Credit Sector Report Italian Corporate Bonds 20 December 2013 Sector View NEUTRAL 2014 Outlook: Still in the Limelight While the expected domestic economic recovery is still in its infancy, we believe Italian corporates could start seeing some benefits from it in 2014. We are therefore less concerned than previously regarding the fundamental prospects of the companies under our coverage, expecting an overall stable credit profile in 2014. As such, we believe Italian corporate bonds will remain in the limelight next year, with higher spread compression potential compared with the main European benchmark credit indices. In the IG sector, we upgrade our recommendation on EXOR’s bonds to BUY from HOLD, and confirm our BUY recommendation on the bonds of A2A, GTECH, and Snam. In the HY sector, we upgrade our bond recommendation on Rottapharm’s bonds to BUY from HOLD, confirm our BUY recommendation on Enel’s and GTECH’s hybrid bonds, downgrade our recommendation on CNH Industrial’s bonds to SELL from HOLD, and maintain a SELL recommendation on Fiat bonds. Corporate Intesa Sanpaolo Research Department Maria Gabriella Tronconi Credit Analyst +39 02 8794 1117 pl e Moderately Positive View on European Credit Markets in 2014. After the credit spread rally over 2012 and 2013, the scope for further spread compression in 2014 has reduced, in our view. However, technical and fundamental factors remain supportive, particularly the ECB’s accommodative monetary policy, the Eurozone economic recovery, and low default rates. In this benign environment, we believe yield-hungry investors will continue to prefer riskier asset classes, such as peripheral vs. core corporate bonds, HY vs. IG, CDS vs. cash, and subordinated debt vs. senior debt. Sa m Italian Corporate Bonds Still in the Limelight. While the expected domestic economic recovery is still in its infancy, we believe Italian corporates could start seeing some benefits (or less disadvantages) from it in 2014. As a result, we expect an overall stable credit profile for the companies under our coverage, thus confirming our Credit View Neutral on the Italian corporate sector generally. We highlight that most of the companies that we cover are still committed to pursuing a greater geographic sales diversification and maintaining cash conservation policies (cost-cutting, capex containment, prudent shareholders policies). In addition, they present an adequate liquidity and low refinancing risk until 2016-17 on average. On the other hand, they continue to be exposed to risks of political instability, new fiscal austerity measures and regulatory pressures, as well as tighter lending conditions compared to their European competitors. As such, the ratings of companies most exposed to Italy sovereign risk remain at risk of downgrade, in our view. Italian Corporate Primary Market Still Lively. The Italian primary market remained lively in 2013, with 56 new bond issues for a total of EUR 26Bn, although down 9% from the record level of 2012. Increasing bank disintermediation and domestic economic recovery should continue to fuel the primary corporate bond market in Italy in 2014, in our view. Investment recommendations on Italian corporate bonds Investment Grade BUY A2A EXOR GTECH Snam High Yield BUY Enel (hybrid bond) GTECH (hybrid bond) Rottapharm HOLD Acea Atlantia Enel Eni Hera Terna HOLD CIR Finmeccanica Wind Note: No recommendation assigned on Telecom Italia bonds. Source: Intesa Sanpaolo Research See page 44 for full disclosures and analyst certification SELL SELL CNH Industrial Fiat Credit ratings Moody’s Acea Baa2/N Atlantia Baa1/N A2A Baa3/N CIR NA CNH Industrial Ba1/S Enel Baa2/N Eni A3/N EXOR NA Fiat Ba3/N Finmeccanica Ba1/N GTECH Baa3/S Hera Baa1/N Rottapharm B1/N Snam Baa1/N Telecom Italia Ba1/N Terna Baa1/N Wind B1/N S&P BBB-/S BBB+/N BBB/N BB/P BB+/S BBB/N A/CWN BBB+/S BB-/S BB+/S BBB-/P BBB/S BB-/S BBB+/N BB+/N BBB+/N BB-/S Source: rating agencies Prices in this report updated at the close of 18.12.2013 (unless stated otherwise). Credit Sector Report 20 December 2013 Contents European Corporate Bond Market 3 2013 Performance 3 2014 Outlook 4 Italy – 2014: a Year of Transition 6 Italian Corporate Bond Market 8 2013 Performance 8 2014 Outlook 9 12 Italian Corporate Primary Bond Market 15 2013 Performance 15 2014 Outlook 15 Company Section 20 e Italian Corporate Bonds: Investment Recommendations 21 pl ACEA: Credit View Neutral ATLANTIA: Credit View Neutral CIR: Credit View Neutral m A2A: Credit View Positive 22 23 24 CNH INDUSTRIAL: Credit View Neutral 25 ENEL: Credit View Neutral 26 Sa ENI: Credit View Neutral 27 EXOR: Credit View Neutral 28 FIAT: Credit View Neutral 29 FINMECCANICA: Credit View Negative 30 GTECH: Credit View Positive 31 HERA: Credit View Neutral 32 ROTTAPHARM: Credit View Neutral 33 SNAM: Credit View Neutral 34 TELECOM ITALIA: Credit View Not Assigned 35 TERNA: Credit View Neutral 36 WIND: Credit View Neutral 37 Appendix 1 - Italian Corporate Bonds vs. Benchmark Index 38 2 Intesa Sanpaolo Research Department Credit Sector Repo ort D 201 13 20 December European E n Corpora ate Bond d Markett 2013 Perform mance Positive perfformance in 2013 In n detail, the JPPM Corporate All Index tigh htened by 22b bps to 84bps YTD, Y driven by industrial bo onds (-25bps to 84bps YTD D), which outperformed com mpared with fin nancial bonds (-17bps to 83 3bps). As a ressult, all the ind dex levels are now n aligned, in ndicating that the credit markets are on th heir way back to normalisatiion. In terms of o maturities, tthe long-end outperformed (-32bps to 10 09bps above 10Y and -25b bps to 92bps 7-10Y 7 bucket)), while the intermediate ten nors of the cu urve underperrformed the most m (-16bps to 72bps 3-5 Y bucket and d -19bps to 90bps 9 5-7Y buckets). Amon ng rating classees, BBB-rated bonds were th he best perform mers (-50bps to t 117bps), while w the AAA A-rated bonds underperform med the most (+4bps to 19bps), with the e BBB-AAA cu urve flattening g by 54bps YTD to 98bps. The performancce of the HY cash c segment was strong in n 2013 (-152bps Merrill Lyncch EURO HY All A Index to 33 39bps), sustained by investorrs’ hunt for yields, as reflectted by the outp performance of o the lowest raating classes (--302bps to 677 7bps “CCC an nd lower rated” bonds, and -199bps to 423bps B-ratted bonds), whilst w the BB-ra ated bonds underperformed d (-128bps to 269bps). We also highlight that all the HY H rating classes are now po ositioned at th heir lowest leveel in the last 12 2 months. Cash: HY bonds far outperforme ed IG bonds Cash h HY: ML Euro HY All, BB, B, aand CCC indices (ASW spreads) Sa m pl Cash C IG: JPM Co orporate, Finan ncial and Industrial (ASW spre eads) e Th he European ccredit marketss posted a po ositive perform mance in 2013 3 (spreads as at close of 18 8.12.13), supp ported by acco ommodative monetary policyy and gradual economic reco overy, apart frrom a limited sell-off in Jun ne, spurred by investors’ feears of prema ature Fed asse et purchase ta apering. So ource: Intesa Sanpaolo Research elaborration on Bloomberg g data e: Intesa Sanpaolo Research R elaborationn on Bloomberg datta Source Also, A the derivaatives sector pu ut in a positive e performance YTD, outperfo orming the cassh segment in n the IG space, while underperforming it in n the HY spacee. In detail, the e Crossover ind dex was the be est performer among the iTraxx indices (-132bps to 307 7bps on the 5y tenor), follow wed by the Su ubordinated Fiinancial index (-74bps to 137bps). Also, th he Main indexx and the Senio or Financial in ndex managed to tighten YTTD, albeit at a slower pace (--31bps to 77b bps and -34bpss to 92bps, re espectively). W We note that th he 5Y tenor outperformed o tthe 10Y bucket across the board, and th hat all the indiices have now w reached the lowest levels o of the last 12 months. In ad ddition, we no ote that the SSovereign Wesstern Europe index outperfo ormed the Ma ain index (-40b bps YTD to 62 2bps on the 5y tenor), thus t positioning below it and testifying once again n that the no ormalisation process is under way. In ntesa Sanpa aolo Researcch Departme ent Crossover ind dex best performer in the derivativ ve sector 3 Credit Sector Repo ort D 201 13 20 December 5Y 5 SovX WE, M Main, Crossoverr indices 5Y SovX S WE, Senio or and Subordi nate financial indices So ource: Intesa Sanpaolo Research elaborration on Bloomberg g data e: Intesa Sanpaolo Research R elaborationn on Bloomberg datta Source 2014 Outlook k Monetary po olicies still accommodattive, but Fed’s start of tapering should cause some market m volatility In n terms of fun ndamentals, we w highlight th hat the mix o of economic policies, p improvements in financial stabilitty in Europe, and a the absence of tensionss on the comm modities marke ets create a be enign context in 2014, chaaracterised by a moderate eeconomic growth without inflationary pressure. After contracting fo or two years, euro area GDP look set to resume growth in 2014, at a pace of around 1%, on ou ur economists, while inflatio on seems likely to stay close er to 1.0% th han to 2.0% in n the next two years, althoug gh for the euro o area as a whole the risk of deflation is co ontained. Also o, we note thatt Moody’s fore ecasts in its ba se-case scenarrio a stable glo obal default ra ate at 2.7% in November 20 014 from November 2013, an nd from 2.8% expected at YE13, Y much lo ower than thee 4.8% historical average calculated overr the last seve en years. This should be driven by an improvement in Europe to 2.7% % in Novembeer 2014, from 3.1% in November 2013 an nd forecast of 3.3% at YE13 3, whilst a dete erioration in th he US to 2.7% in November 2014, from 2.4% in November 2013 and a forecast of 2.3% at YE13. In add dition, we hig ghlight the im mprovement o of both the raating drift1 (-5.4% in Novem mber, from -10.6% at YE12) and the distressed indexx2 (7.3%, from 12.1% at YE12). Moreo over, the outllook for comp panies’ net Improving fu undamental factors Sa m pl e We W expect Euro opean credit markets m to remain supported by positive te echnical and fu undamental fa actors in 2014.. Among the positive p techniccal factors, thee monetary policies of the central banks in n the advanced d economies reemain very acccommodative: rates close to zero, a comm mitment not to o raise them fo or a long time, and generous liquidity sup ply. However, monetary con nditions will no ot be more favvourable than in 2013 in all countries. In t he Eurozone, it is unclear wh hether new sttimulus measures will be ado opted if the ecconomic recoveery strengthen ns. Should economic data outline the risk of a fall backk into recession n, however, th he ECB could cut rates again, enhance fo orward guidan nce, or launch new LTROs (possibly on thee condition of banks using th he funds to sttep up lending). Conversely, the Federal Re eserve is set to o gradually taper its securitiess purchases to o zero during 2 2014, although it has said it will maintain an ample supply of the mon netary base to o cope with th he system's deemands. These developmentss should proba ably trigger a further rise in n medium and long-term yields on the dollar curves, wh ich in turn sho ould be reflected in other markets, m and th he strength of investors' rea actions after so o many years of o addiction to o monetary sttimulus is clearly an unknow wn factor. Am mong other po ositive technica al factors, we expect the Eu uropean prim mary market to t remain so olid in 2014, supported by the persisstent bank disintermediatio on trend, issueers’ willingnesss to lock into low funding costs c benefiting from the EC CB’s pledge to o keep interest rates at reco ord lows as lon ng as needed,, economic reccovery, and lo ow default ratees. We remind d that in the IG space grosss issuance amounted to EUR R 199Bn in 11M13 (vs. EUR R 218Bn in FY1 12), while the HY segment r eached a record level of EUR R 53.5Bn in 11M13 (vs. EUR R 29.3Bn in FY12). 1 2 Rating drift = (U Upgrades-downg grades)/total rate ed issuers. Distressed Indexx = % of issuers with distressed debt (OAS or CD DS above 1,000b bps)/total rated issuers. 4 Inttesa Sanpao olo Research Departmen nt Credit Sector Report 20 December 2013 income is strongly improving, after the decline of adjusted EPS expected in 2013 (-4.1% on the Euro Stoxx 300), with consensus forecasting an adjusted EPS increase of 18.3% in 2014, and 13.4% in 2015 (source IBES). Forecasts 2012 GDP (like-for-like prices, y/y) - q/q Private consumption Fixed investments Public spending Exports Imports Inventories chg. (contrib., % GDP) Current items (% GDP) Public deficit (% GDP) Public debt (% GDP) Consumer prices (y/y) Industrial output Unemployment (%) 3-month Euribor 2013 2014 -0.6 -0.4 1.0 -1.4 -3.9 -0.6 2.7 -0.8 -0.5 1.3 -3.7 92.6 2.5 -2.4 11.4 0.6 -0.5 -3.2 0.3 1.1 0.1 -0.1 2.0 -3.2 95.9 1.4 -0.6 12.1 0.2 0.5 1.6 0.5 4.2 4.1 0.1 2.1 -2.8 97.1 1.2 3.3 12.0 0.2 2012 4Q -1.0 -0.5 -0.5 -1.2 0.0 -0.5 -0.9 -0.2 2.5 1Q -1.2 -0.2 -0.1 -1.9 0.3 -1.0 -1.2 0.1 0.0 2013 2Q -0.6 0.3 0.1 0.2 0.0 2.1 1.6 -0.2 1.3 3Q -0.4 0.1 0.1 0.4 0.2 0.2 1.0 0.3 2.2 4Q 0.3 0.2 0.0 0.2 0.1 0.7 0.9 0.1 2.0 1Q 0.7 0.2 0.0 0.2 0.1 1.3 1.1 0.0 1.9 2014 2Q 0.7 0.3 0.3 0.5 0.1 1.1 0.9 -0.1 0.0 3Q 1.1 0.4 0.2 0.7 0.1 1.1 0.9 0.0 1.4 2.3 -2.0 11.8 0.2 1.9 0.3 12.0 0.2 1.4 1.0 12.1 0.2 1.3 -0.2 12.1 0.2 0.8 0.3 12.1 0.2 0.9 0.8 12.1 0.2 1.3 1.7 12.1 0.2 1.1 1.5 12.0 0.2 e Note: percentage changes vs. previous period, unless indicated otherwise. Source: Intesa Sanpaolo elaborations on Thomson Reuters data Strategic View: moderately positive m pl After the credit spread rally over 2012 and 2013, the scope for further spread compression in 2014 has reduced, in our view. However, technical and fundamental factors remain supportive, especially the ECB’s accommodative monetary policy, the Eurozone economic recovery, and low default rates. In this benign environment, we believe yield-hungry investors will continue to prefer riskier asset classes, such as peripheral vs. core corporate bonds, HY vs. IG, CDS vs. cash, and subordinated debt vs. senior debt. The trend of scaling down the credit spectrum is likely to continue, in our view, with BBB-rated bonds set to outperform again in the IG segment, and the B/CCC-rated bonds remaining the best performer in the HY space. In terms of duration, we believe that the intermediate maturities (3-7 years bucket) will outperform longer maturities (>7 years), due to the negative impact from an eventual interest rate hike. Sa On the other hand, we underline the following main risks to this favourable scenario in Europe: 1) renewed economic shock, given that the Eurozone’s recovery is still in its infancy. A negative impact on growth could derive from lower exports due to a less favourable trend of demand from the rest of the world (especially in emerging markets, where growth is slowing), and/or an appreciation of the exchange rate. 2) A potential re-exacerbation of the financial crisis (less likely today, but not impossible). In this respect, the main risk could come from the markets' reaction to the monetary policy shift in the USA. However, the threats appear significant mostly for the emerging countries, more dependent on foreign investors, than for advanced economies. Intesa Sanpaolo Research Department Main risks: renewed economic or financial shock 5 Credit Sector Report 20 December 2013 Italy – 2014: a Year of Transition Despite the continuing deterioration in the labour market and credit data generally, the recovery Paolo Mameli is also materialising in Italy, although it is not as strong as in the other main Eurozone countries. Economist – Euro Area 2014 will we believe be a year of transition, from recession to a gradual "return to normality". + 39 02 8796 2128 GDP has contracted cumulatively by 4.4% over the last two years, and while the recovery looks set to take shape, it will certainly not be spectacular. In all probability, it will not be until 20152016 before GDP growth moves to just over 1%. After contracting this year by 1.8%, GDP will grow by 0.5% in 2014, on our estimates, with some upside risk arising from the global economic upturn and the repayment of the Public Administration's commercial arrears. However, the main risk relates to the possibility of early elections in 2014 rather than 2015, as in our central scenario, which could renew pressure on country risk as there is a strong possibility of another inconclusive result. 2013 -2.6 -0.7 0.2 0.2 0.2 0.2 0.8 0.1 -1.8 2014 -1.8 0.0 0.1 0.0 -0.1 0.7 1.4 0.3 0.5 e Breakdown of the change in GDP: Intesa Sanpaolo simulations 2012 Previous year GDP (A) 0.6 Fiscal policy effect (B) -3.1 Monetary policy effect (C) 0.3 Long-term rates effect (D) 0.0 Exchange rate effect (E) -0.1 Repayment of the PA's outstanding debt (F) 0.0 Global demand (G) 0.4 Confidence (H) -0.6 (A)+(B)+(C)+(D)+(E)+(F)+(G)+(H) -2.6 pl Note: the fiscal policy effect is obtained by applying augmented "Blanchard-style" multipliers (=1.1) to the changes in the cyclically adjusted primary balance; the effect of changes in the short- and long-term rates is calculated using simulations on the OEF model; the exchange rate and global demand effect is calculated using econometric regressions; the effect of the repayment of outstanding debt by the PA is calculated by applying a multiplier of 0.4 to the companies suffering liquidity problems due to the payment delays; the "confidence" effect is a "residual" variable. Source: Intesa Sanpaolo m The table above gives a breakdown of the expected change in GDP in 2014, compared with 2012-2013. As can be seen, the effects of economic policies and financial variables will be very modest, based on our simulation. Growth will come from: Sa Global demand. In our central scenario, global growth is expected to rise from 2.9% in 2013 to 3.6% in 2014. However, the upturn in global demand for Italian goods will be much greater, rising to 5.2% from 2.7% this year, in particular due to the recovery in Germany and France (13% and 11%, respectively, of total Italian exports) and the uptick in the US (7% of Italian exports). Payment of the Public Administration’s arrears. On our estimates, payment of the Public Administration's arrears totalling EUR 47Bn (which, according to the government, could be as high as EUR 50Bn by 2014) has a positive impact of around 1.1% on GDP (0.2% in 2013, 0.7% in 2014 and a further 0.2% in 2015). At the end of November, of the EUR 27Bn expected for the current year, funds granted or in the process of being granted to debtor organisations amounted to EUR 24Bn, of which over EUR 16Bn had already been paid to creditors. “Risk premium/confidence” effect. After the upsurge in country risk indicators, which at least partly caused the slump in household and corporate confidence in 2012, these are likely to have the opposite effect in 2014, in our view; indeed, in 2013 there has already been a clear recovery in confidence indicators (precisely as a result of the easing of financial tensions). This trend, and especially its impact on real economic activity, is likely to become more marked during 2014, once the recovery also starts to be felt in the labour market (which will have a positive impact on consumer confidence) and in the credit market (which will boost corporate confidence further). With regard to the above-mentioned factors, there appear to be upside risks to our cautious 0.5% GDP growth forecasts in 2014. However, there are also significant downside risks, with the main one being possible renewed pressure on country risk, stemming from or relating to a deterioration in expectations about public finances (specifically the reduction of the debt/GDP 6 The main risk weighing on the scenario is political risk Intesa Sanpaolo Research Department Credit Sector Report 20 December 2013 ratio). A political crisis may also lead to increased pressure, especially if it triggers new elections, which could see the country spiralling into a situation of ungovernability. In this regard, our central scenario assumes that the government will remain in office for the whole of 2014, with early elections in 2015. In our view, the Constitutional Court's recent ruling that the majority premium (both in the House and the Senate) and the "blocked" lists in current electoral law are unconstitutional reduces the political risk as it de facto obliges the political powers to agree on a new voting system. As it would take at least several months to change electoral law, we believe it is unlikely that elections will be held in 2014, given also that Italian law prohibits national elections being held at the same time as European elections (which are on 22-25 May 2014), and that Italy' six-month presidency of the European Union starts on 1 July. Moreover, it is hoped that the new electoral law will enhance the future governability of Italy, which could translate into a fall in the risk premium on the financial markets. In the time available (12-18 months), the government is also likely to attempt to walk the difficult economic tightrope between the need to meet the 3% deficit target (which, in our view, is also at risk for 2014) and reduce debt, as well as attempt to support the burgeoning recovery through expansionary measures. However, there does not seem to be much room for manoeuvre in this regard given that, on our estimates, the Stability Law has already exhausted all margins in achieving the 3% target. No deflation risk in sight Next year, the biggest boost to the cycle will probably still come from foreign trade, although we estimate that its positive contribution to GDP could slow to 0.4% (from 0.7% in 2013). This looks likely to happen against a backdrop of improving trade flows, which will be more marked for exports (+3.4%, given that the global demand indicator for Italian products is expected to rise to 5.2% yoy in 2014, from 2.7% in 2013) than imports (+2.3%, due to ongoing weak domestic demand). 