsidiary is or is not or was or was not at any particular time or throughout anyspecified period a Material Subsidiary, may be relied upon by the Trustee without furtherenquiry or evidence and, if relied upon by the Trustee, shall, in the absence of manifest orproven error, be conclusive and binding on all parties;

(c) P&C Group means P&C and its Subsidiaries from time to time;

(d) Person means any individual, company, corporation, firm, partnership, joint venture,association, organisation, state or agency of a state or other entity, whether or not havingseparate legal personality;

(e) Pirelli Tyre Group means Pirelli Tyre and its Subsidiaries from time to time;

(f) Permitted Security Interest means:

(i) any Security Interest the creation of which has been approved by an ExtraordinaryResolution (as defined in the Trust Deed) of the Noteholders; or

(ii) any Security Interest existing at 22 February 2011, so long as such Security Interestsecures only the indebtedness that it secured at that date; or

(iii) any Security Interest arising by operation of law; or

(iv) any Security Interest created by any entity upon the whole or any part of its undertakingor assets and subsisting at the time such entity (A) merges or consolidates with or isdemerged, contributed or merged into or transferred to the Issuer, any Guarantor or anyMaterial Subsidiary, (B) becomes a Material Subsidiary or (C) sells, contributes ortransfers all or substantially all of its assets to the Issuer, any Guarantor or any MaterialSubsidiary, provided that such Security Interest was not created in connection with, or incontemplation of, such merger, consolidation, demerger, contribution, transfer or sale orsuch entity becoming a Material Subsidiary and provided further that the amount ofRelevant Indebtedness secured by such Security Interest is not subsequently increased;or

(v) any Security Interest created or outstanding on Relevant Indebtedness in connectionwith convertible or exchangeable bonds or notes where the encumbrance created is overthe assets into which the convertible or exchangeable bonds or notes may be convertedor exchanged (as the case may be) and secures only the obligation of the relevant issueror guarantor of the bonds or notes to effect the conversion or exchange (as the casemay be) of the bonds or notes into such assets; or

(vi) any Security Interest to secure Relevant Indebtedness upon or with respect to anypresent or future assets, receivables, remittances or payment rights of the Issuer, anyGuarantor or any Material Subsidiary (the Charged Assets) which is created pursuant toany securitisation or like arrangements whereby all or substantially all the paymentobligations in respect of such Relevant Indebtedness are to be discharged solely from theCharged Assets.

(g) Relevant Indebtedness means:

(i) any present or future indebtedness (whether being principal, premium, interest or otheramounts) of any Person, with an original maturity of more than one year from its date ofissue, for or in respect of any notes, bonds, debentures, debenture stock, loan stock orother debt securities which are, or are capable of being, listed, quoted or traded on anystock exchange, over-the-counter or other securities market (but, for the avoidance of

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doubt, excluding any such indebtedness in the form of bank loans (including, but notlimited to, syndicated loans, bilateral loans and sub-participated loans) or derivativecontracts (including, but not limited to, swaps, options, forwards and futures)); and

(ii) any guarantee or indemnity in respect of any such indebtedness;

(h) Security Interest means any mortgage, charge, pledge, lien or other security interestincluding, without limitation, anything analogous to any of the foregoing under the laws of anyjurisdiction;

(i) Subsidiary means an entity of which a Person has direct or indirect control and control for thispurpose means (i) the direct or indirect ownership of more than 50 per cent. of the VotingShare Capital of the relevant entity or (ii) the right to appoint or remove a majority of the boardof directors of the relevant entity, whether by contract or otherwise; and

(j) Voting Share Capital means, in respect of any Person, shares that carry a right to vote in anordinary general meeting of that Person.

5. INTEREST

5.1 Interest Rate and Interest Payment Dates

The Notes bear interest on their outstanding principal amount from and including 22 February 2011at the rate of 5.125 per cent. per annum, payable annually in arrear on 22 February of each year(each an Interest Payment Date). The first payment (representing a full year’s interest) shall bemade on 22 February 2012.

5.2 Interest Accrual

Each Note will cease to bear interest from and including its due date for redemption unless, upondue presentation, payment of the principal in respect of the Note is improperly withheld or refusedor unless default is otherwise made in respect of payment, in which event interest shall continue toaccrue as provided in the Trust Deed.

