securitisations sector comment positive for italian abs ... · the decree defines “innovative”...

STRUCTURED FINANCE

SECTOR COMMENT8 APRIL 2015

ANALYST CONTACTS

Monica Curti 3902-9148-1106VP-Senior [email protected]

Valentina di Vito [email protected]

Italian SME ABS

The Extension of Equity Crowdfundingto Innovative SMEs is Only MildlyPositive for Italian ABS SMESecuritisationsOn 24 March 2015, the Italian parliament passed Decree No. 3, which contains measuresregarding the banking system and investments. The decree extends access to equitycrowdfunding to small and medium-sized enterprises (SMEs) that it defines as beinginnovative. Previously, only innovative start-up companies had access to this, while a lack ofequity has held up overall SME funding, according to the Association for Financial Marketsin Europe. Innovative Italian start-ups have had limited access so far: less than 20 projects

received financing and less than €1.5 million of capital has been raised1 .

Equity crowdfunding provides an alternative source of funding and is credit positive forinnovative Italian SMEs. However, it is only mildly positive for Italian asset-backed securities(ABS) with underlying SME loans. We expect that few SME borrowers in Italian ABS pools willqualify as being innovative under the decree.

Alternative funding for Italian innovative SMEs will improve theircreditworthinessEquity crowdfunding consists of raising venture capital through online portals, as analternative tool to increase equity. This measure falls within the scope of and reinforces thegovernment's aim to promote Italian SMEs, by supporting their capitalization and facilitatingtheir access to funding. Access to funding through the traditional channels of bank lendingand capital markets has been challenging for Italian SMEs in recent years due to tougheconomic conditions. This coincided with a 5% decrease in the number of SMEs operating

in Italy between 2008 and 20132 . Italian SMEs typically have lower capitalisation than otherEuropean SMEs (see Exhibit 1). Equity crowdfunding is therefore an especially useful fundingtool for Italian “innovative” SMEs, as it is expected to improve their creditworthiness and

make them attractive to bank lenders by reducing their debt-to-equity ratio3 .

The decree defines “innovative” SMEs and expands the scope of existing legislation on equitycrowdfunding to include them (see “Definition of an innovative SME” below). Italy was the

first European country to adopt ad-hoc rules in 2012/20134 . Lending-based crowdfunding is

currently still unregulated in Italy5 .

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This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page onwww.moodys.com for the most updated credit rating action information and rating history.

2 8 APRIL 2015 ITALIAN SME ABS : THE EXTENSION OF EQUITY CROWDFUNDING TO INNOVATIVE SMES IS ONLY MILDLY POSITIVE FOR ITALIAN ABS SMESECURITISATIONS

To qualify as being innovative, an SME would need to allocatee a certain proportion of its spending on research, development andinnovation, while a proportion of its employees would need to meet certain academic criteria.

Exhibit 1

SME Financing: Equity and liabilities (2012)

Countries Total equity on total balance sheet Current debt on total assetsItaly 31% ~48%Germany 36% 30%Spain 47% ~29%Belgium 46% ~29%

Source: Get Insights into 2012 data, Bank for the accounts of companies harmonized, July 2014.

Definition of an innovative SME

Under the decree, innovative SMEs are companies that, amongst other things:

(1) qualify as SMEs under Commission Recommendation 2003/361/EC, i.e., employing fewer than 250 persons and have a maximumannual turnover of €50 million, and/or a maximum annual balance sheet total of €43 million; and

(2) comply with at least two of the following criteria: (i) expenses allocated to research, development and innovation are equal to, orhigher than 3% of the highest value between (a) the company’s production cost and (b) the company’s production value; (ii) either(y) one-fifth or more of the overall work force consists of employees with a PhD, or in the process of obtaining one, or individuals witha degree who have completed a certified research program of at least three years in Italy or abroad; or (x) one-third or more of theoverall work force consists of individuals with a masters degree (laurea magistrale); (iii) it is the owner or the assignee of an industrialproperty right (e.g., a patent) which is pertinent to the company’s core business.

Equity crowdfunding is only mildly positive for Italian ABS SME deals, as few SMEs will benefit fromthe new rules.The decree's scope is narrow, as the government estimates that only 7,000 SMEs would potentially qualify as innovative out of Italy'stotal 3.7 million SMEs. In 2012, only 10% of Italian manufacturing companies qualified as being high technology-intensive accordingto the Statistical Classification of Economic Activites in the European Community (NACE). High technology-intensive SMEs wouldneed to have above-average research and development expenditures and value added activites (see Exhibit 2). ABS SME securitisationstypically refer to the same SME definition, but their pools tend neither to include start-ups nor many innovative SMEs as defined underthe decree.

Exhibit 2

Technology intensity in percentage of total manufacturing companies (all size) by country (manufacturing gross value added)

High-technology[1] Medium-high-technology[2]Italy 10% 37%Germany 16% 59%Spain 5% 34%Belgium 15% 31%

[1] Defined using NACE as Manufacture of basic pharmaceutical products and pharmaceutical preparations (21) and Manufacture of computer, electronic and optical products (26).[2] Defined using NACE as Manufacture of chemicals and chemical products (20); Manufacture of electrical equipment (27); Manufacture of machineryand equipment n.e.c. (28);Manufacture of motor vehicles, trailers and semi-trailers (29); and Manufacture of other transport equipment (30).

Source: Get Insights into 2012 data, Bank for the Accounts of Companies Harmonized, July 2014.



Endnotes1 As of April 2015, for more details, see Osservatorio Crowdfunding, Politecnico di Milano.

2 2014 SBA Fact Sheet Italy, European Commission.

3 AFME report states that in Europe “(…) lack of equity is a key bottleneck to the provision of further overall SME funding; the US has a much moredeveloped equity network for SMEs” (for more details, see Bridging the growth gap, AFME, February 2015).

4 The Italian Law Decree No. 179/2012, so-called “Decreto Crescita Bis”, containing measures aimed at boosting economic growth in Italy, introduced thedefinition of “innovative” start-up companies and enabled them to use equity crowdfunding as an alternative funding tool, subject to the adoption ofimplementing rules by CONSOB, the Italian financial regulator. On 26 June 2013, CONSOB approved, by way of resolution No. 18592, the regulationimplementing the provisions of the Decreto Crescita Bis on equity crowdfunding, by setting up a register, held by the regulator, for the enrolment of on-line funding portals, establishing the requirements to be complied with for the purposes of the enrolment and the relevant process, providing for conductrules to be followed by registered portals and relevant sanctions in case of breach, as well as for rules governing the offers to be made through the portals.

5 Performance of lending based crowding in Italy, absent an ad-hoc legislation, is problematic due to Italian statutory framework which restricts thecarrying out of lending activity in Italy vis-a’-vis the public and on a professional basis to duly licensed intermediaries (i.e. banks and regulated financialintermediaries, see 1 Report Italiano sui Mini-Bond, Osservatorio Mini-Bond, Politecnico di Milano, Febbraio 2015).



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ANALYST CONTACTS

MILAN +39.02.9148.1100

Monica Curti +39.02.9148.1106Vice President – Senior [email protected]

LONDON +44.20.7772.5454

Valentina di Vito [email protected]

securitisations sector comment positive for italian abs ... · the decree defines “innovative”...

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