2014 looks set to be the year of recovery – albeit modest – in domestic demand, which we estimate will grow (net of inventories) by 0.2 of a percentage point in 2014, from -2.4% in 2013 (and -4.6% in 2012). Indeed, as we see it, it could be described more as a stabilisation than a real recovery. Moreover, unemployment (expected to continue to rise to 12.5% in 2014, from an average of 12.2% this year) will not help the recovery in household spending. After exports, the baton of the recovery will pass to investments, which are expected to grow by 0.7%, i.e. faster than GDP. We expect investment in machinery to grow by 1.6% next year, whilst investment in construction will be stagnant, in our view, after a six years of decline. Public spending will struggle to give a non-negligible contribution to GDP, as we estimate it to remain unchanged in 2014, following a 0.2% decline this year. Main GDP growth components Sa m pl e As regards the inflation scenario, we think that 2014 will be very similar to 2013, i.e. a year of low inflation (with CPI closer to 1% than to 2%), but certainly not one of deflation. In our opinion, a deflationary risk would only materialise in the event of strong supply-side shocks (a marked fall in commodities prices, which is not included in our central scenario on commodities, and which would therefore be positive for real activity), or if the embryonic recovery were aborted at birth. Our estimate is for average inflation of 1.3% in 2014 (from 1.2% national and 1.3% harmonised in 2013). Macro forecasts - Italy GDP (2005 prices, yoy) qoq Household Consumption Public Consumption Investments Imports Exports Chg. Inventories (contrib., % GDP) Current account (% GDP) PA Balance (% GDP) Debt (% GDP) Consumer Prices (yoy) Industrial Production Unemployment (%) 0.1 0.0 0.7 2.3 3.4 -0.1 1Q -2.5 -0.6 -0.5 0.1 -2.9 -0.5 -1.2 0.4 2013 2Q -2.2 -0.3 -0.5 0.0 0.0 -0.7 0.7 -0.4 3Q -1.8 0.0 -0.2 0.0 -0.6 2.0 0.7 0.5 4Q -0.8 0.1 0.0 0.0 0.3 -0.2 0.8 -0.2 1Q 0.0 0.2 0.1 0.0 0.2 0.7 0.8 0.0 1.0 -3.0 135.1 1.3 1.3 12.5 1.9 0.1 11.9 1.2 -0.7 12.1 1.1 -0.7 12.3 0.6 0.8 12.5 0.7 0.3 12.6 2012 2013 2014 -2.6 -1.8 0.5 -4.2 -2.6 -8.4 -7.5 1.9 -0.6 -2.5 -0.2 -5.4 -2.6 0.1 -0.2 -0.6 -3.0 127.0 3.0 -6.4 10.8 0.5 -3.0 133.1 1.2 -3.1 12.2 2014 2Q 0.5 0.2 0.2 0.0 0.3 0.4 0.9 -0.1 3Q 0.8 0.3 0.2 0.0 0.5 0.7 1.0 -0.1 4Q 1.0 0.3 0.3 0.1 0.3 1.0 1.0 0.0 1.1 0.7 12.6 1.2 0.6 12.5 2.1 0.2 12.4 Note: Percentage change on the previous period, unless otherwise stated. Source: Intesa Sanpaolo calculations on Thomson Reuters-Datastream data. Intesa Sanpaolo Research Department 7 Credit Sector Repo ort D 201 13 20 December Ittalian Co orporate Bond Market 2013 Perform mance Italian corporate bonds outperforme ed in the IG cash segment, wh hile their performance e was mixed in n the HY space e pl e In n the IG cash ssegment, the main Italian non-financial n co orporate bond ds (see Appendix 1) have outperformed ttheir European n competitors in i 2013 (-42bp ps to 110bps for the JPM In ndustrial All in ndex for BBB-raated bonds), with w EXOR’s 06 6/17 bond, ressulting as the best b performerr under our co overage (-140b bps YTD), follo owed by A2A’ss 11/16 bond (-132bps), and d ACEA’s 03/2 20 (-127bps bo oth). In contraast, ENI’s bond ds were the worst w performeers among Italian IG notes (-23bps on avverage), due to o their lower beta b and highe er rating, altho ough they still outperformed d compared with w the JPM U Utility All indexx for A-rated bonds b (-15bps to 76bps). Alsso, Terna’s bonds lagged be ehind their Itaalian peers (-44 4bps on avera age), and also were the onlyy underperform mers in our co overage compaared with their European co ompetitors (-61 1bps JPM Utilitty All index for BBB-rated bo onds 116). In tthe HY cash seegment, the performance p off the Italian co orporate bondss under our co overage was m mixed. In partiicular we high hlight that Win nd’s 02/18 sen nior bond (-46 64bps YTD) was w the best p performer in the HY space e, followed byy Fiat’s bondss (-170bps on n average), outperforming by far their European peerss in 2013 (-12 28bps ML Eurro HY BB-rated d bonds to 26 69bps). Howevver, the fallen angel Telecom m Italia underpeerformed the most m (+19bps on average YTD), due to th he downgradee to HY statuss in Novemberr and the entrry of its bondss in the HY in ndex at the beginning of December. We also a note that Rottapharm (-7bps YTD), Fin nmeccanica (-16bps on aveerage), and CNH C Industrial’s bonds (-67 7bps on avera age) all underperformed co ompared with h their Europeean peers (-127bps ML Eu uro HY BB-ratted bonds). In n terms of su ubordinated debt, we note that Wind’s 07/17 0 bond w was the best performer p (-652bps YTD), fo ollowed by GTTECH’s 2066 hybrid bond (-216bps), ( whiilst Telecom Ittalia’s 2073 hybrid bond underperformed d (-68bps sincee its launch date on 13 Marcch). Atlantia’s and Enel’s 5Y CD DS outperforme ed Main YTD m n the IG derivaative segment, we highlight that Atlantia’ss 5Y CDS (-101bps YTD) and d Enel’s 5Y In CDS (-95bps) o outperformed both Italy’s 5Y Y CDS (-87bp ps, although slightly s due to their high exxposure to thee domestic maarket), and especially the iTTraxx Main Ind dex (-31bps). In contrast, EN NI’s 5Y CDS (-31bps) perrformed in lin ne with the Main index, whilst underperforming significantly Italy’s 5Y CDS. Note N that all th he Italian IG ccorporates currrently have a higher h CDS co ompared with Main, althoug gh they trade well w inside the Italian sovereig gn 5Y CDS. Currrent IG corpora ate 5Y CDS vs. 55Y Main (bps) Sa Change C in IG co orporate 5Y CD DS vs. 5Y Main in 2013-YTD (b bps) So ource: Intesa Sanpaolo Research elaborration on Bloomberg g data Source e: Intesa Sanpaolo Research R elaborationn on Bloomberg datta Also A in the HY Y derivative secctor, the perfo ormance of H HY Italian issue ers was mixed d. In detail, Wind’s W 5Y CDSS (-523bps YTTD) strongly outperformed tthe Crossover index (-132bp ps), due to po otential debt rrestructuring by b the parent company c Vimp pelcom. In con ntrast, Telecom m Italia’s 5Y CDS resulted as the worst performer (-4bp ps YTD), due to the deterio orating credit profile and ra ating downgraade to junk levvel, as well as to technical s pread pressure e given the exxit from the Main M index and d the entry in the Crossoverr Index in Marrch 2013. Morreover, we hig ghlight that CIR’s, Fiat’s, and Wind’s 5Y CDS C trade outtside the 5Y C Crossover indexx, while CNH Industrial’s, Te elecom Italia’s and Finmeccanica’s 5Y CDS trade inside itt. 8 Wind’s 5Y CD DS strongly outperforme ed among HY, whilst Teleco om Italia underperform med the mostt Inttesa Sanpao olo Research Departmen nt Credit Sector Repo ort D 201 13 20 December Change C in HY ccorporate 5Y CD DS vs. 5Y Crosssover in 2013 (b bps) Currrent HY corporate 5Y CDS vs. 5Y Crossover (bps) ( So ource: Intesa Sanpaolo Research elaborration on Bloomberg g data e: Intesa Sanpaolo Research R elaborationn on Bloomberg datta Source 2014 Outlook k Recovery exp pected in 2014 4 pl e After A two yearss of recession, our economists expect thee Italian econo omy to recove er in 2014, allbeit at a mod derate pace (+ +0.5%), mainlyy driven by fo oreign trade an nd the repaym ment of the Pu ublic Administtration's comm mercial arrears (see dedicate d section). Ho owever, the main risks to th he domestic reecovery relate to t the possibility of early eleections in 2014 4 instead of 20 015, as per our economists’’ central scenaario, which cou uld renew presssure on country risk as there e is a strong po ossibility of another inconclu usive result. Positive A2 2A GTEC CH Neutral Acea Atlantia Enel ENI EXOR Hera Snam Terna Neutral CIR CNH Industrial Fiat Rottapharm Wind Credit View Neutral N unchanged Negative Sa Credit C View on issuers covere ed Investment grade m While W the expected domesttic economic recovery is sstill in its infa ancy, we believe Italian co orporates could start seeing g some beneffits (or less diisadvantages) from it in 20 014. In this co ontext, we co onfirm our Creedit View Neu utral on the avverage of the Italian corporrate issuers under our coverrage, maintain ning 13 Credit View Neutral, 1 Credit View w Negative (Finmeccanica) an nd 2 Credit Vieew Positive (A2 2A and GTECH H), as shown in n the table belo ow. High Yield Positive Negative Finmeccanica F No ote: Credit View on Telecom Italia is not assigned. Source: Intesa Sanpaolo Ressearch We W highlight th hat most of thee companies th hat we cover a re reacting to the challengin ng domestic ecconomic weakkness by focusing on cost-cuttting actions a nd greater geo ographic diverssification of sa ales. In addition, we note thaat Italian corpo orates on averaage have main ntained adequa ate liquidity an nd we expect low refinancin ng risk until 20 016-17, becausse of sound prre-funding don ne in 201213 3, taking advantage of the favourable conditions on the bond market, with total gro oss issuance allready able to o cover bond maturities in 2014-15. Und der our coverrage, we highlight some re efinancing risk in 2015 only for Fiat (exclu uding Chrysler)) and CNH Ind dustrial, while the bulk of Ita alian corporatees present som me refinancing risk in 2016-1 17, on our estimates (see table on next pa age). Furtherm more, we believe that on average the companies’ financial policcy remains co onservative, w with most of the issuers under coveragee still committted to diversifying their In ntesa Sanpa aolo Researcch Departme ent Low refinanccing risk until 2016-17 on average, a some e refinancing risk r in 2015 on nly for Fiat, and CNH Industria al 9 Credit Sector Report 20 December 2013 financial sources (loan-to-bond transition) and lengthening the average life of debt, which is supportive of their credit profiles. We also believe that, given the fragile economic recovery, companies cannot afford to re-leverage their balance sheet yet, thus maintaining a cash conservation attitude in terms of new capital expenditure, shareholders remuneration (dividend pay-out and share buyback programme) and M&A deals. One exception, could be ENI, which is engaged in a high capex plan, typical of the Oil & Gas industry, and plans a share repurchase programme of up to EUR 6Bn in the next few years. Year of Refinancing Risk by Company 2015 CNH Industrial Fiat (excl. Chrysler) 2016 Acea A2A Enel GTECH Hera Snam 2017 Atlantia Enel Eni EXOR Finmeccanica Terna Wind >2017 CIR Rottapharm Telecom Italia Source: Intesa Sanpaolo Research estimates on Company data Most of the ratings remain at risk of downgrade if Italy’s rating is cut pl e However, we note that most of the companies under our coverage still present a high exposure to Italy country risk. As a result, their credit profiles could continue to be affected by weak private consumption and risk of regulatory changes in the regulated businesses (such as utilities, motorways, and telecommunications). We also highlight the negative impact of the still higher refinancing costs than their core European competitors, due to Italy country risk and tight lending standards applied by Italian banks, albeit that conditions have gradually improved in 2013. As such, we expect the ratings of companies most exposed to Italy sovereign risk to remain at risk of downgrade due to the concentration of revenues in Italy and/or in regulated sectors. Strengths Weaknesses Weak Italian economy, although expected to recover in m Adequate liquidity and low refinancing risk in 2014-15. Conservative financial policy (dividend and capex cuts). Focus on cost-cutting and restructuring actions. Sa Greater geographic diversification of sales. Supportive technical factors (2014-15 maturities already covered by 2013 issuance). 2014-15. Pressure on ratings of companies more exposed to Italy sovereign risk. Cost of funding still high, although improving, weighed by sovereign debt risk premium and tight lending standards applied by Italian banks. Long term political stability is uncertain. We remind that on 13 December, S&P affirmed Italy’s rating at BBB, with a negative outlook, reflecting what it saw as a one-in-three chance of downgrade in the next 12 months. S&P said it could lower the rating if the government cannot implement policies that would help to restore growth and keep debt indicators from deteriorating beyond its current expectations. Similarly, sustained delays in effectively addressing some of the rigidities in Italy's labour, services, and product markets, which have been holding back growth, could put downward pressure on the ratings. Also a downward revision of S&P’s assessment of Italy's institutional and governance effectiveness could lead to a rating downgrade by one notch or more, depending on the severity of the circumstances. On the other hand, S&P said it could revise the outlook to stable if the government was to implement structural reforms to the labour, product, and service markets that would be likely to shift the Italian economy to a higher level of growth. In December, S&P affirmed Italy’s rating at BBB/negative On 29 October, Moody’s affirmed Italy’s rating at Baa2, with a negative outlook. The negative outlook reflects its view of: 1) Italy's subdued economic outlook; 2) the negative outlook on Italy's banking system; and 3) the risk that the Italian sovereign might lose investor confidence and, ultimately, access to private debt markets. Moody’s would consider downgrading Italy's In October, Moody’s affirmed Italy’s rating at Baa2/negative 10 Intesa Sanpaolo Research Department Credit Sector Report 20 December 2013 rating in the event of additional deterioration in the country's economic prospects, a decrease in its primary surplus, and/or a need for a significant recapitalisation of banks by the government. A deterioration in the sovereign's funding conditions would also put downward pressure on Italy's rating. On the other hand, Moody’s said it would consider moving the outlook on Italy's sovereign rating to stable in the event that further economic and labour market reforms were successfully implemented and led to an effective strengthening of the growth prospects of the Italian economy. Moreover, a sustained reversal of the upward trajectory of Italy's general government debt-to-GDP ratio against the backdrop of a resumption of growth, which would make public-sector finances less vulnerable to volatile funding conditions, would be credit positive, in Moody’s view. In October, Fitch affirmed Italy’s rating at BBB+/negative pl e On 25 October, Fitch affirmed Italy’s BBB+ rating, with a negative outlook. The negative outlook reflects the following risk factors that may it said result in a downgrade of the ratings: 1) economic and fiscal outturns that reduce confidence that gross general government debt (GGGD) will be placed on a firm downward path from 2014-15; 2) a new bout of political turmoil resulting in paralysed economic and fiscal policies, failure to comply with the constitutional and EU requirement of a balanced budget; 3) a deeper and longer recession would likely undermine the fiscal consolidation efforts and increase contingent risks from the financial sector, and could also weaken the political support for the consolidation path; and 4) significant public recapitalisation needs of the financial sector. On the other hand, future developments that may in Fitch’s view lead to a stabilisation of the outlook include: 1) a sustained economic recovery that supports ongoing fiscal consolidation; 2) confidence that the GGGD has peaked and will be on a firm downward path; and 3) further structural reforms that enhance the competitiveness and growth potential of the Italian economy. Prevalence of negative outlook on Italian companies’ ratings under coverage m Considering the ratings issued by S&P and/or Moody’s on the 17 Italian issuers under our coverage, we note that there are 18 negative outlooks, one rating under review for downgrade (ENI by S&P), 11 stable outlooks and only two positive outlooks by S&P on CIR’s and GTECH’s ratings. Although after the formation of the Letta government pressure for a rating downgrade of Italy has abated, in our view, for illustrative purposes only, we have simulated the impact of an eventual one-notch sovereign downgrade on the ratings of the issuers that we cover (see table below). Sa Simulation Table: impact on ratings of companies that we cover of a one-notch downgrade of Italy's rating Issuer Current rating Simulated Rating Impact of a one-notch sovereign downgrade Moody's S&P Moody's S&P Italy Baa2/N BBB/N Baa3 BBBOne-notch downgrade Acea Baa2/N BBB-/S Baa3 BBBAutomatic one-notch downgrade by Moody’s; greater pressure by S&P Atlantia Baa1/N BBB+/N Baa2 BBB+ Automatic one-notch downgrade by Moody’s; greater pressure by S&P A2A Baa3/N BBB/N Baa3 BBBAutomatic one-notch downgrade by S&P CIR NR BB/P NR BB No direct impact CNH Industr. Ba1/S BB+/S Ba1 BB+ No direct impact Enel Baa2/N BBB/S Baa3 BBBAutomatic one-notch downgrade by Moody’s; greater pressure by S&P Eni A3/N A/CWN Baa1 A Automatic one-notch downgrade by Moody’s, greater pressure by S&P EXOR NR BBB+/S NR BBB+ No direct impact Fiat Ba3/N BB-/S Ba3 BBNo direct impact Finmeccanica Ba1/N BB+/S Ba1 BB+ No direct impact GTECH Baa3/S BBB-/P Baa3 BBBNo direct impact Hera Baa1/N BBB/S Baa2 BBB Automatic one-notch downgrade by Moody’s Rottapharm B1/N BB-/S B1/S BB-/S No direct impact Snam Baa1/N BBB+/N Baa2 BBBAutomatic one-notch downgrade by Moody’s and S&P Telecom Italia Ba1/N BB+/N Ba1 BB+ No direct impact Terna Baa1/N BBB+/N Baa2 BBB Automatic one-notch downgrade by Moody’s and S&P Wind B1/N BB-/S B1 BBNo direct impact Note: NR = not rated; N = Negative; P = Positive; S = Stable; *- = rating under review for downgrade. Source: rating agencies, Intesa Sanpaolo Research Department elaboration Intesa Sanpaolo Research Department 11 Credit Sector Report 20 December 2013 Italian Corporate Bonds: Investment Recommendations After the Italian corporate bonds rally in 2013, we believe that the performance in 2014 could still be positive but is likely to be at a slower pace. In a benign context (economic recovery, low default rates, and accommodative ECB monetary policy), we are less concerned over the fundamental prospects of the companies under our coverage, expecting an overall stable credit profile in 2014, except for Fiat (risk event linked to Chrysler’s minority buyout) and Finmeccanica (high execution risk on restructuring and asset disposals, in a negative A&D context). As a result, we believe that Italian corporate bonds will remain in the limelight, as they still offer a spread premium compared with the main European benchmark credit indices, which should continue to further compress, in our view. We select our best and worst picks following two main drivers: 2014: focus on yield 1) Sound credit metrics: stable/improving credit profile. 