5.3 Calculation of Broken Interest

When interest is required to be calculated in respect of a period of less than an Interest Period, itshall be calculated on the basis of (a) the actual number of days in the period from and including thedate from which interest begins to accrue (the Accrual Date) to but excluding the date on which itfalls due divided by (b) the actual number of days from and including the Accrual Date to butexcluding the next following Interest Payment Date. The period beginning on the issue date of theNotes and ending on (but excluding) the first Interest Payment Date and each successive periodbeginning on an Interest Payment Date and ending on (but excluding) the next succeeding InterestPayment Date shall be an Interest Period.

6. PAYMENTS

6.1 Payments in respect of Notes

Payments of principal and interest in respect of each Note will be made against presentation andsurrender (or, in the case of part payment only, endorsement) of the Note, except that payments ofinterest due on an Interest Payment Date will be made against presentation and surrender (or, in thecase of part payment only, endorsement) of the relevant Coupon, in each case at the specified officeoutside the United States of any of the Paying Agents.

6.2 Method of Payment

Payments will be made by credit or transfer to a euro account (or any other account to which euromay be credited or transferred) specified by the payee and maintained with a bank in a city in whichbanks have access to the TARGET2 System.

6.3 Missing Unmatured Coupons

Each Note should be presented for redemption together with all relative unmatured Coupons, failingwhich the full amount of any relative missing unmatured Coupon (or, in the case of payment notbeing made in full, that proportion of the full amount of the missing unmatured Coupon which theamount so paid bears to the total amount due) will be deducted from the amount due for payment.Each amount so deducted will be paid in the manner mentioned above against presentation and

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surrender (or, in the case of part payment only, endorsement) of the relative missing Coupon at anytime before the expiry of 10 years after the Relevant Date (as defined in Condition 8.2) in respect ofthe relevant Note (whether or not the Coupon would otherwise have become void pursuant toCondition 9) but not thereafter.

6.4 Payments subject to Applicable Laws

Payments in respect of principal and interest on the Notes are subject in all cases to any fiscal orother laws and regulations applicable in the place of payment, but without prejudice to theprovisions of Condition 8.

6.5 Payment only on a Presentation Date

A holder shall be entitled to present a Note or Coupon for payment only on a Presentation Date andshall not, except as provided in Condition 5, be entitled to any further interest or other payment if aPresentation Date is after the due date.

Presentation Date means a day which (subject to Condition 9):

(a) is or falls after the relevant due date;

(b) is a Business Day in the place of the specified office of the Paying Agent at which the Note orCoupon is presented for payment; and

(c) in the case of payment by credit or transfer to a euro account as referred to above, is aTARGET2 Settlement Day.

In this Condition, TARGET2 Settlement Day means any day on which the Trans-EuropeanAutomated Real-Time Gross Settlement Express Transfer (TARGET2) System is open.

6.6 Initial Paying Agents

The names of the initial Paying Agents and their initial specified offices are set out at the end ofthese Conditions. The Issuer and each Guarantor reserve the right, subject to the prior writtenapproval of the Trustee, at any time to vary or terminate the appointment of any Paying Agent andto appoint additional or other Paying Agents provided that:

(a) there will at all times be a Principal Paying Agent;

(b) so long as the Notes are listed on any stock exchange or admitted to trading by any relevantauthority, there will at all times be a Paying Agent with a specified office in such place as maybe required by the rules and regulations of the relevant stock exchange or other relevantauthority;

(c) there will at all times be a Paying Agent in a Member State of the European Union (so long asthere is such a Member State) that is not obliged to withhold or deduct tax pursuant toEuropean Council Directive 2003/48/EC or any law implementing or complying with, orintroduced in order to conform to, such Directive; and

(d) there will at all times be a Paying Agent in a jurisdiction within Europe, other than thejurisdiction in which the Issuer or any Guarantor is incorporated.

Notice of any termination or appointment and of any changes in specified offices will be given to theNoteholders promptly by the Issuer in accordance with Condition 13.

7. REDEMPTION AND PURCHASE

7.1 Redemption at Maturity

Unless previously redeemed or purchased and cancelled as provided below, the Issuer will redeemthe Notes at their principal amount on 22 February 2016.

