What are minibond
Minibonds are medium-long term bonds issued by privately held small and medium-sized enterprises (SMEs), aimed at funding their development plans, extraordinary investments or refinancing operations. They allow SMEs to access capital markets, reducing their dependance on banks’ financing.
Minibond issue has advantages for companies in terms of:
- debt diversification and less dependence on the banking funding;
- opportunity to periodically incur only the cost of interest (coupons) during the life of the instrument;
- tax incentives (deductibility of interest expense up to 30%, deductibility of issuance costs in the same year in which they are incurred, exemption of withholding tax on income paid);
- brand promotion.
SMEs that want to issue minibonds must become more transparent and disclose their historical financial data and forecasts (business plan) to potential investors. The more information you give to the market, the more attention you’ll receive from investors. To this purpose, companies typically involve an advisor, who preliminarily carries out an assessment on the feasibility of the transaction and assist the company with the drafting of the business plan. The presence of an advisor significantly strengthens the credibility of the company when interacting with investors.
Quantitative aspects based on future forecasts and prospective trends of the business
In the terms and conditions of the minibond investors may require to include some binding clauses on the company's governance, the so-called covenants Covenants must be complied with during the lifetime of the security, otherwise the bond could either be withdrawn or renegotiated at less favorable terms with investors.
Most common covenants are:
- safeguard clauses: for the entire duration of the bond, the issuer agrees not to grant liens, mortgages or other collateral on its tangible and intangible assets, on its credits and on its holdings with some exceptions to be negotiated between the parties from time to time
- use of proceeds: the proceeds from the bond issuance must be allocated according to the purposes established
- change of control: in case of a change in the issuer's ownership, the investor has the right to demand the bond's early repayment
- limitation on dividend: limits to dividend distribution
- informativa sui bilanci: need to prepare consolidated financial statements to be certified once a year and to draft a consolidated half-year situation by the first nine months of the year
- limitation on indebtedness: clauses maintaining Net Debt / EBITDA and Gross Debt / EBITDA ratios below set thresholds, to be periodically monitored).
The business plan is the dress code to access capital markets and represents an important moment for the development and growth of a company.
It is a well-structured and complex document, not just a spreadsheet with algebraic calculations; it must illustrate, both in quantitative and qualitative terms, who the company is, who its competitors are and why, the company’s history and its plans for the future, at which results does it aim. Basic requisites are financial sustainability, soundness and consistency of scenarios.
A business plan must be financially sustainable: economic and financial forecasts must highlight that the financing needs are correctly met by financial sources which are reasonably conceivable both in time and form. A business plan must also be based on realistic and proved scenarios, and the expected results must appear reasonably achievable, based on the historical results and expected evolution of market and competition.
Epic provides a template with a table of must-have contents that investors seek in a business plan. Such template can simplify drafting the business plan by the company itself or by its financial advisors.
Following the underwriting phase, companies can list the minibond on Borsa Italiana’s ExtraMOT PRO, the professional segment of the bond regulated market with relatively low costs and simplified procedures. Epic is not involved in the listing process: the company will need assistance by a legal counsel (and by the advisor, in case) in order to draft a brief document detailing and explaining the risk associated with the bond.
With the listing of the bonds the visibility of the issuer with its customers, suppliers and the financial system is increased. The issuer increases its attractiveness towards more investors, thanks to the enhanced image and reputation as well as to the transparency on its financial information.