2) Spread premium vs. European benchmark credit indices. IG: BUY A2A’s, GTECH’s, EXOR’s and Snam’ senior bonds Sa m pl e In the IG sector, we confirm our BUY recommendation on A2A, GTECH, and Snam senior bonds, and upgrade our recommendation on EXOR’s bonds to BUY from HOLD, based on their sound fundamentals and still attractive spreads compared with European peers in their respective industries. In detail, we confirm our BUY recommendation on A2A’s bonds, as they are still attractive compared with the corresponding JPM Utility indices for BBB-rated bonds, and also compared with the bonds of Italian peers Acea and Hera. Whilst GETCH’s bonds have outperformed this year to date, we maintain our BUY recommendation, because they remain attractive compared with JPM Consumer non-cyclical indices for Euro BBB-rated bonds at corresponding maturities, taking also into account the company’s de-leveraging target, and its intention to refinance its financial structure well in advance in order to achieve a lower cost of debt. We also confirm our BUY recommendation on Snam’s bonds, given the company’ solid operating profile sustained by a favourable regulatory framework, continuing to prefer them to Terna’s bonds, due to Snam’ steeper cash curve on longer maturities, despite aligned ratings and similar fully-regulated business. Flushed with EUR 2.5Bn in liquid assets, EXOR’s future investment strategy remain uncertain. However, given its conservative track record and commitment to maintain a solid investment rating, we believe the company is not willing to jeopardise its credit profile with riskier investments. As a result, we upgrade our recommendation on EXOR’s 2017 bond to BUY from HOLD, continuing to prefer it to CNH Industrial’s 2018 bond. In addition, we confirm our HOLD recommendation on the bonds of all the other IG issuers that we cover, because we believe that they are fairly priced compared with their European peers. Investment recommendations on Italian corporate senior bonds Investment Grade BUY HOLD A2A Acea GTECH Atlantia EXOR Enel Snam Eni Hera Terna High Yield BUY HOLD Rottapharm CIR Finmeccanica Wind SELL SELL CNH Industrial Fiat Note: No recommendation assigned on Telecom Italia bonds; Source: Intesa Sanpaolo Research In the HY sector, we upgrade our recommendation on Rottapharm’s bond to BUY from HOLD, as we believe that spreads are attractive, in anticipation that the company’s 4Q13 figures confirm a stabilisation of operational performance. On the other hand, we downgrade our recommendation on CNH Industrial’s bonds to SELL from HOLD, given their tight valuations compared with ML Euro HY index for BB-rated bonds, despite the fact that rating agencies have ruled out an upgrade to investment grade in the short term. We also confirm our SELL recommendation on Fiat’s bonds in view of ratings downgrade risk in case of a debt-financed 12 HY senior bonds: BUY Rottapharm bonds, SELL CNH Industrial and Fiat bonds Intesa Sanpaolo Research Department Credit Sector Report 20 December 2013 Chrysler’s minority buyout, expectations of negative FCF of Fiat standalone until 2015-16, and restricted access to Chrysler’s liquidity. In subordinated bonds, we confirm our BUY recommendation on Enel’s and GTECH’s hybrid bonds, as we continue to believe that they are still attractive compared with ML EURO HY BBrated bonds. In addition, for HY investors comfortable with subordinated debt exposure, we recommend switching to hybrid bonds from the senior bonds of the same issuers, as we expect an outperformance of the former, given the higher yields offered. Investment recommendations on Italian corporate subordinated bonds High Yield BUY HOLD Enel Wind GTECH HY sub bonds: BUY Enel and GTECH’s hybrid bonds SELL Note: No recommendation assigned on Telecom Italia bonds; Source: Intesa Sanpaolo Research In the derivatives segment, we recommend buying CNH Industrial’s and Fiat’s 5Y CDS expecting them to underperform compared with the Crossover index. On the other hand, we continue to recommend selling 5Y protection on CIR, expecting an outperformance compared with the Crossover index. SELL BUY CNH Industrial Fiat pl High Yield HOLD Atlantia Enel Eni HOLD Finmeccanica Wind e Investment recommendations on Italian corporate CDS Investment Grade BUY CDS: BUY CNH Industrial and Fiat’s 5Y CDS, SELL CIR’s 5Y CDS SELL CIR Note: No recommendation assigned on Telecom Italia bonds; Source: Intesa Sanpaolo Research m We finally confirm our relative value recommendations (see table on next page) among the different bonds of the same issuer, in view of existing spread misalignments along the maturity curve of Atlantia, Enel, Eni, Fiat and Finmeccanica. Investment recommendations - NEW Date Bond/CDS Type Spread Rate Buy/ Sell Industrial 20.12.13 EXOIM 5 3/8 06/12/17 Sen ASW FX BUY 137.6 137.6 0.0 20.12.13 EXOIM 5 3/8 06/12/17 JPM Industrial BBB 3-5Y Sen Sen ASW ASW FX BUY FX SELL 137.6 89.7 137.6 89.7 0.0 0.0 0.0 High Yield 20.12.13 ROTPHA 6 1/8 11/15/19 Sen ASW FX BUY 406.0 406.0 0.0 20.12.13 ROTPHA 6 1/8 11/15/19 ML Euro HY BB Sen Sen ASW ASW FX BUY FX SELL 406.0 267.0 406.0 267.0 20.12.13 ML Euro HY BB FIAT 6 7/8 02/13/15 Sen Sen ASW ASW FX BUY FX SELL 267.0 202.8 267.0 202.8 20.12.13 ML Euro HY BB CNH 6 1/4 03/09/18 Sen Sen ASW ASW FX BUY FX SELL 267.0 192.5 267.0 192.5 20.12.13 CDS 5Y Fiat Crossover 5Y CDS Sen ASW ASW FX BUY FX SELL 347.3 293.0 347.3 293.0 20.12.13 CDS CNH Industrial Crossover 5Y CDS Sen ASW ASW FX BUY FX SELL 194.3 293.0 194.3 293.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Sa Entry Current Pick-up level level1 Status Comment NEW Investment recommendation open in the expectation of a tightening of the ASW spread NEW Switch open in the expectation of an outperformance of EXOR 2017 bond vs. JPM Industrial index BBB-rated bonds, 3-5y NEW Investment recommendation open in the expectation of a tightening of the ASW spread NEW Switch open in the expectation of an outperformance of Rottapharm 2019 bond vs. ML Euro HY BB-rated bonds NEW Switch open in the expectation of an underperformance of Fiat 02/15 bond vs. ML Euro HY BB-rated bonds NEW Switch open in the expectation of an underperformance of CNH 03/18 bond vs. ML Euro HY BB-rated bonds NEW Switch open in the expectation of an underperformance of Fiat’s 5Y CDS vs. Crossover 5Y index NEW Switch open in the expectation of an underperformance of CNH Industrial’s 5Y CDS vs. Crossover 5Y index Note: FX = fixed rate. 1) "Current level" at the open of 20.12.2013. Source: Intesa Sanpaolo Research elaboration on Bloomberg data Intesa Sanpaolo Research Department 13 Credit Sector Report 20 December 2013 Investment recommendations - OPEN Date Bond/CDS Type Spread Rate Buy/ Sell Entry Current Pick-up level level1 Status OPEN Switch open on the expectation of an alignment in the ASW gap Sen Sen ASW ASW FX BUY FX SELL 76.6 46.9 65.8 53.8 24.10.13 AEMSPA 4 3/8 01/10/21 HERIM 3 1/4 10/04/21 Sen Sen ASW ASW FX BUY FX SELL 195.3 134.4 174.1 128.4 24.10.13 SRGIM 3 3/8 01/29/21 ATLIM 2 7/8 02/26/21 Sen Sen ASW ASW FX BUY FX SELL 137.4 121.1 110.2 113.7 04.10.13 AEMSPA 4 1/2 11/28/19 HERIM 4 1/2 12/03/19 Sen Sen ASW ASW FX BUY FX SELL 216.0 129.5 161.2 116.4 03.10.13 AEMSPA 4 1/2 11/28/19 Sen ASW FX BUY 216.0 161.2 10.8 6.9 17.8 21.2 -6.0 15.2 27.2 -7.4 19.8 54.8 -13.1 41.6 54.8 19.09.13 ENELIM 6 1/2 01/10/74 Sen ASW FX BUY 448.3 378.0 70.3 19.09.13 ENELIM 5 5/8 06/21/27 ENELIM 3 5/8 04/17/18 Sen Sen ASW ASW FX BUY FX SELL 253.9 140.5 198.9 109.1 19.09.13 ATLIM 3 5/8 11/30/18 ATLIM 3 3/8 09/18/17 Sen Sen ASW ASW FX BUY FX SELL 135.0 95.9 124.3 91.6 19.09.13 ATLIM 5 5/8 05/06/16 HERIM 4 1/8 02/16/16 Sen Sen ASW ASW FX BUY FX SELL 85.3 70.1 79.6 65.7 05.09.13 ENELIM 4 7/8 02/20/18 ENELIM 3 5/8 04/17/18 Sen Sen ASW ASW FX BUY FX SELL 188.8 148.7 146.0 109.1 11.07.13 AEMSPA 4 3/8 01/10/21 ACEIM 4 1/2 03/16/20 Sen Sen ASW ASW FX BUY FX SELL 253.6 247.6 174.1 148.2 28.05.13 AEMSPA 4 1/2 11/28/19 ACEIM 4 1/2 03/16/20 Sen Sen ASW ASW FX BUY FX SELL 194.7 222.0 161.2 148.2 16.01.13 SRGIM 5 1/4 09/19/22 TRNIM 4 3/4 03/15/21 Sen Sen ASW ASW FX BUY FX SELL 186.8 136.0 124.9 103.8 54.9 -31.4 23.5 10.7 -4.3 6.4 5.7 -4.5 1.3 42.8 -39.6 3.2 79.5 -99.4 -19.9 33.5 -73.8 -40.3 61.9 -32.2 29.7 Industrial 07.11.13 EXOIM 5 3/8 06/12/17 CNH 6 1/4 03/09/18 Sen Sen ASW ASW FX BUY FX SELL 180.4 176.0 135.8 192.1 44.6 16.1 60.7 OPEN Switch open given the higher ASW spread and YTM of Snam 01/21 bond vs. Atlantia 02/21 bond, despite aligned ratings OPEN Trading idea opened on the expectation of a narrowing of the ASW gap OPEN Trading idea opened on the expectation of a narrowing of the gap spread with the JPM Utilities Index (BBB, 5-7y) OPEN Trading idea open on the expectation of a further ASW tightening OPEN Switch open in the expectation of a flattening in Enel's maturity curve OPEN Switch open in the expectation of a narrowing of the ASW gap OPEN Switch open in the expectation of an inversion of the ASW gap, given a one-notch better rating of Atlantia vs. Hera at S&P OPEN Switch open in the expectation of a narrowing in the ASW gap OPEN Switch open as we expect the former to outperform in terms of ASW spread due to its improving credit metrics OPEN Switch open on the expectation for a further tightening in AEM 4 1/2 11/19 ASW spread against ACEA, supported by ongoing deleveraging OPEN Switch open given the higher ASW spread and YTM of Snam 5 1/4 09/22 bond vs. Terna 4 3/43/21 bond pl m Sa 18.09.13 GTKIM 5 3/8 02/02/18 JPM Cons. non-cyc. BBB 3-5y Sen Sen ASW ASW FX BUY FX SELL 137.2 71.3 123.3 79.9 13.9 8.6 22.5 High Yield 12.12.13 ROTPHA 6 1/8 11/15/19 FIAT 6 3/4 10/14/19 Sen Sen ASW ASW FX BUY FX SELL 410.6 389.7 406.0 386.7 12.12.13 CIRIM 5 3/4 12/16/24 FNCIM 4 7/8 03/24/25 Sen Sen ASW ASW FX BUY FX SELL 332.0 263.2 341.2 261.9 2.12.13 Sen Sen ASW ASW FX BUY FX SELL 311.3 269.5 295.2 261.9 21.11.13 CDS 5Y CIR 21.11.13 Crossover 5Y CDS 5Y CIR CDS Sen CDS ASW ASW ASW FX SELL FX BUY FX SELL 405.0 332.0 405.0 350.0 291.5 350.0 07.11.13 FNCIM 5 1/4 01/21/22 FNCIM 4 7/8 03/24/25 Sen Sen ASW ASW FX BUY FX SELL 296.9 257.0 301.3 261.9 18.04.13 FIAT 7 3/8 07/09/18 FIAT 5 5/8 06/12/17 Sen Sen ASW ASW FX BUY FX SELL 507.6 424.2 364.6 303.1 4.6 -3.0 1.6 -9.2 -1.3 -10.6 16.0 -7.6 8.5 55.0 -40.5 55.0 14.5 -4.5 4.9 0.4 143.0 -121.1 22.0 FNCIM 4 1/2 01/19/21 FNCIM 4 7/8 03/24/25 OPEN Switch open on the expectation of a narrowing in ASW gap e Utility 30.10.13 ENIIM 4 7/8 10/11/17 ENIIM 4 3/4 11/14/17 Comment OPEN Switch open in the expectation of an inversion of the ASW gap, given the three-notch higher rating of the parent company EXOR vs. CNH Industrial (BBB+ vs. BB+) OPEN Switch open in the expectation of an outperformance of GTECH 2018 bond vs. JPM Consumer non-cyclical index 3-5y OPEN Switch open in the expectation of an inversion of the ASW gap, given the one-notch higher rating at Moody's of Rottapharm OPEN Switch open in the expectation of a narrowing of the ASW gap between the two bonds OPEN Switch open in the expectation of an inversion of the ASW gap, given the 4y shorter maturity of the former OPEN We expect a tightening of CIR'S 5Y CDS OPEN Switch open in the expectation of outperformance of CIR 5YR CDS vs. Crossover an OPEN Switch open in the expectation of an inversion of the ASW gap, given the 3y shorter maturity of the former OPEN Switch open given the higher ASW and YTM of Fiat 7 3/8 07/18 bond vs. Fiat 5 5/8 06/17 bond Note: FX = fixed rate. 1) "Current level" at the open of 20.12.2013. Source: Intesa Sanpaolo Research elaboration on Bloomberg data 14 Intesa Sanpaolo Research Department Credit Sector Repo ort D 201 13 20 December Ittalian Co orporate Primary Bond M arket 2013 Perform mance mediation and Th he increasing bank disinterm mediation and the issue of tthe Sviluppo Decree D (Law 17 7/12/12, n° BBank disinterm ee main 22 21, which alig gned the legal and fiscal treatment of bon nds issued by unlisted comp panies with Svviluppo Decre th hat of listed co ompanies) are the main drivvers of the liveely Italian prim mary bond marrket, in our d rivers of primary market view. In this resspect, we note that in the first 10 month hs of 2013, crredit to the no on-financial co orporate secto or continued to o contract at an a annual estim mated rate of 4.4%, according to data re eleased by the Bank of Italy, while bank lending to non-ffinancial corpo orations fell byy 4.2% qoq in n 3Q13. Italia an corporate se enior bond maaturities in 2013 3-2017 (EUR Bn n) Sa m pl Ittalian corporatte senior bond issuance/matu urities (EUR Bn)) e After A a strong p primary markeet in 2012 (+89 9% yoy to EUR R 29Bn), grosss issuance remained lively SStill lively, desspite the 9% in n 2013, with 5 56 new bond issues i worth a total of EUR 26Bn (-9% yo oy), well enoug gh to cover ddecline in 2013 3 th he 2014-15 maturities. We also a note the strong s increasee in the numb ber of issuers, 36 in 2013 ve ersus 17 in 2012, while at th he same time the smaller am mount of the average a issue, EUR 465M in n 2013 versus EUR 800M in 2012, on our calculations. I n contrast witth 2012, where the usual frrequent issuerss dominated the t primary market, m in 201 13 we highlight the entry of 18 new issuers (see table on the follo owing page), of o which 11 aare HY, 11 are e unlisted and//or four are unrated. Among g the frequentt issuers, Eni was w the biggestt in 2013, placing four bondss for a total off EUR 3Bn, fo ollowed by Fiat Finance and Trade (three bonds for a total t of EUR 2.5Bn), 2 and Sn nam (four issu ues for a total of EUR 2.25 5Bn). We also note the issu ue of hybrid bonds b from Te elecom Italia in n March for EU UR 750M and Enel E in Septem mber for EUR 1.25Bn. So ource: Intesa Sanpaolo Research elaborration on Bloomberg g data e: Intesa Sanpaolo Research R elaborationn on Bloomberg datta Source 2014 Outlook k In n our view, th he outlook forr the Italian corporate c bond d primary market remains favourable, de espite possiblee market volatility following g the Fed’s deecision to start tapering in 2014. We em mphasise thatt the increasin ng bank disinttermediation sshould continu ue to be a valid support fa actor for the ccorporate prim mary market. This is because Italian banks will be forced d to reduce th heir assets in vview of recapittalisation requirements impo osed by the ne ew Basel III rules and the EB BA, which will have a deep per impact on companies w with HY ratingss. We also note that the bigger companiies are tending g to reduce their dependenccy on the bank king system, preferring to ta ap the bond m market for the dual purpose of further diveersifying their sources of financing and to o lengthen aveerage debt durration. We therefore believe that corporate es could contin nue to take ad dvantage of lo ow interest rattes, improved credit spreadss, and a narro ower differential between bo onds and bank loans fundin ng cost. We also a note that in order to maintain m a sound liquidity buffer, corporattes could capittalise on favou urable market conditions to pre-fund the increase in bo ond maturitiess over the nexxt four years: +52% + to EUR 11.2Bn in 201 14, +7% to EU UR 12Bn in 20 015, +38% to o EUR 16.6Bn in 2016, and +7% to EUR 17 7.7Bn in 2017. In ntesa Sanpa aolo Researcch Departme ent Prospects of domestic primary market still favourable 1 15 Credit Sector Repo ort D 201 13 20 December According A to S& &P, stability in financial marrkets and a reccovery of the domestic econ nomy could propel sustained d growth of th he corporate bond b market in n Italy. In the base-case b scena ario, where GDP G growth is llimited to 0-1% % per year in 2013-2017 2 an nd the compan nies issue bond ds mainly to re efinance existin ng debt, S&P estimates e that the proportio on of bond seccurities in total corporate fu unding may ap pproach at bestt 11-14% overr the next five years, up from m 8% at the en nd of 2012. However, in thee best-case sceenario, where GDP increasess by 1-3% per year, S&P estimates that bo ond issuance ccould reach 14 4-17% of tota al funding by 2017, mainly because of a recovery of fixxed investmen nt from the currently weak levels. Moreo over, the agen ncy believes th hat greater re ecourse to the bond market could help improve Italian ccompanies’ cap pital structure and reduce re efinancing riskss, because it could lengthen Italian corporaate funding maturities and diversify d the in nvestor base. H However, acco ording to S&P the t process off bank disinterrmediation cou uld be long an nd arduous, aalso because of o the absence e of a develop ped private placement mark ket in Italy, which w up to now w has limited issues i to below w EUR 150-200 0M. S&P estimate es that bonds could represe ent 11-14% off total funding g by 2017 In n our view, sevveral factors could c put the brakes on bon nd market issu uance, includin ng eventual po olitical instabillity or lack of macroeconom mic recovery, w which could co ontinue to dent business in nvestment. In aaddition, we note n that on average a the co ompanies that we cover have e adequate liq quidity and low refinancing risk until 201 16-17 based o on pre-funding g already done in 201220 013. Lack of recov very and prefunding are possible p brake es on bond marrket issuance pl 9 6 3 -6 -9 m 0 -3 Italia an Corporate Bond B Market O Outlook e Loans L to non-financial busine esses by duratio on (yoy % chan nge) Non fin nancial companie es (*) of whicch: Long term lo oans (*) of whicch: Short term lo oans 1 12 Oct09 Apr10 Oct10 Apr11 Oct11 Apr12 Oct12 O Apr13 O ct13 Strengths S Sa No ote: (*) from June 2 2010 to May 2011, data adjusted to tak ke account of the sttatistical disscontinuity, due to o re-recognition in bank financial stattements of assets sold or securitised. Source: In ntesa Sanpaolo Reseearch Department elaboration e on Bankk of Italy da ata. Wea aknesses The Sviluppo o Decree hass aligned the e legal and ffiscal treatment of bonds issued by b unlisted com mpanies with llisted companies. bank Increasing b corporates. disinterm mediation, especially for % Italian GDP in 201 3-17; Best Case = +1/3% + Italian GDP Note: Base Case = +0/1% 17. Source: Intesa Sa anpaolo Research ellaborations on S&P data 2013-1 HY Gradual align nment of funding cost betwe een bank loanss and bonds. Possible pre-ffunding of 2016-17 maturitie es. Willingness to o maintain a so ound liquidity buffer. b Exposure to sove ereign risk still conditioning cost c of funding g, alb beit improving.. Poor macroecon nomic contexxt weighing on corporatees’ invvestment spend ding and demaand for credit. Sound liquidity position and low refinanciing needs unttil 20 016-17 on averrage. 