7.2 Redemption for Taxation Reasons

If the Issuer satisfies the Trustee immediately before the giving of the notice referred to below that:

(a) as a result of any change in, or amendment to, the laws or regulations of a RelevantJurisdiction (as defined in Condition 8.2), or any change in the application or officialinterpretation of the laws or regulations of a Relevant Jurisdiction, which change or

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amendment becomes effective after 22 February 2011, on the next Interest Payment Dateeither (i) the Issuer would be required to pay additional amounts as provided or referred to inCondition 8 or (ii) the Issuer is unable to make payment itself and each Guarantor in makingpayment would be required to pay such additional amounts; and

(b) the requirement cannot be avoided by the Issuer or, as the case may be, the relevantGuarantor taking reasonable measures available to it,

the Issuer may at its option, having given not less than 30 nor more than 60 days’ notice to theNoteholders in accordance with Condition 13 (which notice shall be irrevocable and shall specify thedate fixed for redemption), redeem all the Notes, but not some only, at any time at their principalamount together with interest accrued and unpaid, if any, to but excluding the date of redemption,provided that no such notice of redemption shall be given earlier than 90 days prior to the earliestdate on which the Issuer or, as the case may be, the relevant Guarantor would be required to paysuch additional amounts, were a payment in respect of the Notes then due. Prior to the publicationof any notice of redemption pursuant to this Condition 7.2, the Issuer shall deliver to the Trustee acertificate signed by two authorised signatories of the Issuer or, as the case may be, the relevantGuarantor stating that the requirement referred to in (a) above will apply on the next InterestPayment Date and cannot be avoided by the Issuer or, as the case may be, the relevant Guarantortaking reasonable measures available to it, and the Trustee shall be entitled to accept the certificateas sufficient evidence of the satisfaction of the conditions precedent set out above, in which event itshall be conclusive and binding on the Noteholders and the Couponholders.

7.3 Redemption at the Option of the Issuer

The Issuer may, having given not less than 30 nor more than 60 days’ notice to the Noteholders inaccordance with Condition 13 (which notice shall be irrevocable and shall specify the date fixed forredemption), redeem all, but not some only, of the Notes, on 22 August 2012 (being the date falling18 months after the issue date of the Notes) or at any time thereafter (the Optional RedemptionDate) at a redemption price per Note equal to the greater of:

(a) 100 per cent. of the principal amount of the Note; or

(b) as determined by the Reference Dealers (as defined below), the sum of the then current valuesof the remaining scheduled payments of principal and interest (not including any interestaccrued on the Notes to, but excluding, the Optional Redemption Date) discounted to theOptional Redemption Date on an annual basis (based on the actual number of days elapseddivided by 365 or (in the case of a leap year) by 366) at the Reference Dealer Rate (as definedbelow) plus 0.25 per cent.,

plus, in each case, any interest accrued on the Notes to, but excluding, the Optional RedemptionDate.

As used in this Condition 7.3:

(i) Reference Bund means the F11,000,000,000 2 per cent. German Federal Government Bondsof Bundesrepublik Deutschland due 26 February 2016, with ISIN DE0001141596;

(ii) Reference Dealers means Banca IMI S.p.A., Barclays Bank PLC, Mediobanca – Banca di CreditoFinanziario S.p.A., Société Générale and UniCredit Bank AG; and

(iii) Reference Dealer Rate means with respect to the Reference Dealers and the OptionalRedemption Date, the average of the five quotations of the mid-market annual yield tomaturity of the Reference Bund or, if the Reference Bund is no longer outstanding, a similarsecurity in the reasonable judgement of the Reference Dealers at 11.00 a.m. London time onthe third business day in London preceding the Optional Redemption Date quoted in writing tothe Issuer and the Trustee by the Reference Dealers.

7.4 Redemption at the Option of the Holders

(a) Redemption at the Option of the Holders upon a Put Event

If a Put Event occurs, each Noteholder shall have the option (a Put Option) (unless prior to thegiving of the relevant Put Notice the Issuer has given notice of redemption under Condition 7.2 orCondition 7.3 above) to require the Issuer to redeem (or, at the Issuer’s option, to purchase) theNotes of such holder (in whole but not in part) on the Put Date at 101 per cent. of their principal

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amount, together with interest accrued to (but excluding) the date of redemption or purchase (asthe case may be).

(b) Interpretation

For the purposes of these Conditions:

(i) Camfin means Camfin S.p.A., any Person of which Camfin S.p.A. is a Subsidiary, any (direct orindirect) Subsidiary of any of the aforementioned Persons and any Person into which CamfinS.p.A. is merged;

(ii) a Change of Material Shareholding shall occur if:

(A) P&C ceases to be the owner (directly or indirectly) of 85% of the Voting Share Capital inPirelli Tyre (other than upon the occurrence of a Pirelli Merger, if any); or

(B) a Person (other than Camfin) or Persons acting in concert (other than the PermittedHolders) (i) becomes the owner, directly or indirectly, of more than 50% of the VotingShare Capital in P&C or (ii) acquires the right, by contract or otherwise, to appoint orremove a majority of the board of directors of P&C (in each case, a 50% Trigger); or