20 013 issuance already covers 22014-15 bond maturities. Ab bsence of a de eveloped privaate placement market, whicch has limited issuess to below EURR 150-200M. Increase of p private placem ments abroad, even by unrrated companies, with high brand b recogn nition and b broad geographical diversification. 16 Inttesa Sanpao olo Research Departmen nt Credit Sector Report 20 December 2013 Senior Bonds Issued by Italian Corporates in Euro in 2013 (only institutional) Maturity 15.01.19 15.01.20 01.02.18 18.09.14 29.01.28 21.08.15 21.02.18 15.03.18 01.04.20 30.06.17 29.01.21 26.04.18 30.04.19 15.05.20 24.04.18 07.05.17 30.09.17 21.02.18 22.05.23 12.05.14 04.12.14 18.06.18 10.07.23 10.01.21 16.07.18 14.10.19 22.07.20 01.08.18 01.08.18 01.08.20 13.06.17 13.02.20 12.09.18 12.09.25 14.10.19 25.09.20 10.04.21 17.10.18 24.01.19 26.02.21 15.12.19 15.11.20 15.11.19 19.11.18 22.11.21 12.09.25 28.11.18 19.01.21 15.06.18 01.12.20 31.12.21 20.02.21 13.01.22 Sprd at issue1,2 538 193 305 60 516 569 645 170 208 322 672 671 385 375 696 340 40 145 225 140 283 391 541 268 567 658 771 105 155 230 130 487 330 275 392 128 550 612 765 319 136 115 292 324 709 609 180 165 190 e Coupon (%) 5.6 6.4 7.9 4.4 5.2 0.8 6.1 6.6 7.1 2.4 3.4 3.9 5,5 7.4 4,5 4.3 7.2 6.1 3.4 0.6 1.7 3.3 3.3 4.4 5 7 4.0 6.1 7.3 8.5 2.4 3.5 3.8 3.8 6.8 4.9 3.3 4.0 5.1 2.9 5.8 7.3 8.5 3.8 2.625 3.75 3.9 4.5 7.625 7.1 3.5 3.3 3.6 pl M 250 300 180 250 700 150 350 1,250 200 1,000 500 230 150 300 300 145 275 150 68 60 250 750 1,000 500 275 850 750 400 200 425 250 500 600 900 400 1,000 500 750 375 750 200 215 200 300 800 300 300 700 320 600 600 600 500 m Name Cerved Tech. Cerved Tech. Zobele Holding FGA Capital Ireland Hera MERCEDES-BENZ FIN SERV Italcementi Fiat Finance & Trade IVS Group Snam Snam EI TOWERS Wind Acquisition TITAN LUXCO Indesit Imm.re Grande Distribuzione Sisal Holding SpA Italcementi Hera MERCEDES-BENZ FIN SERV FGA Capital Ireland Poste Italiane ENI SPA A2A SPA Amplifon SpA Fiat Finance & Trade Ltd SA Ferrovie dello Stato SALINI COSTRUTTORI SPA GAMENET SPA MANUTENCOOP FACILITY Snam Snam ACEA ENI Fiat Finance & Trade Telecom Italia Hera FGA Capital Ireland Mediaset Atlantia RHINO BONDCO S.P.A RHINO BONDCO S.P.A MARCOLIN SPA FINCAN CAN NAV ITALIANI ENI SPA ENI SPA LINEA GROUP HOLDING SPA Finmeccanica SNAI SPA ASTALDI SPA FERROVIE DELLO STATO AEROPORTI DI ROMA SPA A2A SPA Sa 2013 Jan.15 Jan.15 Jan.21 Jan.21 Jan.21 Feb.12 Feb.14 Mar.12 Mar.26 Apr.03 Apr.03 Apr.18 Apr.19 Apr.18 Apr.22 Apr.29 May.08 May.14 May.16 May.17 May.22 Jun.10 Jul.02 Jul.02 Jul-09 Jul-09 Jul.15 Jul.23 Jul.25 Jul.26 Sep.02 Sep.02 Sep.05 Sep.05 Sep.12 Sep.19 Sep.26 Oct.10 Oct.17 Oct.22 Oct.25 Oct.25 Nov.07 Nov.05 Nov.14 Nov.14 Nov.21 Nov.26 Nov.27 Nov.27 Dec.05 Dec.05 Dec.09 Moody's B2 B2 B2 Baa3 Baa1 A3 Ba2 B1 Baa1 Baa1 (P)B2 (P)B1 Baa1 A3 Baa3 Baa2 Baa3 B1 (P)B1 (P)B2 Baa1 Baa2 A3 B1 Baa3 Baa1 Baa3 Baa1 (P)B2 (P)B2 (P)B2 A3e A3e Ba1 (P)B1 (P)B1 Baa3 Baa3e S&P Fitch B BBB BBB+ ABB+ BBBBAABBB B BBB+ ABBB - BBB+ A BBB BBBBBBB BBB+ BB (P)B+ - BBB+ A /*A+ BBBBBBBBBB BB+ BBBBBB+ A(P)BA /*- BBB-e BB+ (P)B(P)B+ B+e BBB BBB+e - BBB+e - Notes: the ratings reported in the table are those at issue date on individual issues. 1) For fixed bond spreads over MID Swap at launch, 2) Floaters = floater spreads. Issues classified by Thomson as: “Government and Agencies” are excluded; only issues that amount to a minimum of EUR 50M were included; Source: Thomson One/Bloomberg Subordinated bonds Issued by Italian Corporates in Euro in 2013 (only institutional) Launch date Name M Coupon Maturity Sprd at issue1,2 2013 Mar.13 Telecom Italia 750 7.75 20.03.73 Sep.03 ENEL 1,250 6.5 10.01.74 524 Nov.27 SNAI SPA 160 12 15.12.18 1134 Moody's S&P Fitch Ba2 /*Ba1 (P)Caa1 BB (P)CCC BB BBB- Notes: the ratings reported in the table are those at issue date on individual issues. 1) For fixed bond spreads over MID Swap at launch, 2) Floaters = floater spreads. Issues classified by Thomson as: “Government and Agencies” are excluded; only issues that amount to a minimum of EUR 50M were included; Source: Thomson One/Bloomberg Intesa Sanpaolo Research Department 17 Credit Sector Report 20 December 2013 Italian Corporate bond denominated in euro matured in 2013 Name Country AEM SPA IT DOLOMITI ENERGIA IT ENEL SOC AZIONI IT ENI SPA IT FERROV DEL STATO IT FGA CAPITAL IRE IR FIAT FIN & TRADE LX FINMECCANICA FIN LX HERA SPA IT SAFILO CAP INTL LX TELECOM ITALIA FIN SA LX TELECOM ITALIA IT TELECOM ITALIA IT EUR M 500 97 750 1500 600 500 1000 750 140 135 678 437 268 Coupon (%) 4.875 3.467 4.25 4.625 0.055 4 6.625 8.125 1.75 9.625 6.875 6.75 0.837 Maturity (M) 30.10.2013 (M) 20.12.2013 (M) 12.06.2013 (M) 30.04.2013 (M) 05.09.2013 (M) 28.03.2013 (M) 15.02.2013 (M) 03.12.2013 (M) 01.10.2013 (M) 15.05.2013 (M) 24.01.2013 (M) 21.03.2013 (M) 19.07.2013 M=matured. Source: Intesa Sanpaolo elaboration on Bloomberg data (only issues that amount to a maximum of EUR 50M were included) m Coupon (%) 4.875 4.875 5 4.25 0.41 5.875 5.25 1.657 4.375 6.125 7.625 5.125 0.613 7.875 4.75 4.25 e EUR M 300 299 2218 700 1000 1250 500 250 750 900 1250 274 60 284 557 600 pl Italian Corporate bonds denominated in Euro maturing in 2014 Name Country ACEA SPA IT ASM BRESCIA IT ATLANTIA IT EDISON SPA IT ENEL (ENTNZENEL) IT ENI SPA IT FGA CAPITAL IRE IR FGA CAPITAL IRE IR FGA CAPITAL IRE IR FIAT FIN & TRADE LX FIAT FIN & TRADE LX GRUPPO ESPRESSO IT MERCEDES-BENZ FI IT TELECOM ITALIA IT TELECOM ITALIA IT TERNA SPA IT Maturity 23.07.2014 28.05.2014 09.06.2014 22.07.2014 20.06.2014 20.01.2014 28.02.2014 04.12.2014 18.09.2014 08.07.2014 15.09.2014 27.10.2014 05.12.2014 22.01.2014 19.05.2014 28.10.2014 Source: Intesa Sanpaolo elaboration on Bloomberg data (only issues amounting to a minimum of EUR 50M are included) Sa Italian Corporate bonds denominated in Euro maturing in 2015 Name Country EDISON SPA IT ENEL FINANCE INTL NV NE ENEL SPA IT ENEL SPA IT ENI SPA IT ENI SPA IT FIAT FINANCE & TRADE LX CNH INDUSTRIAL FIN EUR LX IMPREGILO INT INFRASTRCT NE LUXOTTICA GROUP SPA IT MERCEDES-BENZ FIN SERV I IT PRYSMIAN SPA IT ROMULUS FINANCE S.R.L IT ROMULUS FINANCE S.R.L IT SARAS SPA IT SNAM SPA IT TELECOM ITALIA SPA IT TELECOM ITALIA SPA IT EUR M 500 1250 1300 1000 1000 1000 1500 1000 150 500 150 400 200 175 250 750 750 120 Coupon (%) 3.25 4.625 1.125 5.25 1.209 4 6.875 5.25 6.526 4 0.8 5.25 1.11 1.11 5.583 2 4.625 0.858 Maturity 17.03.2015 24.06.2015 14.01.2015 14.01.2015 29.06.2015 29.06.2015 13.02.2015 11.03.2015 26.11.2015 10.11.2015 21.08.2015 09.04.2015 20.02.2015 20.02.2015 21.07.2015 13.11.2015 15.06.2015 23.11.2015 Source: Intesa Sanpaolo elaboration on Bloomberg data (only issues amounting to a minimum of EUR 50M are included) 18 Intesa Sanpaolo Research Department Credit Sector Report 20 December 2013 Italian Corporate bonds denominated in Euro maturing in 2016 Name Country A2A SPA FIXED ATLANTIA FIXED BUZZI UNICEM FIXED CAMPARI MILANO FIXED ENEL FIN INTL NV FIXED ENEL SPA FLOATING ENEL SPA FIXED ENI SPA FIXED FERROV DEL STATO FLOATING FIAT FIN & TRADE FIXED FIAT FIN & TRADE FIXED HERA SPA FIXED GTECH SPA FIXED PIAGGIO & C FIXED PIRELLI & C SPA FIXED SNAM FIXED SNAM FLOATING TELECOM ITALIA FIXED TELECOM ITALIA FIXED TELECOM ITALIA FLOATING EUR M 762 1500 350 350 1500 1000 2000 1500 194 1000 1000 500 750 150 500 1000 300 1000 850 400 Coupon (%) 4.5 5.625 5.125 5.375 4 1.082 3.5 5 0.22 6.375 7.75 4.125 5.375 7 5.125 4.375 1.075 5.125 8.25 0.99 Maturity 02.11.2016 06.05.2016 09.12.2016 14.10.2016 14.09.2016 26.02.2016 26.02.2016 28.01.2016 15.06.2016 01.04.2016 17.10.2016 16.02.2016 05.12.2016 01.12.2016 22.02.2016 11.07.2016 17.10.2016 25.01.2016 21.03.2016 07.06.2016 Source: Intesa Sanpaolo elaboration on Bloomberg data (only issues amounting to a minimum of EUR 50M are included) e Italian Corporate bonds denominated in Euro maturing in 2017 Name Country ATLANTIA SPA IT EDISON SPA IT ENEL-SOCIETA PER AZIONI IT ENEL FINANCE INTL NV NE ENI FINANCE INTL SA BE ENI SPA IT ENI SPA IT ENI SPA IT EXOR SPA IT FIAT FINANCE & TRADE LX FIAT FINANCE NORTH AMERI US FINMEC FINANCE SA LX IMMOBILIARE GRANDE DIST IT MEDIASET SPA IT SEAT PAGINE GIALLE SPA IT SEAT PAGINE GIALLE SPA IT SEAT PAGINE GIALLE SPA IT SISAL HOLDING IST DI PAG IT SNAM SPA IT TELECOM ITALIA SPA IT TELECOM ITALIA SPA IT TERNA SPA IT WIND ACQUISITION FIN SA LX WIND ACQUISITION HOLDING LX Sa m pl EUR M 1000 600 1500 1000 100 215 1110 1250 690 850 1000 600 145 300 550 200 65 275 1250 1000 1000 1250 1250 497 Coupon (%) 3.375 3.875 5.25 4.125 3.75 3.128 4.875 4.75 5.375 7 5.625 4.375 4.335 5 10.5 10.5 10.5 7.25 2.375 7 4.5 4.125 11.75 12.25 Maturity 18.09.2017 10.11.2017 20.06.2017 12.07.2017 25.05.2017 11.10.2017 11.10.2017 14.11.2017 12.06.2017 23.03.2017 12.06.2017 05.12.2017 07.05.2017 01.02.2017 31.01.2017 31.01.2017 31.01.2017 30.09.2017 30.06.2017 20.01.2017 20.09.2017 17.02.2017 15.07.2017 15.07.2017 Source: Intesa Sanpaolo elaboration on Bloomberg data (only issues amounting to a minimum of EUR 50M are included) Intesa Sanpaolo Research Department 19 Credit Sector Report 20 December 2013 Company Section 21 ATLANTIA: Credit View Neutral 22 A2A: Credit View Positive 23 CIR: Credit View Neutral 24 CNH INDUSTRIAL: Credit View Neutral 25 ENEL: Credit View Neutral 26 ENI: Credit View Neutral 27 EXOR: Credit View Neutral 28 FIAT: Credit View Neutral 29 FINMECCANICA: Credit View Negative 30 e ACEA: Credit View Neutral 31 HERA: Credit View Neutral ROTTAPHARM: Credit View Neutral m SNAM: Credit View Neutral pl GTECH: Credit View Positive 32 33 34 TELECOM ITALIA: Credit View Not Assigned 35 TERNA: Credit View Neutral 36 20 37 Sa WIND: Credit View Neutral Intesa Sanpaolo Research Department Credit Sector Repo ort D 201 13 20 December ACEA: A Cred dit View Neutral N (M Moody’s B Baa2/Neg.., S&P BBB B-/Stable, FFitch BBB+ +/Neg.) Alesssandro Chiodini +39 02 8794 1115 EBITDA E breakdo own (2012) Inco ome performan nce So ource: Company data, Intesa Sanpaolo Research elaboratio on Sourcce: Company data, Intesa Sanpaolo Ressearch elaboration Credit C View, Ra ating, and Bond d Recommenda ation Strengths S m pl e Credit View Neutral. We confirm our Credit C View Neeutral on Acea in view of the e group’s solid operating perrformance, wh hich should contin nue to be underpinned by th he 80% contr ibution of regulated activitie es. However, i n our credit view, we factorr in stable metricss in the coming months give en a slowdown n in the collecttion of overdue receivables ffrom the publiic sector, and the t confirmation of a sizeable 60-65% 6 dividend pay-out. Ratings Und der Pressure. Acea’s rating is aligned to th hat of Italy by both Moody’ss and Fitch, w with a negative outlook that the t agencies belieeve reflects Accea’s exposure e to the econo omic situation in Italy. At the same time, S&P has assigned a one notch lower rating b but with a stab ble outlook, reflecting its view w of the favou urable impact of o managemennt’ steps to reccover some of the t financial flexibility that the agency believe es it has lost i n recent yearss. A further do owngrade wouuld be triggered, said S&P, by b a failure to streengthen its creedit metrics an nd to contain negative work king capital ou utflow, but alsoo by a Moodyy’s downgradee of Italy’s rating. Market Focu us. Whilst initiaatives aimed at a strengthenin ng the group’ss credit metricss could be suppportive of furtther compression in risk premiu ums, we mainttain a HOLD recommendatio on on Acea’s bonds factorin ng in slower ppayment of ove erdue receivab bles from the pub blic sector, and increased financial pressu ure from its major sharehold der, Comune ddi Roma – tra anslating into the t confirmation of a generous dividend policcy. Wea aknesses Sa Leader in waater business in Italy, while e ranking fourrth in electricity disttribution and waste w activitiess. High contribu ution from reegulated activities (80% of FY12 EBITDA) proviiding predictab ble revenues an nd cash flows. Long-term co oncessions in reegulated business. Focus on operational efficieencies and costt-cutting. Low refinanciing risk until 20 016. Reduced regu ulatory uncertainty in the water w division (50% of EBITDA) with supportive transitory tarifffs in 2012-13.. Sig gnificant expossure to Italy coountry risk. Rissk of regulatory and/or fiscal changes. Hig gh exposure to o public sector customers. Co orporate goverrnance negativvely affected by b City of Rom me, its major shareho older (51%). Ge enerous dividen nd policy. Still low visibility on the group’’s long-term strategy. Au utomatic downgrade drivenn by a downward revision in Italy’s rating by Moody’s M or Citty of Rome’s ra ating by Fitch. Leverage L trend (x) Deb bt repayment schedule s (EUR M M, 30.09.13) So ource: Company data, Intesa Sanpaolo Research elaboratio on Sourcce: Company data, Intesa Sanpaolo Ressearch elaboration In ntesa Sanpa aolo Researcch Departme ent 2 21 Credit Sector Repo ort D 201 13 20 December ATLANTIA: A : Credit View Neutra al Maria Ga abriella Tronco oni +39 02 8794 1117 (M Moody’s B Baa1/Neg.., S&P BBB B+/Neg., Fiitch A-/Ne eg.) Revenues R by ge eographical are ea (1H13) Inco ome performance So ource: Company data, Intesa Sanpaolo Research elaboratio on Source e: Company data, In ntesa Sanpaolo Reseearch elaboration Credit C View, Ra ating, and Bond d Recommenda ation Strengths S Sa m pl e Credit View Neutral. We maintain our Credit View N Neutral on Atlantia based on encouraging ssigns of impro ovement seen in 9M13, low reefinancing riskk until 2017, and a higher co ontribution exp pected from fo oreign concesssionaires, whicch should offseet the negative impact of the traffic decline in Italy, albeitt improving qo oq (-2.4% in 1Q13, -2.7% inn 2Q13, and -0.8% in 3Q13 3). erger of Atlan ntia and Gemina (the holdin ng of Aeropo rti di Roma, “AdR”) “ becam me We remind tthat on 1 Deccember the me effective, creaating a global leader in the in nfrastructure ssector, with 5,0 000km of toll motorway andd over 41M airport passengers served in 201 12. We expectt a neutral imp pact on Atlanttia’s credit pro ofile, given no cash outlay, G Gemina’s relattively small size, favourable prrospects of AdR R, and separate funding of A Autostrade perr l’Italia (API) an nd AdR, on a nnon-recourse basis. b Ratings Und der Pressure. Fitch, F Moody'ss and S&P havee maintained a negative outlook on Atlanttia’s ratings. Moody’s M has said it could down ngrade Atlantia’s rating in ca ase of: 1) mateerial change in n terms and co onditions of keey concessions; 2) evidence of o political interrference and/o or discriminato ory fiscal meassures; 3) large e investment/a acquisition witth a negative impact on th he group’s finan ncial profile; an nd 4) deteriora ation in credit metrics (FFO/d debt ratio belo ow 11-12% annd FFO/financial charges ratio below 3.5x). A downgrade of Italy’s rating g would be likkely to result in n a downgrade e of Atlantia's rrating by Moody’s, whilst S& &P allows a two--notch maximu um distance with w the sovereeign. S&P has said it could downgrade d Atllantia’s rating if the compan ny adopts a morre aggressive financial policy and/or if the o operating enviironment deteriorates, reduccing its ability to t improve cassh flow generation. Fitch has said s it could do owngrade Atlaantia’s rating if its net debt/EB BITDA ratio is ssustainably above 6x. Market Focu us. We maintaain a HOLD reccommendation n on Atlantia’ss bonds, as the ey are almost aligned with the t JPM Utilitiees indices for BB BB-rated bondss at correspond ding maturitiess. High and stteady cash flow from the e API concesssion, accounting fo or 80% of totaal EBITDA (expiry in 2038). Favourable an nd transparentt industry regulation. High liquidity and low refinaancing risk unttil 2017. Positive trafficc dynamics in Latin L America. Business diverrsification after the merger with w Gemina. Wea aknesses Hig gh exposure to o Italy countryy risk, where re ecession weigh hs on n traffic volume es. Low de-leveraging until 20155, given the sizeable capex, rig gid dividend po olicy, and internnational expan nsion. Ratings under pressure p due to sovereign risk and hig gh levverage. Leverage L trend (x) Debt repayment sc chedule (EUR B Bn, 30.09.13) So ource: Company data, Intesa Sanpaolo Research elaboratio on Source e: Company data, In ntesa Sanpaolo Reseearch elaboration 22 2 Inttesa Sanpao olo Research Departmen nt Credit Sector Repo ort D 201 13 20 December A2A: A Credit View Po ositive Alessandro Chiodiini +3 39 02 8794 1115 (M Moody’s B Baa3/Neg.., S&P BBB B/Neg.) EBITDA E breakdo own (2012) Inco ome performance So ource: company datta, Intesa Sanpaolo Research elaboration Source e: company data, Intesa Sanpaolo Resea earch elaboration Credit C View, Ra ating, and Bond d Recommenda ation Wea aknesses Sa Strengths S m pl e Credit View Positive. We confirm our Positive P Credit View on A2A, as we expectt the strengtheening in its financial profile to t continue overr the coming months, m in line e with the gro oup’ strong commitment to deleveraging. In its 2013-15 5 strategic plan n, A2A pointed to a net debt down to EUR 3.2Bn at YE15 5 from EUR 4.3 3Bn at YE12, and a a leverage down to 2.5x from 4.1x, as a result of orgaanic growth (drriven by energyy and waste diivisions), opera ational streamlining in wastee activities, conservative capex, disposal of minorities’ shareeholdings, and cost reduction n. While we re ecognise the po otential headw winds from con ntinued pressurre on domestic power generaation margins, this should b be mitigated by b A2A’s favou urable gas proocurement policy and flexible thermal fleet, as well as thee stability grantted by regulateed and quasi-regulated activities (approx. 550% of total EBITDA). Ratings Und der Pressure. Moody’s M and S&P’s S negativee outlook refleccts A2A’s high h exposure to tthe poor counttry environmen nt in Italy, weighed by difficult electricity market m conditio ons, and its we eakened credit metrics as a result of a pa ast debt-fundeed M&A activity and generous dividend policcy. However, th he recovery in the group’s crredit metrics ovver the last 12 2 months should have provided d some relief to t ratings pressure, in our vieew. A potentia al downgrade could also be triggered by a downgrade of o Italy’s rating, according to S&P. S Market Focu us. We confirrm our BUY recommendati r ion on A2A’s bonds, as th hey are still aattractive compared with th he corresponding g JPM Utility indices for BB BB-rated bond s, preferring the t 11/19 issu ue across the curve. We alsso reiterate ou ur relative value recommendattion in favour of o A2A againstt Acea and Hera bonds. Italy’s largesst multi-utilityy and secon nd largest po ower generator. Diversified and vertical integ grated businesss mix. High contrib bution from regulated and quasi-regu lated activities (50% % of total EBITTDA). Competitive gas procurem ment policy an nd flexible theermal generator’s fleet. Positive FCF aafter dividends,, devoted to debt reduction. Strong comm mitment to deeleveraging an nd low refinan ncing risk until 2016 6. We eak economic prospects in Ittaly. Hig gh operationa al risk profile due to expa ansion in non nreg gulated activities (energy andd waste). Grradual expiry of CIP 6 incentivves (EUR 50M over 2013-15). We eak financial profile p and hig h leverage due to past M&A As and generous divvidend policy. Renewed rating g pressure in case of lag gged or halteed deleveraging, or an Italy downggrade. Regulatory and political p risks. Leverage L trend (x) Debt Repayment Schedule S (EUR B Bn, 31.12.12) So ource: company datta, Intesa Sanpaolo Research elaboration Source e: company data, Intesa Sanpaolo Resea earch elaboration In ntesa Sanpa aolo Researcch Departme ent 2 23 Credit Sector Repo ort D 201 13 20 December CIR: C Credit View Neu utral Maria Ga abriella Tronco oni +39 + 02 8794 1117 (S S&P BB/Po ositive) Group G revenues by geographical area (1H13 3) Grou up income perfformance So ource: Company data, Intesa Sanpaolo Research elaboratio on Source e: Company data, In ntesa Sanpaolo Reseearch elaboration Credit C View, Ra ating, and Bond d Recommenda ation Sa Strengths S m pl e Credit View Neutral. Follo owing the favo ourable ruling of the Civil Co ourt of Cassation in Septem mber on Lodo Mondadori, M CIR’s financial flexibility has imprroved considerrably, although h the impact on o its credit prrofile will depeend on the wa ay the addition nal funds are utilised. We also remain cautious on the prosspects of Sorge enia, affected as it is by heavvy asset write--downs and high leverage. Pen nding any decission on the liq quidity investm ments, we conffirm our Creditt View Neutrall on CIR, based d on the group’s weak fundam mentals and thee still-difficult outlook, o particcularly for Sorg genia. Rating Upgrrade Potentia al. On 12 Nove ember, S&P reevised its outlo ook on CIR to positive from stable, while affirming the BB issuer and issue ratings. Thee outlook revission reflected SS&P’s view tha at CIR's credit metrics m have siignificantly imp proved following the final rulin ng on the Lodo o Mondadori proceedings, i n which Fininvvest was orderred to pay CIRR compensatio on of EUR 491M, resulting in a net gain of EU UR 319M, excluding legal co osts and taxes. As a result, S& &P said it may raise CIR’s ratting to BB+ if the t company: 1) invests its available funds in n improving th he credit qualitty of its asset portfolio; 2) reefinances Sorg genia well befo ore of the bank lin nes; and/or 3) maintains m a loaan-to-value rattio sustainably below 15%. C Conversely, S& &P may revise the t the maturity o outlook to staable if a large part p of CIR's financial flexibillity is used for a dividend payyment, or if theere is a lack off improvementt in the performance of CIR's main m operating companies. us. Although attractive, a we confirm a HO OLD recommendation on CIR’s 2024 bonnd, given the difficult financcial Market Focu situation of SSorgenia, which has recentlyy started talks w with banks ovver debt restructuring. On thhe other hand,, we continue to believe that C CIR’s 5Y CDS iss attractive, and recommend selling it both h outright and against the 5Y Y Crossover. Wea aknesses Sound industrial portfolio diversification. High financiaal flexibility and low refina ancing risk att the holdings levell. Conservative financial policyy (EUR 1.5Bn NAV, N LTV <15% %). Operating subsidiaries’ deb bt is non-recou urse and not ccrossdefaulted with the holdingss’ debt. We eak asset quality of main poortfolio investm ments, especiaally Sorgenia (13% of o NAV). Hig gh exposure to Italy countryy risk via Sorg genia, L’Espressso and KOS (70% of o consolidatedd revenues in 1H13). 1 ery high leverag ge of Sorgeniaa and debt resttructuring. Ve Ou utlook still poor for Sorgenia and L’Espresso o. CIR C group: Leve erage trend (x) CIR Holdings: H NAV by equity inveestments (price es at 18.12.13) So ource: Company data, Intesa Sanpaolo Research elaboratio on Source e: Company data, In ntesa Sanpaolo Reseearch elaboration 24 2 Inttesa Sanpao olo Research Departmen nt Credit Sector Repo ort D 201 13 20 December CNH C INDUS STRIAL: Crredit View w Neutral Maria Gabriella Tronco oni +3 39 02 8794 1117 (M Moody’s B Ba1/Stable e, S&P BB+ +/Stable) Revenues R by ge eographical are ea (2012) Inco ome performance So ource: company datta, Intesa Sanpaolo Research elaboration Source e: company data, Intesa Sanpaolo Resea earch elaboration Credit C View, Ra ating, and Bond d Recommenda ation Strengths S Sa m pl e Credit View w Neutral. Bassed on the co ompany’s 9M1 13 results and unchanged 2013 2 targets, we confirm our o Credit View w Neutral on CN NH Industrial (C CNHI), expecting a broadly sstable credit prrofile this past year, supporteed by a strong performance of o the agriculturral equipment (AG) business that should o offset ongoing weakness at trucks t and thee construction equipment (CE) divisions, in o our view. CNHI has said it plans to present a new businesss plan in 1Q14 4. Stable Ratin ngs. Although management remains comm mitted to achie eving an investment grade rrating, we do not expect it to t materialise in the short term m. Following the t merger of Fiat Industrial (FI) and CNH into CNHI NV V on 29 September 2013, th he rating agenciees assigned neew ratings to CNHI, C with a sttable outlook. Moody’s has said it could uppgrade CNHI’s Ba1 rating if: 1) EBITA margin ns rise to aroun nd 8%; 2) EBIT T/interest expen oves to 4.0x; and a 3) debt/EBBITDA ratio falls below 3.0x. In nse ratio impro contrast, Moody’s has statted that it could downgrad de CNHI’s rating if: 1) EBITA A margins falll below 6%; 2) EBIT/interest o falls to 2.5x;; and 3) debt//EBITDA ratio rises above 3.5x. S&P could d lower CNHI ’s BB+ rating if its operatin ng expense ratio performance and cash geneeration weaken n, causing cred dit metrics to deteriorate d as follows: 1) debbt/EBITDA ratio o above 4x, an nd d it could raise CNHI’s rating if: 1) debt/EBIITDA ratio is below 3x; and 2) 2 2) FFO/debt ratio below 20%. In contrastt, S&P has said FFO/debt ratio o is above 30% %. Market Focu us. We downg grade our reco ommendation on FIIM bond ds to SELL from HOLD, becaause of their tight valuation ns compared witth ML Euro HY Y index for BB-rated bonds, despite the fa act that the ratting agencies hhave ruled outt an upgrade to t investment grrade territory in the short terrm. Wea aknesses World’s fourtth-largest capiital goods gro oup and secon nd in agricultural eq quipment. hic diversification. High product and geograph gration and technological t leadership in fuel Vertical integ efficiency and d emissions red duction. HI, due to a sim mpler Lower cost off funding expeected for CNH allocation of iintra-group capital. ng upgrade to IG in the medium term. Potential ratin Cyyclical and high hly capital-intennsive businesse es. Lower demand of trucks in EEurope and off CE worldwid de expected in 2013. Weaker deemand of AG G in NA and of o tru ucks in Brazil exxpected in 20114. He eavy capex-plan n in 2013-201 4 (EUR 1.3-1.4 4Bn p.a.). Hig gh funding nee ed of CNH Cappital and relian nce on ABS. Joiint liability witth Fiat for thee group’s pre--demerger deb bt (up p to EUR 3.75B Bn, ex. art. 25006 Civil Code).. Leverage L trend (x) Debtt repayment sc chedule (EUR B Bn, 30.09.13) So ource: Company data, Intesa Sanpaolo Research elaboratio on Source e: Company data, In ntesa Sanpaolo Reseearch elaboration In ntesa Sanpa aolo Researcch Departme ent 2 25 Credit Sector Repo ort D 201 13 20 December ENEL: E Cred dit View Neutral Alessandro Chiodini +3 39 02 8794 1115 (M Moody’s B Baa2/Neg.., S&P BBB B/Stable, F itch BBB+/RWN) EBITDA E breakdo own (9M13) Inco ome performan nce So ource: company datta, Intesa Sanpaolo Research elaboration Sourcce: company data, Intesa Sanpaolo Reseearch elaboration Credit C View, Ra ating, and Bond d Recommenda ation Strengths S Sa m pl e Credit View Neutral. We confirm our Credit View Neu utral on Enel maintaining m tha at the strong ccommitment to o deliver further on its deleveeraging targetss, together with w a greater contribution from renewab bles and Latinn America ope erations, should contribute to offset the glo oomy industria al outlook in IItaly and Spain n. Although generation marrgins are set to remain under pressure in m mature marketss, the companyy has confirmeed its FY13 targ gets with a po otential upbeatt in net debt ta arget (EUR 40B Bn vs. previous EEUR 42Bn). This is also in light of recent p rogress in tack kling its balancce sheet issuess through the implementatio on of its strategiic plan, including: EUR 1.4Bn of asset disp posals (vs. targ geted EUR 6Bn n by 2014), EU UR 2.6Bn of hybrid h issues (vvs. targeted EUR 5Bn by 2014)), and opex cutts (EUR 4Bn byy 2014). Howe ever, we recognise the potenntial threat stem mming from th he heightened reegulatory and political risk in n Spain, given rrecent amendm ments to the energy e reform envisaging the e removal of th he government ccontribution to o 2013 sector’ss revenues, imp plying that utilities will have to fund the reelative EUR 3.6Bn tariff deficit. Ratings Und der Pressure. All A Enel’s ratin ngs are aligned d to that assigned on Italy, given g the relevvant domestic exposure. Whiile S&P cut its ratting to BBB bu ut revised the outlook o to stab ble following Ittaly’s downgra ade in July, Mooody’s kept its Baa2 rating an nd negative outlook, reflecting g that on the sovereign. Ho owever, recent deleveraging announcemennts should havve moved Enel’s credit metricss closer to the required guida ance for curren nt ratings: FFO O/net debt of around 20% att Moody’s and 18% at S&P. A downgrade could intervenee if: 1) Enel fails to improve i ts financial pro ofile in line witth provided guuidelines by 20 014; 2) a further deterioration in the operating environment; and 3) in ccase of a down ngrade of Spain (Baa3/Stablee) or Italy (Baa2 2/Neg) to belo ow investment g grade, according to Moodyy’s. S&P, in ccontrast, sees no correlatio on with Spainn’s rating, given the group p’s diversification n in Latin Amerrica, whilst a one-notch o dow wngrade of Italyy does not trigger an automaatic cut in Enell’s rating. Market Focu us. We maintain an HOLD re ecommendatio n on Enel’ sen nior bonds give en the limited sspread differential against th he JPM Utility index. Converseely, we reiteratte our BUY reccommendation n on Enel’s hybrid bonds in light of its hig gh-risk premium differential vss. senior paper,, and an unlike ely dividend cu ut allowing a co oupon deferral. Leader operattor in Italy and d Spain. Relevant con ntribution from m regulated activities a (50% % of EBITDA). Increasing exxposure to high growth countries c in LLatin America and Central Europee. Focus on deleeveraging supp ported by hybrid bond issuaance, asset disposalls, capex optim misation and lo ower opex. Good liquidityy position and low refinancin ng risk until 20 017. Leverage L trend (x) So ource: company datta, Intesa Sanpaolo Research elaboration 26 2 Wea aknesses Hig gh exposure to o poor environnment in Italy and a Spain (60% % of EBITDA). Persisting regula atory and poolitical risk, mainly m in Spain folllowing recent amendments to the energy reform. Co onstrained marrgins from elecctricity generation in Italy an nd Spain. Hig gh level of deb bt and leveragee vs. European peers. Ratings under pressure, p due to weak cred dit metrics an nd sovvereign correla ation. Deb bt Repayment Schedule S (EUR Bn, 30.09.13) Source e: company data, Inttesa Sanpaolo Reseaarch elaboration Inttesa Sanpao olo Research Departmen nt Credit Sector Repo ort D 201 13 20 December ENI: E Credit View Neu utral (M Moody’s A A3/Neg., S&P S A/CWN, Fitch A A+/Neg.) Maria Gabriella Tronco oni +3 39 02 8794 1117 Revenues R by ge eographical are ea (2012) Inco ome performance So ource: Company data, Intesa Sanpaolo Research elaboratio on Source e: Company data, In ntesa Sanpaolo Reseearch elaboration Credit C View, Ra ating, and Bond d Recommenda ation Strengths S Sa m pl e Credit View Neutral. Baseed on the grou up’s weak opeerating perform mance in 9M13 3 and still-diffiicult market co onditions across c flow gene eration to remaain under presssure in the nexxt the board, wee confirm our Credit View Neutral on ENI, expecting its cash few quarters.. We thereforee expect broad dly stable leverrage in 2013, mainly due to o substantial assset disposals (YTD cash-in of o o highlight tha at in October, the BoD approved the starrt of a flexiblee share buy-ba ack programm me around EUR 6Bn). We also (authorisation n up to EUR 6B Bn). der Pressure. ENI’s ratings remain at riskk of downgrad de. On 16 Julyy, S&P placed ENI’s rating on o CreditWatcch Ratings Und Negative (CW WN) following the one-notch h downgrade o of Italy’s rating g to BBB/negative. This refleected the pote ential one-notcch rating downg grade if ENI co ontinues to be e considered a government--related entity (GRE), with ttwo-notches maximum m ratin ng distance allow wed, or if S&P concluded tha at evolving cou untry risk could d harm ENI’s standalone creddit profile (SAC CP) to a greateer extent than ffactored in at that time. S&P P has said it p plans to resolve e its CWN placement by YE 13. Also, Moo ody’s has said it could downgrade ENI’s ratiing if it further cuts Italy's raating, since the maximum distance alloweed between the two ratings is two notches. Fitch has statted it could do owngrade ENI’’s rating in casse of: 1) failure to maintain upstream stra ategic targets in opean oil and gas g peers; 3) ffailure to resto ore refining an nd line with statted goals; 2) above-average operating cossts versus Euro chemical seg gments to pro ofitability by 2015; 2 4) net adjusted debt/FFO consiste ently above 2 x; and 5) FFO O/fixed chargees consistently b below 8x. us. We confirm m our HOLD re ecommendatio on on ENI’s bo onds, given that they are m mostly in line with w JPM Energ gy Market Focu index for A-rrated bonds, and a in view off downward p pressure on EN NI's ratings an nd the immineent start of a share buy-bacck programme. Strong positio on in the profittable E&P secto or. High oil pricess and sizeable oil & gas disco overies. Good position n in G&P secto or in Europe. Ongoing reneegotiations of take-or-pay t ga as contract. High liquidity and low refinaancing risk unttil 2017. Commitment to a disciplinee financial struccture. Strategic stakke of 30.3% ow wned by the Italian governm ment. Wea aknesses E& &P division increasingly depenndent on high-risk non-OECD countries (around d 60% of EBITT in Africa in 20 012). Hig gh exposure to o oil and gas pprice as well as EUR/USD rate Mo oderate exposure to Italy coountry risk (27 7% of revenuees and <7% EBIT in n 2012). We eak performan nce in the gas, refining, chem mical divisions. Pre essure on ratin ngs due to soveereign risk, negative FCF afteer divvidends and share buyback pprogramme (up p to EUR 6Bn). Leverage L trend (x) Debtt repayment sc chedule (EUR B Bn, 30.06.13) So ource: Company data, Intesa Sanpaolo Research elaboratio on Source e: Company data, In ntesa Sanpaolo Reseearch elaboration In ntesa Sanpa aolo Researcch Departme ent 2 27 Credit Sector Repo ort D 201 13 20 December EXOR: E Cred dit View Neutral N Maria Gabriella Tronco oni +3 39 02 8794 1117 (S S&P BBB+//Stable) Consolidate C sale es by geograph hical area (2012) NAV V by equity investment (pricess at 18.12.13) So ource: Company data, Intesa Sanpaolo Research elaboratio on Source e: Company data, In ntesa Sanpaolo Reseearch elaboration Credit C View, Ra ating, and Bond d Recommenda ations Sa Strengths S m pl e Credit View Neutral. Follo owing the sale e in June of itss 15% stake in n SGS, which in our view waas the highest quality asset of o EXOR’s portfo olio, there is great g uncertain nty over the ho olding compan ny’s future investment strateegy. With EUR R 2.5Bn in liquid assets, we reemain concern ned that EXOR R could make a substantial capital injection into the nnew entity resulting from th he eventual merrger of Fiat and a Chrysler, thus increasin ng asset concentration on lower quality investments and potentiallly triggering a d downgrade off EXOR’s rating g. In expectatiion of the holding’s next in nvestment movves, we confirm m a Credit View Neutral on EX XOR, which is linked to our Neutral N Credit V Views on CNH Industrial and Fiat, its main innvestments, which account fo or around 58% o of the current EUR E 8.2Bn NAV V. Stable Rating. The stable outlook reflectts S&P’s view tthat EXOR wo ould continue to t maintain its conservative capital c structurre and meaning gful financial flexibility, with a loan-to-vvalue (LTV) rattio below 20%, even in ttimes of high equity markeet turbulence. A According to S&P, EXOR’s ra ating could be downgraded in the followin ng cases: 1) thhe LTV ratio exxceeds 20%; 2) 2 increasing op perating and financial risks in n its largest in nvestment porttfolio companies, especially Fiat and CNHI; and/or 3) an ny plans by EXO OR for a substaantial equity injjection into an ny of its subsid diaries. We also o note that baased on S&P’s criteria, EXOR R’s rating could rreach up to thrree notches ab bove the sovereeign rating, givven its moderate country riskk exposure to Italy. us. Despite its uncertain stra ategic outlookk, we find EXO OR’s 2017 bon nd attractive ccompared with h JPM Industrial Market Focu index for BBB B-rated bonds. As a result, we e upgrade our recommendattion to BUY fro om HOLD. Wea aknesses One of Europ pe’s biggest invvestment holding companies . ortfolio, streng gthened by th e sale Highly liquid investment po of SGS’ stake in June 2013 (EUR 2.4Bn in cash). Prudent invesstment and finaancial policy (LLTV <20%). 