(C) Camfin ceases to be the owner (directly or indirectly) of at least 20% of the Voting ShareCapital in P&C (the 20% Trigger);

(iii) Change of Material Shareholding Period means the period from the date of the first publicannouncement of an arrangement, event or proposal that could result in a Change of MaterialShareholding until the end of a 90-day period following public notice of the occurrence of therelevant Change of Material Shareholding (or such longer period as the rating of the Notes isunder publicly announced examination by a Ratings Agency for ratings assignment or ratingsreview, provided that such ratings assignment or ratings review period (A) has been publiclyannounced within the period ending 90 days after the date of the public notice of theoccurrence of the relevant Change of Material Shareholding and (B) does not exceed a periodof 60 days after the date of the announcement referred to in the preceding paragraph (A));

(iv) Investment Grade means a credit rating assigned by a Ratings Agency which is at least equalto, or better than, Baa3 (in the case of Moody’s), BBB- (in the case of Fitch or Standard &Poor’s) or an equivalent rating awarded by another Ratings Agency;

(v) Permitted Holders means the parties to the Shareholders’ Agreement if and for so long asCamfin is (i) a party to the Shareholders’ Agreement and (ii) the owner (directly or indirectly)of an amount of Voting Share Capital in P&C which is greater than the amount of Voting ShareCapital in P&C owned (directly or indirectly) by any other single party to the Shareholders’Agreement, acting by itself;

(vi) Pirelli Merger means any amalgamation, merger, consolidation or similar transaction carriedout between P&C and Pirelli Tyre and pursuant to which only a single entity (the SurvivingEntity) survives and the Surviving Entity has assumed in accordance with applicable law all ofthe assets and liabilities of P&C and Pirelli Tyre prior to the date of the relevant amalgamation,merger, consolidation or similar transaction, including all the rights and obligations of P&Cand Pirelli Tyre under or in respect of the Notes, the Coupons and the Trust Deed, and,following a Pirelli Merger, references in these Conditions and the Trust Deed to P&C or PirelliTyre shall be construed as references to the Surviving Entity;

(vii) Put Date means the day which is seven days after the expiration of the Put Period;

(viii) a Put Event shall occur if a Change of Material Shareholding occurs, provided that, in respectof a Change of Material Shareholding which is a 50% Trigger or a 20% Trigger, such Changeof Material Shareholding results in a Ratings Downgrade;

(ix) Put Event Notice means a notice given by the Issuer to the Noteholders in accordance withCondition 13 specifying:

(A) that Noteholders are entitled to exercise the Put Option;

(B) the procedure for exercising the Put Option; and

(C) such other information relating to the Put Option as the Trustee may require;

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(x) Put Period means 90 days from the date on which the Put Event Notice is duly given to theNoteholders;

(xi) Ratings Agency means Moody’s Investors Services Ltd (Moody’s), Fitch Ratings Ltd (Fitch),Standard & Poor’s Rating Services, a division of the McGraw Hill Companies Inc. (Standard &Poor’s) or any of their successors, or any other internationally recognised credit rating agencyof equivalent standing;

(xii) a Ratings Downgrade will be deemed to occur if, immediately prior to the commencement ofa Change of Material Shareholding Period, the Notes carry:

(A) an Investment Grade rating from any Ratings Agency and such rating is, during theChange of Material Shareholding Period, either downgraded below Investment Grade orwithdrawn and such rating is not, within the relevant Change of Material ShareholdingPeriod, subsequently (in the case of a downgrade) upgraded by such Ratings Agency toan Investment Grade rating or (in the case of a withdrawal) replaced by an InvestmentGrade rating from another Ratings Agency; or

(B) no credit rating and no Ratings Agency assigns to the Notes an Investment Grade ratingduring the Change of Material Shareholding Period,

provided, however, that a Ratings Downgrade shall not be deemed to occur if the RatingsAgency making the downgrade or withdrawal in rating to which paragraph (A) of thisdefinition would otherwise apply does not announce or publicly confirm or inform the Trusteeor the Issuer in writing at its request that the downgrade or withdrawal, as the case may be,was the result, in whole or in part, of the applicable Change of Material Shareholding; and

(xiii) Shareholders’ Agreement means the agreement in place between Camfin and certain othershareholders of P&C as at the date hereof, as amended or restated from time to time.

(c) Procedure for exercise of Put Options

Promptly upon the Issuer becoming aware that a Put Event has occurred and in any case not laterthan 14 days thereafter, the Issuer shall, and promptly upon and in any event within 90 days of theTrustee becoming aware that a Put Event has occurred the Trustee may, and if so requested inwriting by the holders of at least one-quarter in principal amount of the Notes then outstanding or ifso directed by an Extraordinary Resolution of the Noteholders shall, (subject in each case to theTrustee being indemnified and/or secured and/or prefunded to its satisfaction), give a Put EventNotice to the Noteholders.