017. Low refinanciing risk until 20 bt is non-recourse and not cross Operating subsidiaries’ deb defaulted with EXOR’s debtt. Mo odest portfolio o diversificatioon, after the sale of a 15% % sta ake in SGS. Pre esence in cyclical sectors expposed to Euro opean econom mic we eakness. Pre edominance off majority stakees limits investtment liquidity. Possible negative e impact from substantial capital injection in e new eventua al Fiat-Chrysler combined enttity. the NAV: N listed and d unlisted invesstments (pricess at 18.12.13) Hold dings’ debt repa ayment schedu ule (EUR M, 30..09.13) So ource: Company data, Intesa Sanpaolo Research elaboratio on Source e: Company data, In ntesa Sanpaolo Reseearch elaboration 28 2 Inttesa Sanpao olo Research Departmen nt Credit Sector Repo ort D 201 13 20 December FIAT: Crediit View Ne eutral (M Moody’s B Ba3/Negattive, S&P BB-/Stable B e, Fitch BB-/Negative e) Maria Ga abriella Tronco oni +39 02 8794 1117 Revenues R by ge eographical are ea and business unit (LTM13) Income performance So ource: company datta, Intesa Sanpaolo Research elaboration Source e: company data, Intesa Sanpaolo Resea earch elaboration Credit C View, Ra ating, and Bond d Recommenda ation Strengths S Sa m pl e Credit View w Neutral. Despite the dow wnward revisio on of its 2013 3 targets, we confirm our Credit View Neutral N on Fiaat, continuing to o expect a broaadly stable cred dit profile for 2 2013, excludin ng the planned d buyout of Chhrysler’s minorrity stake, whicch we believe remains the keyy driver of the group’s prospeects, and, in our view, could d lead to a onee-notch rating downgrade if it r low on n the timing, price p and mix of o funding of C Chrysler’s buyo out. Fiat has said is fully debt-fiinanced. Howeever, visibility remains it intends to present a new w five-year bussiness plan in A April, at which h time it believes there will be more clarity on Chryslerr’s buyout. der Pressure. Fiat’s ratings remain at risk o of downgrade by Fitch and Moody’s. Fitchh has said it co ould downgrad de Ratings Und Fiat’s rating in n case of: 1) a sustained fall in revenue an nd operating margins; m 2) mounting liquidityy issues, includ ding refinancin ng concerns or a major stake increase in Chrrysler, further w weakening the e group’s capittal structure; 33) consolidated gross debt/FFO above 3x; 4) FFiat standalonee gross debt/FFFO above 5x; aand/or 5) evide ence of tangible support to C Chrysler. Mood dy’s said it could downgrade FFiat’s rating if: 1) standalone e negative FCF fails to reducce to significan ntly below EURR 2.5Bn in 201 13; 2) there is a significant losss of market sh hare in Europe; and 3) there is a decline in the earnings and a cash flow contribution from its Braziliaan operations. N Note that only S&P maintain ns a stable outtlook on Fiat’ss rating, but itt has stated it could downg grade it if: 1) its performance in Europe and Brazil is wo orse than expeected; 2) FFO/a adjusted net debt d is below the 12-20% range, and neet kes on higher d debt following the purchase of the remainiing 41.5% stake in Chrysler. debt/EBITDA is above 4.5-5x; and 3) it tak us. We confirm m our SELL reccommendation n on Fiat’s bon nds in view off ratings downngrade risk in case of a deb bt Market Focu financed Chryysler’s buyout,, expectations of negative FC CF of Fiat stan ndalone until 2015-16, 2 and restricted acce ess to Chryslerr’s liquidity. Wea aknesses Leader in Italyy and Brazil, sttrong presence e in the US thro ough Chrysler. a low fuel consumption cars, Well-positioneed in small and light commerrcial vehicles an nd luxury cars. graphical and production diversification d Broader geog with the acquisition of Chrysler. Low refinanciing risk until 2017 for Chrysler on a standaalone basis (but refiinancing risk fo or Fiat excl. Ch hrysler in 2015)). Trrend in industrrial division lev verage (x) Debtt repayment sc chedule (EUR B Bn, 30.09.13) So ource: Company data, Intesa Sanpaolo Research elaboratio on Note: Fiat excl. Chrysler. Source: S Company daata, Intesa Sanpaolo o Research elaboration In ntesa Sanpa aolo Researcch Departme ent Hig gh exposure to o Europe and BBrazil, weak prresence in Asiaa. Revenues concen ntrated in smalll car segment. Low capacity utilisation and larrge losses in Eu urope. Ne ew 2013 targets still am mbitious, implying a stron ng improvement in Chrysler’s perfformance in 4Q Q13. Rating at risk of downgrad e in case off debt-financeed acq quisition of 41.5% stake in C Chrysler. 2 29 Credit Sector Repo ort D 201 13 20 December FINMECCANICA: Credit View Negative N Maria Gabriella Tronco oni +3 39 02 8794 111 17 (M Moody’s B Ba1/Neg., S&P BB+/S Stable, Fittch BB+/Ne eg.) 2012 2 – Revenue es by geograph hical area Inco ome performance So ource: company datta, Intesa Sanpaolo Research elaboration Source e: company data, Intesa Sanpaolo Resea earch elaboration Credit C View, Ra ating, and Bond d Recommenda ation Strengths S Sa m pl e Credit View w Negative. Fo ollowing the company’s c weeak 9M13 resu ults, weighed by Ansaldo BBreda’s heavy losses, and th he downward reevision to its 20 013 targets, we confirm our Credit View Negative N on Finmeccanica. W We continue to believe that th he company’s ou utlook remainss challenging, given the incrreasing pressure on the defe ence budgets iin its main ma arkets (Italy, UK K, and US), and ongoing extraaordinary charg ges related to restructuring actions and co ontract disputees, which we believe b are likeely to continue to o penalise its FCF F generation n. As a result, FFinmeccanica’ss ability to dele everage relies m mainly on assetts disposal. Ratings Und der Pressure. Both Fitch and Moody’s haave maintained d a negative outlook o on Finm meccanica’s ra atings. Moodyy’s said it could d downgrade Fin nmeccanica's rating r if: 1) op perating margin ns will not tren nd towards thee high single-d digit percentag ge range; 2) adjusted debt-to-EBITDA will not n fall and reemain below four f times; 3) it is unable tto maintain a strong liquiditty profile; and 4) free cash flow f does not grow towarrds several hu undred million euro. Fitch hhas said it could downgrad de Finmeccanica’s ratings if: 1)) there are new w material advverse findings in relation to corruption inveestigations; 2) FFO-based F leasse adjusted grosss leverage is sustained s abovve 4x; 3) adjussted FFO margin is below 7% %; 4) FCF is coonsistently neg gative; and/or 5) 5 there are furtther material cash c restructuring charges. W Whilst maintaining a stable outlook, S&P has said it co ould downgrad de Finmeccanica’s rating if its FFO/debt F ratio falls to 15% o or its debt/EBIT TDA increases to t 4.5x. us. Following the t disposal off Ansaldo Enerrgia and the signing of a Mo oU for the expploration of assset disposal alsso Market Focu in the Transpo ortation sectorr, we believe th he downside riisk on Finmecccanica’s bonds has reduced. A As such, we maintain m a HOLLD recommendattion, although h we believe Finmeccanica’s bonds remain slightly expen nsive versus thhe ML EURO HY H index for BB Brated bonds. Predominancee of predictablle defence-rela ated activities. Well-diversifieed position in European E A&D D industry. Sound geograaphical diversiffication. Backlog coverrs around 2.4 years y of produ uction. Strategic stakke of 32.4% heeld by Italian government. Low refinanciing risk until 20 017. Wea aknesses Ne egative A&D in ndustry outloook, given defen nce budget cuts in the main OECD countries. De ependence on Italian military market, expeccted to fall. Exe ecution risk to assets disposaal and restructu uring plans. Reputational risk k due to corrupption investigattion. Rating at risk of further downggrade by Fitch//Moody’s. Leverage L trend (x) Debtt repayment sc chedule (EUR B Bn, 30.09.13) So ource: Company data, Intesa Sanpaolo Research elaboratio on Source e: Company data, In ntesa Sanpaolo Reseearch elaboration 30 3 Inttesa Sanpao olo Research Departmen nt Credit Sector Repo ort D 201 13 20 December GTECH: G Cre edit View Positive Maria Gabriella Tronco oni +3 39 02 8794 1117 (M Moody’s B Baa3/Stable, S&P BB BB-/Positiv ve) Revenues R by ge eographical are ea (9M13) Inco ome performance So ource: Company data, Intesa Sanpaolo Research elaboratio on Source e: Company data, In ntesa Sanpaolo Reseearch elaboration Credit C View, Ra ating, and Bond d Recommenda ation Sa Strengths S m pl e Credit View Positive. We confirm our Credit C View Possitive on GTEC CH, based on itts solid 9M13 results, a firm commitment to t further de-levveraging in 2013, and in our o view low refinancing risk r until 2016 6. We are paarticularly enco ouraged by th he increasing contribution from m GTECH’s forreign operation ns, which are allowing a the company to redduce exposure e to Italy counttry ure greater susstainability of its solid fundaamentals in the e medium term m, now that tthe Italian lotte ery industry haas risk and ensu reached matu urity. We highlight that GTEC CH is finalising g a new strateg gic plan, focussed on cost-cuttting, which it has said will be b presented in 1Q14. al. We continue to believe th hat both S&P and a Moody’s could c upgrade GTECH’s ratin ng by one notcch Rating Upgrrade Potentia in 2014, if Itaaly’s country riisk stabilises. S&P S has stated d that it could upgrade GTEC CH’s rating to BBB if leverag ge is maintaineed below 3x an nd if it gained d confidence that the unccertain macroe economic environment in Ittaly would no ot meaningfully negatively impact the comp pany’s Italian operations’ o revvenue or cost base. b Moody’s has said it couuld upgrade GTECH’s G rating if DA-capex/interrest expense were w to sustain nably improve below 2.5 tim mes and above 5 adjusted debtt/EBITDA and adjusted EBITD times, respecctively. Moody’s has also sta ated that GTEC CH's rating co ould exceed th hat of the sovvereign (Baa2/negative) by no n more than on ne notch. us. Whilst GETTCH’s senior bonds b have ou utperformed th his year to datte, we maintaiin our BUY re ecommendation, Market Focu because they remain attracctive compared d with JPM Co onsumer non-cyclical indices for Euro BBB-rrated bonds at correspondin ng We also confirm m our BUY reco ommendation o on GTECH’s hyybrid bonds. maturities. W Wea aknesses Global leaderr in lottery indu ustry. w, given that 90% 9 of revenu ues is High visibilityy on cash flow under contracct until 2016. hed government relationship p and high levvel of Well-establish contract reten ntion. ortfolio of lotteery operations and a licenses. Diversified po ors. High entry baarriers for potential competito generation, high liquidity an nd low refinan ncing Positive FCF g risk until 2016 6. Ma ature and capittal-intensive seector. Hig gh exposure to Italy countryy risk (56% of o revenues an nd 69% of EBITDA in 9M13). ower contribution of Italiaan activities, given g domesttic Slo eco onomic weakn ness. Rissk of change in n industry reguulation or tax ra ate. Rissk of non-renew wal of main loottery licences or o large upfron nt payyment to retain licences. Ca apex increase likely to exploitt growth opportunities. Leverage L trend (x) Debtt repayment schedule (EUR Bn n, 30.09.13) So ource: Company data, Intesa Sanpaolo Research elaboratio on In ntesa Sanpa aolo Researcch Departme ent Note: Hybrid bonds includ ded at first call date in 2016. Source: Co ompany data, Intesaa olo Research elabora ation Sanpao 3 31 Credit Sector Repo ort D 201 13 20 December HERA: H Cred dit View Neutral N Alesssandro Chiodini +3 39 02 8794 111 15 (M Moody’s B Baa1/Neg.., S&P BBB B/Stable) EBITDA E breakdo own (2012) Inco ome performan nce Not regulated 50% Regulated d 50% So ource: Company data, Intesa Sanpaolo Research elaboratio on Note: *pro-forma basis. Source: S Company daata, Intesa Sanpaolo o Research elaboration. Credit C View, Ra ating, and Bond d Recommenda ation Strengths S m pl e Credit View w Neutral. Despite the full exposure to tthe recession in Italy through its exclusivvely domestic operations, we w confirm our C Credit View Neutral on Hera a in view of itss solid operatiing profile und derpinned by tthe Acegas-Ap ps consolidatio on (effective from m January 2013), its business diversificatio n, the relevantt contribution by regulated aactivities (accounting for 50% % of total EBITD DA) ensuring high visibility on cash flowss, and manage ement’s solid track record inn delivering sttrategic targetts. However, pottential negativve headwinds could stem frrom regulatoryy or fiscal changes, exacerbbated by the tough econom mic scenario. Rating at Rissk by Moody y’s. Moody’s has maintained a negative ou utlook, given the weak domeestic environm ment. In contrast S&P’s stable o outlook reflectts its expectatiions that Heraa will manage to achieve cre edit metrics in line with current rating leveel. Italy’s downg grade by one notch n would be b a rating trig gger at Moodyy’s, while S&P recognises a ttwo-notch maximum distancce with Italy’s rating. Market Focu us. We confirm m our HOLD recommendatio n on Hera’s bo onds as their spreads are currrently aligned to JPM Utilitiees index for BBB B-rated bonds, also factoring in the compan ny’s exposure to t Italy’s counttry risk. Wea aknesses Hig gh exposure to Italy’s counttry risk, given total domesttic op perations. Ma argins under pressure in liiberalised wasste and energ gy (esspecially gas sa ales), given Italyy’s weak economic situation. Rissk of negative regulatory or ffiscal changes. Ge enerous divide end pay-out aand sizeable capex plan oveer 20 012-2017 (EUR 2Bn). Rating pressure at a Moody’s. Leverage L trend (x) Debtt repayment sc chedule (EUR M M, 30.09.13)* Sa Italy’s second-largest local multi-utility. m Diversified bu usiness mix. Predictable caash flow and earnings e from regulated activvities (50% of total EBITDA), seet to increase e further by 2 2017 (58% of totall EBTIDA). Low exposure to powerr generation and flexible gas procurement policy. Synergies from m integration with w Acegas-A Aps. Low refinanccing risk unttil 2016 and d commitmen nt to deleveraging (net debt/EBITTDA target 2.7xx at YE16). So ource: Company data, Intesa Sanpaolo Research elaboratio on; * pro-forma basiis 32 3 Note: including bond issued in October 20133. Source: Company data, Intesa Sanpao olo Researrch elaboration Inttesa Sanpao olo Research Departmen nt Credit Sector Repo ort D 201 13 20 December ROTTAPHA R ARM: Cred dit View Ne eutral Melanie Gavin +3 39 02 8794 111 18 (M Moody’s B B1/Neg., S&P S BB-/Sttable) Sales by geogrraphic location of customers (9M13) ( Tren nd in profitability So ource: Company data, Intesa Sanpaolo Research elaboratio on Source e: Company data, Intesa Sanpaolo Reseaarch elaboration Credit C View, Ra ating, and Bond d Recommenda ation Strengths S m pl e Credit View Neutral. The group had seen a build-up of working ca apital over the last few yearss associated wiith an extensio on of debtors’ d days in Italy. Rottapharm R ha as since reverssed this policy with the ben nefits feeding through in 9M M13 cash flow w. However, thee group saw a drop in sales and a particularlyy EBITDA yoy at a 1Q13, attributable primarilly to logistics problems p in Itaaly and, to a lessser extent, pricce discounting in order to faccilitate a re-entry/stabilisation n of the previoous debtor build-up. Problem ms in Spain assocciated with thee shift in the product p mix an nd impact of price p reductionss also contribuuted. There are e tentative sign ns that EBITDA may stabilise, whilst growth h in other marrkets helps mittigate the wea akness in the domestic market. We will be b urther evidencee of a stabilisattion of sales an nd EBITDA from m 4Q13 onwards. looking for fu Rating at Rissk by Moody’’s. For S&P, the e stable outloo ok reflects its view v that Rotta apharm’s operaational underp performance haas bottomed ou ut and that it will continue to generate p positive cash flows, f with a recovery in EBBITDA expecte ed in 2013. Fo or Moody’s, thee negative outtlook reflects the higher levvel of debt an nd expectation ns that YE levverage will be e above 5x, th he threshold set for potential downgrade d pre essure on ratin ngs. us. We take th he view that spreads are atttractive at the present time and improve oour bond recommendation to t Market Focu BUY from HO OLD on Rottaph harm bonds, in n anticipation tthat 4Q13 figu ures confirm a stabilisation off operational performance. p Wea aknesses Sm mall size versus competitors. Exposure to Italy (25% of 9M1 3 sales) and Spain (5%). Pre essure on rx--reimbursed re reference pricing (c.25% of o po ortfolio in 2012 2) by Southernn European aussterity measurees (go overnment reim mbursement ppolicies). De ecreasing top line and EBITD DA since 2009 9, high leverag ge and open to acquisitions/non-oorganic investm ments. Sales, but particularly EBITDA,, hit in 1Q13, due to logisttic pro oblems in Ittaly, price diiscounting an nd a shift in priicing/product mix m in Spain. Trend T in leverag ge Estim mated debt rep payment sched dule (EUR M, 30 0.09.13) Sa Well-establish hed brands in n niche semi-ethical and OTC products. Good core caash conversion rate at FFO levvel. Increasing geeographic diverrsification, with a higher gro owth rate in emerg ging markets. Good degree of vertical inteegration and fllexible cost basse. Low capital in ntensity. Strategy gearred towards red ducing businesss risk profile. Low refinanciing risk until 20 019. So ource: Company data, Intesa Sanpaolo Research elaboratio on In ntesa Sanpa aolo Researcch Departme ent Note: data excludes CP off revolving factoringg, lease liabilities, he edging instruments, and otther financial liabilities. Amortising debtt in 2014-17. 2013 includes CPLTD and revolving debt, of which EUR 48M we estimatte to be subject to annual a amortising ule of term loans. So ource: Company datta, Intesa Sanpaolo Research elaboration. schedu 3 33 Credit Sector Repo ort D 201 13 20 December SNAM: S Cre edit View Neutral N Alesssandro Chiodini +3 39 02 8794 111 15 (M Moody’s B Baa1/Neg.., S&P BBB B+/Neg.) EBITDA E breakdo own (2012) Inco ome performan nce So ource: Company data, Intesa Sanpaolo Research elaboratio on Sourcce: Company data, Intesa Sanpaolo Ressearch elaboration Credit C View, Ra ating, and Bond d Recommenda ation Strengths S m pl e Credit View Neutral. We maintain our Neutral Cred it View on Snam in view off its low operaating risk on the t back of th he usiness, with limited sensitivvity of revenue es to change in volumes. Allthough the group’s g financial regulated natture of the bu profile remain ns affected byy higher financial charges, ffollowing the spin-off from ENI, the com mpany has opttimised its deb bt structure revissing downwarrds its FY13 gu uidance of cosst-of-debt to 3.7% from 4%, and estimati ng total annual savings up to t EUR 60M. On the regulato ory front, we see an overaall neutral imp pact given a better-than-exp b pected final outcome for gaas hich should offset a likely neg gative impact ffrom distributio on tariff review w. transport, wh Ratings Und der Pressure. Snam is currrently rated aat the same le evel by both S&P and Mooody’s, and one notch higheer compared to Italy’s rating, which equate es to the maxximum allowed differential against the soovereign. As a result, Snam m’s s correlattion with Italy’’s creditworthiness. A downw ward rating re evision could be b pressure on itts rating mainly reflects its strong triggered by a downgrade of Italy, or byy a deterioratio on of Snam’s financial f profile on the backk of detrimenttal regulatory or o e envirronment. fiscal changess prompted byy the sluggish economic Market Focu us. We confirm m our BUY reco ommendation on Snam’s bo onds, given the e company’ sollid operating profile p sustaineed by a favourab ble regulatory framework. We W also reitera te our prefere ence compared d with Terna’s bonds, given Snam’s steepeer cash curve on n longer maturrities, despite aligned a ratings and similar fully-regulated business. b Wea aknesses Hig gh exposure to o Italy country risk as businesss is domestic. Rissk of fiscal and regulattory changess given Italyy’s constrained public budget. Ge enerous dividen nd policy. Sizzeable capex plan in 201 3-16 (EUR 6.2Bn 6 gross of o sub bsidies) Co oncession renew wal risk in the distribution bu usiness. Rattings under pressure, due too sovereign risk k. Leverage L trend (x) Debtt repayment sc chedule (EUR M M, 30.09.2013) So ource: Company data, Intesa Sanpaolo Research elaboratio on Source e: Company data, In ntesa Sanpaolo Reseearch elaboration Sa Strong compeetitive position ning. Solid operating profile givven fully regu ulated busine sses, with high visibility on earnin ngs and cash flows. Supportive an nd transparent regulatory framework. Limited expossure of revenuees to changes in gas demand d. High operatin ng profitability with steady margins. m Low refinanciing risk until 20 016. Lower cost off debt after its debt portfolio o optimisation. 34 3 Inttesa Sanpao olo Research Departmen nt Credit Sector Repo ort D 201 13 20 December TELECOM T IITALIA: Credit View Not Assig gned (Moody’s ( Ba1/Neg.,, S&P BB+//Neg., Fitcch BBB-/Ne eg.) Sales S by geogra aphic area (9M13) Melanie Gav vin +3 39 02 8794 1118 Inco ome performance So ource: Company data, Intesa Sanpaolo Research elaboratio on Note: EBIT adj. for ext. wrrite-down; Source: C Company data, Intesa Sanpaolo Researcch ation elabora Credit C View, Ra ating, and Bond d Recommenda ation pl e Credit View not Assigned d. Telecom Ita alia remains un nder strong co ompetitive and regulatory prressures. Grow wth continues to t be primarily ffed by Latam operations, o although the gro oup has now sold s its Argenttine operationss. Leverage is high, and therre does not appeear to be any potential p positive catalyst oveer the short to o medium-term m to assist de-leeveraging. Ratings Und der Pressure. Ratings R remain n under downw ward pressure despite the recent downgra des to high yie eld. The group p’s debt burden iis high, whilst its ability to ad dequately de-leever over the short s term from m organic cashh flow is constrrained. Market Focu us. Bond recom mmendation no ot assigned. Strengths S Wea aknesses Leverage L trend (x) Hig gh exposure to Italy, neeed for high her geograph hic divversification. Inccumbent operator experienccing structural contraction in some segments. Struggling inn an increasingly competitivve and tough regula atory environm ment. Ma aterial de-leveraging potenttial from interrnally-generateed sources is limitted and hen ce primarily dependent on o extternal factors. Extraordinaryy operations are unlikely to t pro ovide material relief. Political issues are a factor in determining the t structure of o the e group going forward. m Domestic EBITTDA margins are a still high. Strong domesstic footprint and a market sha are. Solid core cassh flow generaation and stron ng liquidity marrgin. Managementt focused on dee-leveraging. Reasonably w well balanced debt d maturity profile. p Low refinanciing risk until 20 018. Sa So ource: Company data, Intesa Sanpaolo Research elaboratio on In ntesa Sanpa aolo Researcch Departme ent Debtt repayment sc chedule (EUR B Bn, 30.09.13) Source e: Company data, In ntesa Sanpaolo Reseearch elaboration 3 35 Credit Sector Repo ort D 201 13 20 December TERNA: T Cre edit View Neutral Ale essandro Chiod dini +39 + 02 8794 1115 (M Moody’s B Baa1/Neg.., S&P BBB B+/Neg., Fiitch A-/Ne eg.) EBITDA E breakdo own (9M13) Inco ome performan nce So ource: company datta, Intesa Sanpaolo Research elaboration Sourcce: company data, Intesa Sanpaolo Reseearch elaboration Credit C View, Ra ating, and Bond d Recommenda ation Sa Strengths S m pl e Credit View Neutral. We maintain our Neutral N Credit View on Terna a, expecting itss credit metricss to remain alm most stable in the d by its low-risk regulated activities in a favourable re egulatory conttext, which prrovides revenu ues’ coming montths, supported insulation from the downw ward trend in domestic d electrricity demand. However, from m 2014 Terna will be negatively impacted by the reset in its base allow wed remunerattion (6.3% vs.. current 7.4% %), accounting g for approx. EUR 115-120 0M (8-9% of the group’s total grid revenues), although pa artially mitigateed by the decrrease in the Ro obin Hood taxx (down to 6.5 5% from 10.5% %). Going forward, potential further f pressure on Terna’ss financial pro ofile could also o stem from iits recent acce eleration in no on( due diligence d for reenewable proje ects in Chile), coupled c with sstill-significant domestic capeex. regulated activities abroad (ongoing Ratings Und der Pressure. Even though Terna is still rated one-no otch higher than Italy by alll the rating agencies, a they all recognise a n negative outloo ok, reflecting that t on the so overeign. Key triggers t for a downgrade d coould be a cut of o the sovereig gn’s rating (S&P B BBB/Neg; Moo ody’s Baa2/Neg g), but also deetrimental regulatory or fiscal charges proompted by the e weak domestic environment. Market Focu us. We confirm m our HOLD recommendati r ion on Terna’ss bonds as current spreads are the tighte est among Itallian utilities and ccontinue to bee expensive compared to JPM M Utilities BBB B-rated bonds and Italian BTTPs curve. We also reiterate our o relative valuee recommendaation in favou ur of Snam’s bonds on lon nger maturitiess, given higheer spreads, de espite the sim milar regulated natture of the bussinesses and eq quivalent rating gs, both cappe ed by that on Italy. Monopolist in n Italy and the largest grid op perator in Euro ope. Solid operatin ng profile giveen fully regulated business, with high visibility on earnings an nd cash flows. Supportive an nd transparent regulatory framework. Limited expo osure of revenues to chan nges in elect ricity demand. Strong profitaability and stab ble margins. Low refinanciing risk until 20 017. Le everage trend (x) Wea aknesses Op perating exposure 100% dom mestic. Rissk of regulatorry or fiscal cha nges prompted by the slugg gish eco onomic environment. Sizzeable capex plan over 2013--17 (EUR 4.2Bn). Accceleration in non-traditionaal activities abroad (up to EUR E 90 00M), not included in its strattegic plan. Ne egative FCF after dividends. Intterim review fo or 2014-15 of tthe risk-free ra ate in tariffs (base WA ACC down to 6.3% from 7.44%). Debtt Repayment Schedule (EUR M M, YE12) 8,000 Bonds Bank loans 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 2013 So ource: company datta, Intesa Sanpaolo Research elaboration 36 3 2014 20155 2016 2017 > 2017 7 Source e: company data, Intesa Sanpaolo Resea earch elaboration Inttesa Sanpao olo Research Departmen nt Credit Sector Repo ort D 201 13 20 December WIND: W Cred dit View Neutral N (M Moody’s B B1/Neg., S&P S BB-/Sttable, Fitch h BB-/Neg.) Breakdown B of ssales by activitty (9M13) Tren nd in profitability So ource: company datta, Intesa Sanpaolo Research elaboration Source e: company data, Intesa Sanpaolo Resea earch elaboration Melanie Gav vin +3 39 02 8794 111 18 Credit C View, Ra ating, and Bond d Recommenda ation Strengths S m pl e Credit View w Neutral. Sou und core business profile, b but beginning to feel the im mpact of com mpetitive pressures. Wind haas historically m maintained a sttrong competitive edge thro ough price lea adership, whicch could be ssomewhat und dermined goin ng forward, in our view. Key to o the outlook is the policy o of the parent VimpelCom V as regards Wind’’s debt structure, as Wind haas nomous de-levveraging poten ntial given the current weight of debt. Th he parent has stated that itt will assess th he limited auton optimal funding structure of o Wind within the context of an evaluattion of underlying equity vaalues of each of the differen nt g structure e. funding blockks within the group der Pressure. For Moody’s, a downgrade could it has said materialise e if leverage exxceeds 5x, FCFF were to movve Ratings Und closer to zero o, there was no n evidence of o refinancing debt well ahe ead of maturities, and/or a deterioration in the liquiditty profile. For Fitch a stabilisaation of Wind’s operating aand financial performance p will w be difficultt to achieve and a even mino or additional prressures could d compromise deleveraging g efforts. Fitch h’s rating con ntinues to beenefit from itss sole ultimatte shareholder. S&P recently upgraded u Wind d on revised raating criteria, viewing v Wind as a “strategiccally importan nt” subsidiary of o Vimplecom. Market Focu us. We maintaain a HOLD reccommendation n on Wind’s bonds. Parental intervention is the key, butt we see this as a unlikely to m materialise at leeast before th he PIKs becom me cash pay in n early 2014. Within the strructure, we prefer the senio or secured bond ds and remain cautious c on the PIKs that carrry substantial risks. Wea aknesses 10 00% Italian exposure and now feeling the effects of o competition with h margin presssure building. Hig ghly leveraged d. Periods of dde-leveraging have h historicallly been followed by b re-leveraginng within perm mitted covenan nt lim mits (or requirin ng waivers) whhen viable opp portunities havve been found. After the acquisition by Vim mpelCom, upsstream parenttal a now a m major driver. Introduces an a considerations are ement of unce ertainty. If opperating performance wanees, ele the e extent of pa arental supporrt may be que estioned, in ou ur vie ew. Trend T in leverag ge (x) Debtt repayment sc chedule (EUR B Bn, 30.09.13) So ource: company datta, Intesa Sanpaolo Research elaboration Source e: company data, Intesa Sanpaolo Resea earch elaboration Sa High margins, strong cassh flows, alth hough weakeening somewhat. So olid operating performance historically. h hough compettition Well-positioneed in the Italiaan market alth is beginning tto bite. Proven manaagement competence over recent years and solid largely ccredit friendly track t record, as a bondholderss and upstream intterests were predominantly aligned. SSome uncertainty no ow remains ovver this issue. pre-paying deebt and anticipating leveerage History of p targets. Low rrefinancing risk until 2017. In ntesa Sanpa aolo Researcch Departme ent 3 37 Credit Sector Report 20 December 2013 Appendix 1 - Italian Corporate Bonds vs. Benchmark Index Italian senior corporate bonds denominated in euro vs. JPM indices (ASW spread, bps) 102 106 109 101 102 108 108 106 100 102 110 106 106 110 110 100 123 109 102 109 103 105 104 107 111 108 110 106 111 116 112 112 111 111 113 112 114 100 105 108 112 113 108 109 110 111 110 100 102 104 104 111 105 100 101 102 103 106 111 101 111 60 128 151 145 37 110 167 180 184 26 83 94 126 120 122 117 134 127 26 58 211 73 98 91 115 112 148 112 125 128 147 156 172 162 176 182 202 -3 38 48 68 56 61 84 89 94 90 82 98 111 111 139 167 171 29 122 216 68 120 131 184 126 213 279 147 109 242 254 275 187 77 164 176 224 195 210 119 237 210 73 113 296 153 215 184 208 198 261 195 222 233 243 256 258 265 266 292 302 37 84 73 146 73 83 90 103 109 107 88 121 126 114 279 247 175 197 195 238 169 232 149 287 -66 Utit.BBB 1-3Y -85 Utit.BBB 3-5Y -127 Util. BBB 5-7Y -2 Util. BBB 5-7Y -71 Utit.BBB 1-3Y -132 Utit.BBB 1-3Y -87 Utit.BBB 5-7Y -95 Utit.BBB 5-7Y -3 Utit.BBB 7-10Y -51 Utit.BBB 1-3Y -81 Utit.BBB 1-3Y -82 Utit.BBB 3-5Y -98 Utit.BBB 3-5Y -76 Utit.BBB 3-5Y -88 Utit.BBB 5-7Y -2 Utit.BBB 5-7Y -103 Utit.BBB 7-10Y -83 Util. BBB +10Y -47 Utit.BBB 1-3Y -54 Utit.BBB 3-5Y -85 Media&Tel. BBB 3-5Y -80 Utit.BBB 1-3Y -117 Utit.BBB 1-3Y -93 Utit.BBB 1-3Y -93 Utit.BBB 3-5Y -86 Utit.BBB 3-5Y -113 Utit.BBB 3-5Y -83 Utit.BBB 3-5Y -97 Utit.BBB 3-5Y -104 Utit.BBB 3-5Y -95 Utit.BBB 5-7Y -99 Utit.BBB 7-10Y -86 Utit.BBB 7-10Y -103 Utit.BBB 7-10Y -90 Utit.BBB 7-10Y -110 Utit.BBB 7-10Y -101 Util. BBB +10Y -40 Util. A 1-3Y -46 Util. A 1-3Y -25 Util. A 1-3Y -78 Util. A 3-5Y -17 Util. A 3-5Y -21 Util. A 3-5Y -6 Util. A 5-7Y -13 Util. A 5-7Y -15 Util. A 5-7Y -18 Util. A 5-7Y -6 Util. A 7-10-Y -23 Util. A 7-10-Y -15 Util. A 10+Y -3 Util. A 10+Y -140 Indust. BBB 3-5Y -81 Util. BBB 5-7Y -4 Utit.BBB 7-10Y -168 Indust. BBB 1-3Y -74 Indust. BBB 1-3Y -22 Indust. BBB 3-5Y -101 Utit.BBB 1-3Y -112 Util. BBB 5-7Y -18 Utit.BBB 7-10Y -103 Util. BBB +10Y 64 92 110 110 64 64 110 110 128 64 64 92 92 92 110 110 128 165 64 92 81 64 64 64 92 92 92 92 92 92 110 128 128 128 128 128 165 27 27 27 42 42 42 68 68 68 68 74 74 106 106 92 110 128 58 58 92 64 110 128 165 94 161 164 164 94 94 164 164 182 94 94 161 161 161 164 164 182 225 94 161 147 94 94 94 161 161 161 161 161 161 164 182 182 182 182 182 225 35 35 35 47 47 47 70 70 70 70 86 86 127 127 140 164 164 86 86 140 94 164 164 225 e 1.0 2.3 2.9 3.1 0.8 1.7 3.0 3.3 3.6 0.6 1.4 1.8 2.4 2.3 2.6 2.8 3.3 3.5 0.6 1.5 3.1 1.1 1.5 1.5 1.9 1.9 2.4 2.1 2.2 2.3 2.8 3.1 3.5 3.5 3.7 3.8 4.3 0.3 0.8 1.0 1.5 1.4 1.5 2.1 2.2 2.3 2.3 2.6 3.0 3.4 3.4 2.1 3.2 3.5 0.6 1.6 3.3 1.2 2.5 3.1 4.2 pl 300 0.6 600 4.7 500 6.2 600 7.2 299 0.4 762 2.9 750 5.9 500 7.1 500 8.1 2,218 0.5 1,500 2.4 1,000 3.7 1,000 4.9 1,000 5.1 750 6.2 750 7.2 1,000 10.5 500 11.7 700 0.6 600 3.9 230 4.4 1,250 1.5 2,000 2.2 1,500 2.7 1,500 3.5 1,000 3.6 2,500 4.2 1,000 4.3 750 4.5 1,000 4.8 1,000 6.2 750 7.6 2,500 8.7 1,000 9.3 300 9.8 750 10.4 850 13.5 1,250 0.1 1,000 1.5 1,500 2.1 1,110 3.8 1,250 3.9 1,000 4.1 750 5.5 1,500 5.7 1,000 6.1 1,000 6.5 800 7.9 1,000 9.6 900 11.7 300 11.7 690 3.5 750 6.6 600 8.0 500 0.2 750 0.7 750 4.8 500 2.2 500 6.0 500 7.8 700 14.1 ASW ASW YTD2 JPM Benchmark index ASW ASW YTD 18.12.13 2.1.13 Chg 18.12.13 2.1.13 Chg Sa INVESTMENT GRADE ACEIM 4 7/8 07/23/14 ACEIM 3 3/4 09/12/182 ACEIM 4 1/2 03/16/20 ADRIT 3 1/4 02/20/212 AEMSPA 4 7/8 05/28/14 AEMSPA 4 1/2 11/02/16 AEMSPA 4 1/2 11/28/19 AEMSPA 4 3/8 01/10/212 AEMSPA 3 5/8 01/13/222 ATLIM 5 06/09/14 ATLIM 5 5/8 05/06/16 ATLIM 3 3/8 09/18/17 ATLIM 3 5/8 11/30/18 ATLIM 4 1/2 02/08/19 ATLIM 4 3/8 03/16/20 ATLIM 2 7/8 02/26/212 ATLIM 5 7/8 06/09/24 ATLIM 4 3/8 09/16/25 EDFFP 4 1/4 07/22/14 EDFFP 3 7/8 11/10/17 EITIM 3 7/8 04/26/182 ENELIM 4 5/8 06/24/15 ENELIM 3 1/2 02/26/16 ENELIM 4 09/14/16 ENELIM 5 1/4 06/20/17 ENELIM 4 1/8 07/12/17 ENELIM 4 7/8 02/20/18 ENELIM 3 5/8 04/17/18 ENELIM 4 3/4 06/12/18 ENELIM 5 3/4 10/24/18 ENELIM 4 7/8 03/11/20 ENELIM 5 07/12/21 ENELIM 5 09/14/22 ENELIM 4 7/8 04/17/23 ENELIM 5 1/4 09/29/23 ENELIM 5 1/4 05/20/24 ENELIM 5 5/8 06/21/27 ENIIM 5 7/8 01/20/14 ENIIM 4 06/29/15 ENIIM 5 01/28/16 ENIIM 4 7/8 10/11/17 ENIIM 4 3/4 11/14/17 ENIIM 3 1/2 01/29/18 ENIIM 3 3/4 06/27/19 ENIIM 4 1/8 09/16/19 ENIIM 4 1/4 02/03/20 ENIIM 4 06/29/20 ENIIM 2 5/8 11/22/212 ENIIM 3 1/4 07/10/232 ENIIM 3 3/4 09/12/252 ENIIM 3 3/4 09/12/252 EXOIM 5 3/8 06/12/17 FERROV 4 07/22/202 FERROV 0 12/31/212 FGACAP 5 1/4 02/28/14 FGACAP 4 3/8 09/18/14 FGACAP 4 10/17/182 HERIM 4 1/8 02/16/16 HERIM 4 1/2 12/03/19 HERIM 3 1/4 10/04/212 HERIM 5.2 01/29/282 Price m Amt. Dur. YTM1 % Out YR Bond Bond vs. Index S&P Fitch Moody’s -31 -3 BBB-69 36 BBB-54 41 BBB-54 35 BBB+ -31 -26 BBB -31 46 BBB -54 56 BBB -54 70 BBB -54 56 BBB -31 -38 BBB+ -31 20 BBB+ -69 2 BBB+ -69 34 BBB+ -69 28 BBB+ -54 11 BBB+ -54 6 BBB+ -54 6 BBB+ -60 -38 BBB+ -31 -38 BBB+ -69 -33 BBB+ -66 130 -31 9 BBB -31 34 BBB -31 28 BBB -69 23 BBB -69 21 BBB -69 57 BBB -69 21 BBB -69 33 BBB -69 37 BBB -54 37 BBB -54 28 BBB -54 44 BBB -54 34 BBB -54 48 BBB -54 54 BBB -60 37 BBB -8 -30 A /*-8 12 A /*-8 21 A /*-5 25 A /*-5 14 A /*-5 19 A /*-3 17 A /*-3 21 A /*-3 26 A /*-3 22 A /*-13 9 A /*-13 24 A /*-20 4 A /*-20 5 A *-48 47 BBB+ -54 56 BBB -36 43 BBB -28 -29 BB+ -28 64 BB+ -48 124 BB+ -31 5 BBB -54 10 BBB -36 3 BBB -60 20 BBB BBB+ Baa2 BBB+ Baa2 BBB+ (P)Baa2 BBB+ Baa3 Baa3 Baa3 Baa3 Baa3 Baa3 ABaa1 ABaa1 ABaa1 ABaa1 ABaa1 ABaa1 ABaa1 ABaa1 ABaa1 WD Baa3 WD Baa3 BBB BBB+ /*Baa2 BBB+ /*Baa2 BBB+ /*Baa2 BBB+ /*Baa2 BBB+ /*Baa2 BBB+ /*Baa2 BBB+ /*Baa2 BBB+ /*Baa2 BBB+ /*Baa2 BBB+ /*Baa2 BBB+ /*Baa2 BBB+ /*Baa2 BBB+ /*Baa2 BBB+ /*Baa2 BBB+ /*Baa2 BBB+ /*Baa2 A+ A3 A+ A3 A+ A3 A+ A3 A+ A3 A+ A3 A+ A3 A+ A3 A+ A3 A+ A3 A+ A3 A+ A3 A+ A3 A+ A3e BBB+ BBB+ BBBBaa3 BBBBaa3 BBBBaa3 Baa1 Baa1 Baa1 Baa1 NR = Not Rated. Notes: 1) YTC for callable bonds; 2) YTD from launch date for bonds issued in current year. Source: Intesa Sanpaolo Research elaboration on Bloomberg data 38 Intesa Sanpaolo Research Department Credit Sector Report 20 December 2013 Italian senior corporate bonds denominated in euro vs. indices (continued) Amt. Dur. YTM1 Out YR ASW ASW 18.12.13 2.1.13 YTD2 Chg JPM Benchmark index ASW ASW 18.12.13 2.1.13 YTD Chg 110 113 104 99 106 109 103 111 102 108 103 108 113 105 104 116 103 108 104 114 114 115 110 127 133 284 47 70 140 117 59 72 77 90 107 116 120 133 34 78 84 93 110 119 206 218 185 283 84 94 203 249 111 128 162 151 164 154 199 206 50 121 132 143 157 178 -96 Cons.NonCyc. BBB 3-5Y -92 Cons.NonCyc. BBB 3-5Y -52 Cons.NonCyc. BBB 5-7Y 0 Utilities BBB 3-5Y -36 Cons.NonCyc. BBB 1-3Y -24 Cons.NonCyc. BBB 5-7Y -62 Utilities BBB 3-5Y -132 Utit.BBB 7-10Y -52 Utit.BBB 1-3Y -56 Utilities BBB 3-5Y -85 Utilities BBB 3-5Y -60 Utilities BBB 3-5Y -57 Utit.BBB 5-7Y -38 Utit.BBB 5-7Y -79 Utit.BBB 7-10Y -72 Utit.BBB 7-10Y -16 Utit.BBB 1-3Y -44 Utilities BBB 3-5Y -48 Utilities BBB 3-5Y -50 Utit.BBB 5-7Y -47 Utit.BBB 7-10Y -59 Util. BBB +10Y 82 82 86 92 51 86 92 128 64 92 92 92 110 110 128 128 64 92 92 110 128 165 95 95 99 161 64 99 161 182 94 161 161 161 164 164 182 182 94 161 161 164 182 225 -13 -13 -13 -69 -13 -13 -69 -54 -31 -69 -69 -69 -54 -54 -54 -54 -31 -69 -69 -54 -54 -60 4.1 6.0 2.6 3.4 4.8 5.6 2.2 3.3 2.1 1.8 1.9 2.4 3.2 3.5 3.9 3.8 4.5 4.5 5.1 1.6 2.8 3.8 3.5 3.8 4.7 4.8 4.9 7.8 3.8 4.2 4.1 4.9 6.7 7.4 8.0 3.6 4.5 1.3 2.0 7.7 6.2 103 106 107 112 106 101 109 106 103 102 104 105 107 111 109 106 108 111 108 104 114 100 103 109 99 103 99 102 109 101 108 109 104 106 105 104 103 107 104 102 104 309 466 198 243 401 340 163 200 167 159 154 207 271 311 328 306 362 367 391 119 196 262 256 274 299 305 266 568 400 312 324 363 512 603 631 292 332 116 164 568 412 378 522 310 392 489 473 221 245 270 331 324 375 477 512 513 433 543 532 513 178 271 268 239 292 315 333 303 625 674 363 450 467 608 785 671 413 350 238 264 541 419 -69 NR -56 Merril Lynch, B -112 Merril Lynch, BB -149 Merril Lynch, BB -87 Merril Lynch, B -133 Merril Lynch, BB -58 Cons.NonCyc. BBB 3-5Y -46 Cons.NonCyc. BBB 5-7Y -103 Merril Lynch, BB -172 Merril Lynch, BB -170 Merril Lynch, BB -168 Merril Lynch, BB -205 Merril Lynch, BB -201 Merril Lynch, BB -185 Merril Lynch, BB -127 Merril Lynch, BB -181 Merril Lynch, BB -165 Merril Lynch, BB -122 Merril Lynch, BB -59 Merril Lynch, BB -75 Merril Lynch, BB -6 NR 18 Merril Lynch, BB -18 Merril Lynch, BB -16 Merril Lynch, BB -28 Merril Lynch, BB -37 Merril Lynch, BB -57 Merril Lynch, B -274 Merril Lynch, CCC -51 Merril Lynch, BB -126 Merril Lynch, BB -104 Merril Lynch, BB -96 Merril Lynch, BB -181 Merril Lynch, B -41 Merril Lynch, B -121 NR -18 NR -122 Merril Lynch, BB -100 NR 27 Merril Lynch, B -7 Merril Lynch, BB 423 269 269 423 269 82 86 269 269 269 269 269 269 269 269 269 269 269 269 269 269 269 269 269 269 423 677 269 269 