To exercise the Put Option, the holder of the Notes must deliver at the specified office of any PayingAgent on any Business Day at the place of such specified office falling within the Put Period, a dulysigned and completed notice of exercise in the form (for the time being current and which may, ifthis Note is held through Euroclear Banking S.A./N.V. (Euroclear) or Clearstream Banking, sociétéanonyme (Clearstream, Luxembourg), be any form acceptable to Euroclear and Clearstream,Luxembourg delivered in a manner acceptable to Euroclear and Clearstream, Luxembourg)obtainable from any specified office of any Paying Agent (a Put Notice) and in which the holdermust specify a bank account to which payment is to be made under this Condition 7.4 accompaniedby such Notes and all Coupons appertaining thereto or evidence satisfactory to the Paying Agentconcerned that such Notes and all Coupons appertaining thereto will, following the delivery of thePut Notice, be held to its order or under its control. A Put Notice given by a holder of any Note shallbe irrevocable except where, prior to the due date of redemption, an Event of Default has occurredand is continuing, in which event such holder, at its option, may elect by notice to the Issuer towithdraw the Put Notice.

(d) Duties of the Trustee in connection with a Put Event

The Trustee is under no obligation to ascertain whether a Put Event or any event which could leadto the occurrence of or could constitute a Put Event has occurred and, until it shall have actualknowledge or notice pursuant to the Trust Deed to the contrary, the Trustee may assume that noPut Event or other such event has occurred.

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7.5 Purchases

The Issuer, any Guarantor or any of the Issuer’s other Subsidiaries (as defined above) may at anytime purchase Notes (provided that all unmatured Coupons appertaining to the Notes arepurchased with the Notes) in any manner and at any price. Such Notes may be held, reissued, resoldor, at the option of the Issuer, such Guarantor or such Subsidiary, surrendered to any Paying Agentfor cancellation.

7.6 Cancellations

All Notes which are (a) redeemed or (b) purchased and cancelled pursuant to Condition 7.5,together with all relative unmatured Coupons attached to the Notes or surrendered with the Notes,may not be held, reissued or resold.

7.7 Notices Final

Upon the expiry of any notice as is referred to in Condition 7.2, 7.3 or 7.4 above, the Issuer shall bebound to redeem the Notes to which the notice refers in accordance with the terms of suchCondition (in the case of Condition 7.4 above, save as otherwise provided therein).

8. TAXATION

8.1 Payment without Withholding

All payments in respect of the Notes by or on behalf of the Issuer or any Guarantor shall be madewithout withholding or deduction for, or on account of, any present or future taxes, duties,assessments or governmental charges of whatever nature (Taxes) imposed or levied by or on behalfof the Relevant Jurisdiction, unless the withholding or deduction of the Taxes is required by law. Inthat event, the Issuer or, as the case may be, the relevant Guarantor will pay such additionalamounts as may be necessary in order that the net amounts received by the Noteholders andCouponholders after the withholding or deduction shall equal the respective amounts which wouldhave been receivable in respect of the Notes or, as the case may be, Coupons in the absence of thewithholding or deduction; except that no additional amounts shall be payable in relation to anypayment in respect of any Note or Coupon:

(a) presented for payment by or on behalf of, a holder who is liable to the Taxes in respect of theNote or Coupon by reason of his having some connection with the Relevant Jurisdiction otherthan the mere holding of the Note or Coupon; or

(b) presented for payment in the Republic of Italy; or

(c) presented for payment by or on behalf of a holder who would not be liable or subject to thewithholding or deduction by making a declaration of non-residence or other similar claim forexemption to the relevant tax authority; or

(d) where such withholding or deduction is imposed on a payment to an individual and is requiredto be made pursuant to European Council Directive 2003/48/EC or any law implementing orcomplying with, or introduced in order to conform to, such Directive; or

(e) presented for payment by or on behalf of a holder who would have been able to avoid suchwithholding or deduction by presenting the relevant Note or Coupon to another Paying Agentin a Member State of the European Union; or

(f) presented for payment more than 30 days after the Relevant Date (as defined below) except tothe extent that a holder would have been entitled to additional amounts on presenting thesame for payment on the last day of the period of 30 days assuming, whether or not such is infact the case, that day to have been a Presentation Date (as defined in Condition 6); or

(g) on account of imposta sostitutiv