269 269 423 423 269 423 269 622 397 397 622 397 95 99 397 397 397 397 397 397 397 397 397 397 397 397 397 397 397 397 397 397 622 979 397 397 397 397 622 622 397 622 397 -199 -128 -128 -199 -128 -13 -13 -128 -128 -128 -128 -128 -128 -128 -128 -128 -128 -128 -128 -128 -128 -128 -128 -128 -128 -199 -302 -128 -128 -128 -128 -199 -199 -128 -199 -128 pl e 1.7 2.1 2.7 4.0 1.0 1.9 2.4 2.7 1.1 1.3 1.6 1.8 2.2 2.5 2.8 3.1 0.7 1.5 1.8 1.8 2.6 3.2 Sa INVESTMENT GRADE GTKIM 5 3/8 12/05/16 750 3.0 GTKIM 5 3/8 02/02/18 500 4.1 GTKIM 3 1/2 03/05/20 500 6.2 300 4.9 LINHLD 3 7/8 11/28/182 LUXIM 4 11/10/15 500 1.9 LUXIM 3 5/8 03/19/19 500 5.2 POSIM 3 1/4 06/18/182 750 4.5 SISIM 4 1/2 10/26/20 500 6.9 SRGIM 2 11/13/15 750 1.9 SRGIM 4 3/8 07/11/16 1,000 2.6 2 SRGIM 2 3/8 06/30/17 1,250 3.5 SRGIM 3 7/8 03/19/18 1,500 4.2 SRGIM 5 01/18/19 1,000 5.1 SRGIM 3 1/2 02/13/20 1,250 6.2 2 SRGIM 3 3/8 01/29/21 500 7.1 SRGIM 5 1/4 09/19/22 1,000 8.8 TRNIM 4 1/4 10/28/14 600 0.9 TRNIM 4 1/8 02/17/17 1,250 3.2 TRNIM 2 7/8 02/16/18 750 4.2 TRNIM 4 7/8 10/03/19 600 5.8 TRNIM 4 3/4 03/15/21 1,250 7.2 TRNIM 4.9 10/28/24 800 10.9 HIGH YIELD & UNRATED AMPIM 4 7/8 07/16/182 275 4.6 ASTIM 0 12/31/201,2 600 7.0 BZUIM 5 1/8 12/09/16 350 3.0 BZUIM 6 1/4 09/28/18 350 4.8 CERTCH 6 3/8 01/15/201,2 300 6.1 CIRIM 5 3/4 12/16/24 300 11.0 CPRIM 5 3/8 10/14/16 350 2.8 CPRIM 4 1/2 10/25/19 400 5.8 ESIM 5 1/8 10/27/14 274 0.9 FIAT 6 1/8 07/08/14 900 0.6 FIAT 7 5/8 09/15/14 1,250 0.7 FIAT 6 7/8 02/13/15 1,500 1.2 FIAT 6 3/8 04/01/16 1,000 2.3 FIAT 7 3/4 10/17/16 1,000 2.8 FIAT 7 03/23/17 850 3.3 FIAT 5 5/8 06/12/17 1,000 3.5 2 FIAT 6 5/8 03/15/18 1,250 4.2 FIAT 7 3/8 07/09/18 600 4.6 FIAT 6 3/4 10/14/192 1,250 5.8 CNH 5 1/4 03/11/15 1,000 1.2 CNH 6 1/4 03/09/18 1,200 4.2 300 4.9 FINCAN 3 3/4 11/19/182 FNCIM 4 3/8 12/05/17 600 4.0 FNCIM 5 3/4 12/12/18 500 5.0 2 FNCIM 4 1/2 01/19/21 700 7.1 FNCIM 5 1/4 01/21/22 600 8.1 FNCIM 4 7/8 03/24/25 500 11.3 200 4.6 GAMENT 7 1/4 08/01/181,2 GCLIM 9 3/8 04/15/181 200 4.3 INDIM 4 1/2 04/26/182 300 4.4 ITCIT 6 1/8 02/21/182 500 4.2 ITCIT 6 5/8 03/19/20 739 6.2 200 6.3 IVSIM 7 1/8 04/01/201,2 MANTEN 8 1/2 08/01/201,2 425 6.6 MCLIM 8 1/2 11/15/191,2 200 5.9 MSIM 5 02/01/17 300 3.1 MSIM 5 1/8 01/24/192 375 5.1 150 3.0 PIAGIM 7 12/01/161,2 PRYIM 5 1/4 04/09/15 400 1.3 RHIGIM 7 1/4 11/15/201,2 215 6.9 ROTPHA 6 1/8 11/15/191 400 5.9 Price m Bond Bond vs Index 28 45 47 192 -3 -16 49 -11 -5 -20 -15 -1 -3 5 -8 5 -29 -14 -8 -17 -18 -46 S&P Fitch Moody’s BBBBBBBBB- BBBBBB+ BBB+ BBB BBB+ BBB+ BBB+ BBB+ BBB+ BBB+ BBB+ BBB+ BBB+ BBB+ ABBB+ ABBB+ ABBB+ ABBB+ ABBB+ A- 43 -71 BB+ -26 BB+ -22 B 71 BB 81 113 -102 BB-110 BB-115 BB-62 BB2 BB42 BB59 BB37 BB93 BB98 BB122 BB-150 BB+ -73 BB+ -13 BB+ 5 BB+ 30 BB+ 36 BB+ -3 BB+ 145 B+ -277 CCC+ 43 55 BB+ 94 BB+ 243 BB180 B+ 208 B-153 BB145 143 BB- B+ BBBBBBBBBBBBBBBBBBBBBB+ BB+ BB+ BB+ BB+ - Baa3 Baa3 Baa3 Baa2 Baa2 Baa1 Baa1 Baa1 Baa1 Baa1 Baa1 Baa1 Baa1 Baa1 Baa1 Baa1 Baa1 Baa1 Baa1 (P)B1 B2 B1 B1 B1 B1 B1 B1 B1 B1 B1 B1 Ba2 Ba2 Ba1 Ba1 Ba1 Ba1 Ba1 B1 B3 Ba3 Ba3 B2 (P)B2 Ba3 (P)B2 Ba3 NR = Not Rated. Notes: 1) YTC for callable bonds; 2) YTD from launch date for bonds issued in current year. Source: Intesa Sanpaolo Research elaboration on Bloomberg data Intesa Sanpaolo Research Department 39 Credit Sector Report 20 December 2013 Italian senior corporate bonds denominated in euro vs. Merrill Lynch indices (continued) Amt. Dur. YTM1 Out YR HIGH YIELD & UNRATED SALINI 6 1/8 08/01/182 400 4.6 SISTP 7 1/4 09/30/171,2 275 3.8 SNAIM 0 05/31/181,2 320 4.5 TITIM 7 7/8 01/22/14 284 0.1 TITIM 4 3/4 05/19/14 557 0.4 TITIM 4 5/8 06/15/15 750 1.5 TITIM 5 1/8 01/25/16 1,000 2.1 TITIM 8 1/4 03/21/16 850 2.3 TITIM 7 01/20/17 1,000 3.1 TITIM 4 1/2 09/20/17 1,000 3.8 TITIM 4 3/4 05/25/18 750 4.4 TITIM 6 1/8 12/14/18 750 5.0 TITIM 5 3/8 01/29/19 1,250 5.1 TITIM 4 01/21/20 1,000 6.1 TITIM 4 7/8 09/25/202 1,000 6.8 TITIM 5 1/4 02/10/22 1,250 8.1 TITIM 7 3/4 01/24/33 1,015 19.1 TITIM 5 1/4 03/17/55 670 41.2 TITANL 7 3/8 05/15/201,2 300 6.4 WINDIM 7 3/8 02/15/181 1,750 4.2 WINDIM 7 3/8 02/15/181 200 4.2 ZOBELE 7 7/8 02/01/181,2 180 4.1 4.6 6.9 9.2 0.8 1.0 2.1 2.4 2.5 2.9 3.2 3.6 3.9 4.0 4.2 4.5 4.9 6.8 6.7 7.2 2.3 6.7 5.9 Price 106 102 100 101 101 104 106 112 112 105 105 110 106 99 102 102 110 80 103 106 106 106 ASW ASW 18.12.13 2.1.13 362 578 656 55 87 166 191 211 237 235 263 286 289 270 297 315 439 332 552 128 107 541 485 623 638 93 82 129 160 180 211 208 224 248 248 241 318 274 442 331 625 591 629 622 YTD2 Chg -123 -45 19 -38 5 37 31 31 26 27 39 39 41 29 -21 41 -3 1 -73 -464 -521 -81 JPM Benchmark ASW ASW index 18.12.13 2.1.13 Merril Lynch, BB Merril Lynch, B Merril Lynch, B Merril Lynch, BB Merril Lynch, BB Merril Lynch, BB Merril Lynch, BB Merril Lynch, BB Merril Lynch, BB Merril Lynch, BB Merril Lynch, BB Merril Lynch, BB Merril Lynch, BB Merril Lynch, BB Merril Lynch, BB Merril Lynch, BB Merril Lynch, BB Merril Lynch, BB Merril Lynch, B Merril Lynch, BB Merril Lynch, BB Merril Lynch, B 269 423 423 269 269 269 269 269 269 269 269 269 269 269 269 269 269 269 423 269 269 423 397 622 622 397 397 397 397 397 397 397 397 397 397 397 397 397 397 397 622 397 397 622 YTD Chg e Bond -128 -199 -199 -128 -128 -128 -128 -128 -128 -128 -128 -128 -128 -128 -128 -128 -128 -128 -199 -128 -128 -199 Bond vs. Index S&P Fitch Moody’s 93 155 233 -214 -182 -103 -78 -58 -32 -34 -6 17 20 1 28 46 170 63 129 -141 -162 118 B (P)BBB+ BB+ BB+ BB+ BB+ BB+ BB+ BB+ BB+ BB+ BB+ BB+ BB+ BB+ BB+ B BB BB B BB BBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBB BB - B1 (P)B1 Ba1 Ba1 Ba1 Ba1 Ba1 Ba1 Ba1 Ba1 Ba1 Ba1 Ba1 Ba1 Ba1 Ba1 Ba1 B2 Ba3 Ba3 B2 pl NR = Not Rated. Notes: 1) YTC for callable bonds; 2) YTD from launch date for bonds issued in current year. Source: Intesa Sanpaolo Research elaboration on Bloomberg data Italian subordinated corporate bonds denominated in euro vs. Merrill Lynch indices (continued) Bond Amt. Dur. YTC Out YR % Price 394 373 1010 605 213 - 496 589 975 673 865 - YTD1 Chg JPM Benchmark ASW ASW index 18.12.13 2.1.13 -102 Merril Lynch, BB -216 Merril Lynch, BB 34 Merril Lynch, CCC -68 Merril Lynch, BB -652 Merril Lynch, B Merril Lynch, B m ENELIM 6 1/2 01/10/741 1,250 60.1 5.0 107 GTKIM 8 1/4 03/31/66 750 52.3 4.1 109 SNAIM 0 12/31/181 160 5.0 15.5 103 TITIM 7 3/4 03/20/731 750 59.2 7.0 103 WINDIM 11 3/4 07/15/17 1,250 3.6 2.9 106 WINDIM 12 1/4 07/15/17 497 3.6 - 105 ASW ASW 18.12.13 2.1.13 269 269 677 269 423 423 397 397 979 397 622 622 YTD Chg -128 -128 -302 -128 -199 -199 Bond vs. Index S&P Fitch Moody’s 125 BB+ 104 BB 333 (P)CCC 336 B+ -210 B+ B - Ba1 Ba2 (P)Caa1 Ba3 B3 Caa1 Sa NR = Not Rated. Notes: 1) YTD from launch date for bonds issued in current year. Source: Intesa Sanpaolo Research elaboration on Bloomberg data 40 Intesa Sanpaolo Research Department Credit Sector Report 20 December 2013 Sa m pl e Notes Intesa Sanpaolo Research Department 41 Credit Sector Report 20 December 2013 Sa m pl e Notes 42 Intesa Sanpaolo Research Department Credit Sector Report 20 December 2013 Sa m pl e Notes Intesa Sanpaolo Research Department 43 Credit Sector Report 20 December 2013 Disclaimer Analyst certification The financial analysts who prepared this report, and whose names and roles appear within the document, certify that: (1) The views expressed on the Companies mentioned herein accurately reflect independent, fair and balanced personal views; (2) No direct or indirect compensation has been or will be received in exchange for any views expressed. Specific disclosures 1. Neither the analysts nor any members of the analysts’ household have a financial interest in the securities of the Companies. 2. Neither the analysts nor any members of the analysts’ household serve as an officer, director or advisory board member of the Companies. 3. The analysts named in the document are not members of AIAF. 4. The analysts named in this document are not registered with or qualified by FINRA, the U.S. regulatory body with oversight over Banca IMI Securities Corp. Accordingly, the analysts may not be subject to NASD Rule 2711 and NYSE Rule 472 with respect to communications with a subject company, public appearances and trading securities in a personal account. For additional information, please contact the Compliance Department of Banca IMI Securities Corp at 212-326-1133. 5. The analysts of this report do not receive bonuses, salaries, or any other form of compensation that is based upon specific investment banking transactions. 6. The research department supervisors do not have a financial interest in the securities of the Companies. This research has been prepared by Intesa Sanpaolo SpA and distributed by Banca IMI SpA Milan, Banca IMI SpA-London Branch (a member of the London Stock Exchange) and Banca IMI Securities Corp (a member of the NYSE and NASD). Intesa Sanpaolo SpA accepts full responsibility for the contents of this report and also reserves the right to issue this document to its own clients. Banca IMI SpA and Intesa Sanpaolo SpA, which are both part of the Intesa Sanpaolo Group, are both authorised by the Banca d'Italia and are both regulated by the Financial Services Authority in the conduct of designated investment business in the UK and by the SEC for the conduct of US business. e Opinions and estimates in this research are as at the date of this material and are subject to change without notice to the recipient. 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Research is available on Banca IMI’s web site (www.bancaimi.com or www.intesasanpaolo.com) or by contacting your sales representative. Valuation methodology Banca IMI’s credit views are based on the expected trend of the company’s fundamentals. The view reflects the sector trend and the competitive scenario, the company’s financial strength, as well as its profitability outlook and competitive positioning. In our credit quality valuation, we consider management’s intention and ability to meet debt obligations, the company’s dividend policy and, in general, its attention to bondholders’ interests. Among key financial ratios, for those sectors where relevant, we assess the company’s ability to generate operating cash flow, its capacity to repay maturing debt through cash flow, its net interest coverage ratio and capital ratios. In the case of significant events, which could determine a change in our credit view, we may place our recommendation under review. This review does not necessarily imply a change in the credit view. 44 Intesa Sanpaolo Research Department Credit Sector Report 20 December 2013 Corporate credit view key NOT ASSIGNED Definition We expect an improvement in fundamentals over the next six months We expect substantially stable fundamentals over the next six months We expect a deterioration in fundamentals or visibility on fundamentals over the next six months The credit view for this company has been suspended as there is not a sufficient fundamental basis for determining an investment view. The previous credit view, if any, is no longer in effect for this company The company is or may be covered by the Research Department but no credit view is assigned either voluntarily or to comply with applicable regulations and/or firm policies in certain circumstances, including when Intesa Sanpaolo Group is acting in an advisory capacity in a merger or strategic transaction involving the company A2A - Historical credit views (-1Y) ACEA - Historical credit views (-1Y) Date 01-Aug-13 04-Oct-13 08-Nov-13 Credit View UNDER REVIEW POSITIVE POSITIVE Date 06-Nov-12 14-Nov-12 12-Mar-13 15-May-13 07-Aug-13 30-Oct-13 13-Nov-13 Credit View NEUTRAL NEUTRAL NEUTRAL NEUTRAL NEUTRAL NEUTRAL Date 20-Nov-12 13-Mar-13 07-May-13 30-Jul-13 18-Sep-13 31-Oct-13 13-Nov-13 22-Nov-13 Credit View NEUTRAL NEUTRAL NEUTRAL NEUTRAL NEUTRAL NEUTRAL NEUTRAL NEUTRAL Date 31-Oct-12 18-Feb-13 15-Mar-13 26-Apr-13 08-Aug-13 31-Oct-13 26-Nov-13 Credit View NEUTRAL NEUTRAL NEUTRAL NEUTRAL NEUTRAL NEUTRAL NEUTRAL Date 01-Nov-12 08-Feb-13 26-Feb-13 30-Apr-13 31-Jul-13 25-Oct-13 04-Nov-13 Credit View NEUTRAL Date 12-Nov-12 22-Jan-13 13-Feb-13 14-Feb-13 25-Apr-13 15-May-13 02-Aug-13 20-Sep-13 07-Oct-13 11-Nov-13 02-Dec-13 Atlantia - Historical credit views (-1Y) pl Sa Exor - Historical credit views (-1Y) Date 15-Nov-12 17-Apr-13 10-May-13 31-May-13 03-Jun-13 06-Sep-13 15-Nov-13 Credit View NEUTRAL NEUTRAL NEUTRAL NEUTRAL NEUTRAL NEUTRAL NEUTRAL NEUTRAL Eni - Historical credit views (-1Y) m Enel- Historical credit views (-1Y) Date 15-Nov-12 06-Dec-12 14-Mar-13 08-May-13 12-Jul-13 02-Aug-13 11-Nov-13 27-Nov-13 Credit View NEGATIVE NEGATIVE NEGATIVE NEGATIVE NEGATIVE NEUTRAL NEUTRAL Cir - Historical credit views (-1Y) Date 13-Nov-12 14-Jan-13 12-Mar-13 13-May-13 05-Aug-13 12-Nov-13 e Credit rating key Credit view POSITIVE NEUTRAL NEGATIVE SUSPENDED CNH -Industrial - Historical credit views (-1Y) Date 05-Nov-13 Intesa Sanpaolo Research Department Credit View POSITIVE POSITIVE POSITIVE POSITIVE NEUTRAL NEUTRAL NEUTRAL Fiat - Historical credit views (-1Y) Finmeccanica - Historical credit views (-1Y) Credit View NEUTRAL NEUTRAL NEUTRAL NEUTRAL NEUTRAL NEUTRAL NEUTRAL Credit View NEGATIVE NEGATIVE NEGATIVE NEGATIVE NEGATIVE NEGATIVE NEGATIVE NEGATIVE NEGATIVE NEGATIVE NEGATIVE 45 Credit Sector Report 20 December 2013 Hera - Historical credit views (-1Y) GTECH - Historical credit views (-1Y) Credit View NEUTRAL NEUTRAL NEUTRAL NEUTRAL NEUTRAL NEUTRAL NEUTRAL NEUTRAL Date 01-Aug-13 18-Sep-13 06-Nov-13 Credit View NEUTRAL NEUTRAL NEUTRAL NEUTRAL NEUTRAL Date 30-Oct-12 04-Mar-13 15-Mar-13 25-Apr-13 12-Jul-13 02-Aug-13 01-Oct-13 31-Oct-13 Credit View NOT ASSIGNED NOT ASSIGNED NOT ASSIGNED NOT ASSIGNED NOT ASSIGNED NOT ASSIGNED NOT ASSIGNED NOT ASSIGNED NOT ASSIGNED NOT ASSIGNED NOT ASSIGNED NOT ASSIGNED Date 28-Jan-13 07-Feb-13 19-Mar-13 15-May-13 12-Jul-13 26-Jul-13 14-Nov-13 Rottapharm - Historical credit views (-1Y) Date 22-May-13 05-Jun-13 03-Sep-13 13-Sep-13 29-Nov-13 Snam - Historical credit views (-1Y) Wind - Historical credit views (-1Y) Credit View NEUTRAL NEUTRAL NEUTRAL NEUTRAL NEUTRAL NEUTRAL NEUTRAL NEUTRAL Terna - Historical credit views (-1Y) Credit View NEUTRAL NEUTRAL NEUTRAL NEUTRAL NEUTRAL NEUTRAL NEUTRAL pl Telecom IT - Historical credit views (-1Y) Date 14-Nov-12 21-Feb-13 09-Apr-13 09-May-13 16-May-13 23-May-13 16-Jul-13 06-Aug-13 08-Oct-13 09-Oct-13 08-Nov-13 15-Nov-13 Credit View POSITIVE POSITIVE POSITIVE e Date 16-Nov-12 29-Nov-12 26-Mar-13 16-May-13 15-Jul-13 29-Aug-13 27-Sep-13 15-Nov-13 - Historical credit views (-1Y) Sa m Date Credit View 29-Aug-12 NEUTRAL 18-Mar-13 NEUTRAL 06-May-13 NEUTRAL 16-May-13 NEUTRAL 13-Aug-13 NEUTRAL 06-Nov-13 NEUTRAL 04-Dec-13 NEUTRAL Credit view allocations Intesa Sanpaolo Research Credit View distribution at November 2013 Number of Companies subject to credit views: 25** Positive Total Credit Research coverage - last credit view (%) 12 of which Intesa Sanpaolo's clients* (%) 67 Neutral 68 82 Negative 20 80 (*) Companies on behalf of whom Intesa Sanpaolo and the other companies of the Intesa Sanpaolo Group have provided corporate and investment banking services in the last 12 months; percentage of clients in each rating category; ** Total number of companies covered is 26. Investment recommendations Banca IMI’s recommendations on the issuer(s) bonds or relative CDS are based on the following rating system: Investment recommendations Recommendation Definition BUY We expect the bond or CDS subject to the recommendation to outperform the reference index, sector or benchmark in a period up to six months HOLD We expect the bond or CDS subject to the recommendation to perform in line with the reference index, sector or benchmark in a period up to six months SELL We expect the bond or CDS subject to the recommendation to underperform the reference index, sector or benchmark in a period up to six months 46 Intesa Sanpaolo Research Department Credit Sector Report 20 December 2013 Specific disclosures Interests and conflicts of interest - related to Articles 69-quater and 69-quinquies of the Issuers’ Regulation issued by Consob with Resolution no 11971 of 14.05.1999 as subsequently amended and supplemented (hereinafter the "Issuers' Regulation"), Article 24 of “Rules governing central depositories, settlement services, guarantee systems and related management companies” issued by Consob and Bank of Italy, FINRA's NASD Rule 2711 and NYSE Rule 472, as well as the FSA Conduct of Business Sourcebook rules COBS 12.4.9R (3) and COBS 12.4.10R (5) between the Intesa Sanpaolo Group and issuers of financial instruments, and their group companies and referred to in research products are available, in accordance with Article 69-septies of the Issuers' Regulation, the aforementioned FINRA’s Rules and the aforementioned FSA Rules, alongside with “Research Policy” and the extract from “A business model for managing confidential information and conflicts of interest” on the Intesa Sanpaolo’s website: http://www.group.intesasanpaolo.com/scriptIsir0/si09/studi/eng_archivio_conflitti.jsp In particular, for the issuers and/or financial instruments mentioned in this report for which recommendations have been made, and for the issuers and/or financial instruments for which no recommendation has been made, but which are subject to periodical cover by the Intesa Sanpaolo Research Department in other reports containing recommendations, we supply information regarding possible conflicts of interest with the Intesa Sanpaolo Group on the Intesa Sanpaolo’s website above We highlight that disclosures are also available to the recipient of this research upon making a written request to Intesa Sanpaolo – Equity&Credit Research, Largo Mattioli, 3- 20121 Milan - Italy or by visiting Intesa Sanpaolo’s website: www.intesasanpaolo.com/Research. The Intesa Sanpaolo Group maintains procedures and organisational mechanism (such as Information Barriers, Crossing Procedures, Watch & Restricted List) to professionally manage conflicts of interest arising from the many activities of the Group Intesa Sanpaolo in relation to investment research. Sa m pl e For the issuers and/or financial instruments mentioned in this report for which no recommendation has been made, and which are not subject to cover by the Intesa Sanpaolo Research Department, we have not supplied information regarding possible conflicts of interest with the Intesa Sanpaolo Group. Intesa Sanpaolo Research Department 47 Credit Sector Report 20 December 2013 Banca IMI SpA Intesa Sanpaolo Research Department – Head of Research Gregorio De Felice Head of Equity & Credit Research Giampaolo Trasi Credit Research Maria Grazia Antola Alessandro Chiodini Melanie Gavin Maria Gabriella Tronconi Barbara Pizzarelli Banking Utilities Telecoms & High Yield Industrials & High Yield Research Assistant +39 02 8794 9803 [email protected] +39 02 8794 1114 +39 02 8794 1115 +39 02 8794 1118 +39 02 8794 1117 +39 02 8794 1116 [email protected] [email protected] [email protected] [email protected] [email protected] Largo Mattioli, 3 20121 Milan, Italy Tel: +39 02 7261 1 Banca IMI Securities Corp. 1 William Street 10004 New York, NY, USA Tel: (1) 212 326 1230 Banca IMI London Branch Sa m pl e 90 Queen Street London EC4N 1SA, UK Tel +44 207 894 2600 48 Intesa Sanpaolo Research Department
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