Italian Corporate Bonds

Transcription

1 Italian Corporate Bonds Credit View Neutral unchanged In the corporate sector, we believe that the current credit markets do not reflect the fundamentals of individual companies, especially in the case of Italian names, skewed by sovereign debt contagion risk. Hence in the short term, we recommend a relative value approach, with a preference for names less exposed to Italy country risk because of their broad geographical diversification and/or high financial flexibility. In the IG sector, we stand by our BUY recommendation on ENI, EXOR and Lottomatica bonds, SELL on ACEA, and HOLD on all the other bonds. In the HY sector, we stand by our HOLD recommendation on bonds of all the issuers that we cover. Cautious credit view on European credit markets. With the global economy slowing, we believe that developments in the European sovereign debt crisis will continue to be the key European credit market driver in We believe that until investors perceive a clear will among political leaders to structurally resolve the eurozone's problems, the credit markets will continue to feature high uncertainty and volatility, together with low liquidity and high risk aversion. As a result, our view remains cautious and we see no reason to add risk right now, especially on peripheral names. CREDIT VIEW Corporate Intesa Sanpaolo Research Department Maria Gabriella Tronconi Credit Analyst Credit View Neutral on Italian corporate bonds. We stand by our Credit View Neutral to the Italian corporate bond market, based on our expectation that the overall credit profile will remain almost steady in 2012 for most companies that we cover. In detail, we note that they have adequate liquidity and low refinancing risk in the short term. However, we also note that Italian corporates could be hurt by a deeper than expected recession in Italy, implementation of the fiscal austerity measures, the risk of regulatory changes in regulated industries, and an increase in the cost of refinancing, possibly leading to new rating downgrades on the companies that we cover. In this environment, we expect the best performers in 2012 to be companies that feature broad geographical diversification and/or enjoy high financial flexibility, such as ENI, EXOR, and Lottomatica. Brilliant 1H12 for the Italian corporate primary market. Volume on the Italian corporate primary market increased 33% yoy in 1H12, with 10 new issues for a total of EUR 9.9Bn, much higher than the EUR 6.4Bn maturing in We point out, however, that developments in the Italian sovereign debt crisis will continue to shape market access. As a result, bond issuance will be easier for big companies, more capable of containing the cost of funding and quickly taking advantage of windows of opportunity on the market. Investment recommendations on Italian corporate senior bonds Investment Grade BUY HOLD SELL ENI Atlantia Acea EXOR Lottomatica Enel Finmeccanica Hera High Yield BUY HOLD SELL Cir Fiat Fiat Industrial Seat Wind Note: No recommendation assigned on Telecom Italia bonds. Source: Intesa Sanpaolo Research. Credit ratings Moody s S&P Acea Baa1/N BBB+/N Atlantia A3/S BBB+/N Cir - BB/S Enel Baa1/UR BBB+/N ENI A2/N A/N EXOR - BBB+/S Fiat Ba2/N BB-/S Fiat Industrial Ba1/S BB+/S Finmeccanica Baa2/S BBB-/N Hera Baa1/N BBB+/S Lottomatica Baa3/S BBB-/P Seat PG Ca/UR D Telecom Italia Baa2/N BBB/N Wind B1/S BB-/S Source: rating agencies Note: Prices in this report are updated at the close of (unless otherwise noted). See page 28 for full disclosures and analyst certification

2 Contents European credit market 3 A two-speed 1H12 3 2H12 Outlook 4 Italian corporate bond market 5 Performance 1H12 5 Outlook 2H12 6 Italian corporate primary bond market 8 Italian corporate bonds: relative value ideas 10 Company Section 11 ACEA (Moody s Baa1/Negative, S&P BBB+/Negative, Fitch A-/Negative) 12 ATLANTIA (Moody s A3/Stable, S&P BBB+/Neg., Fitch A-/Stable) 13 CIR (S&P BB/Stable) 14 ENEL (Moody s Baa1/under review, S&P BBB+/Stable, Fitch A-/under review) 15 ENI (Moody s A2/Negative, S&P A/Negative, Fitch A+/Stable) 16 EXOR (S&P BBB+/Stable) 17 FIAT (Moody s Ba2/Negative, S&P BB-/Stable, Fitch BB/Negative) 18 FIAT INDUSTRIAL (Moody s Ba1/Stable, S&P BB+/Negative) 19 FINMECCANICA (Moody s Baa2/Negative, S&P and Fitch BBB-/Negative) 20 HERA (Moody s Baa1/Negative, S&P BBB+/Stable) 21 LOTTOMATICA (Moody s Baa3/Stable, S&P BBB-/Positive) 22 SEAT (Moody s Ca/under revision for upgrade, S&P D) 23 TELECOM ITALIA (Moody s Baa2/Neg., S&P and Fitch BBB/Neg.) 24 WIND (Moody s B1/Stable, S&P BB-/Stable, Fitch BB/Negative) 25 Appendix - Italian Corporate Bonds 26 Intesa Sanpaolo Research Department 2

3 European credit market A two-speed 1H12 In 1H12 the European credit markets put in an overall positive performance, but a brilliant 1Q12 was almost wiped out by a sickly 2Q12. In detail, in 1Q12 the markets were lifted by two extraordinary 3Y refinancing operations by the ECB which noticeably reduced banks' refinancing risk over the next 1-3 years, especially in the peripheral countries. But in 2Q12 the positive effect wore off and credit spreads once again widened, exacerbated by renewed heightening of the European sovereign debt crisis, mainly due to political problems in Greece and the vulnerabilities of Spanish banks. So investors once again focused on eurozone risk, especially Spain and Italy government debt. The European sovereign debt crisis has been exacerbated by constant political differences over how to manage it and a deterioration in macroeconomic conditions both in Europe, with the beginnings of contagion from the peripheral to the core countries, and in the rest of the world, especially the slowdowns in US and China. In this environment, the markets suffered a return to high uncertainty and sharp credit spread volatility, with investment decisions driven by flight-to-quality. Nonetheless, year to date, investment grade performance remained positive, with ASW spreads tightening 32bps to 166bps. In detail, financial bonds tightened 68bps to 184bps, supported by the ECB s LTROs, while industrials underperformed, tightening only 9bps to 154bps. The curve by maturity steepened as the 1-3Y segment outperformed, tightening 47bps to 115bps, and the curve by rating class also steepened, the BBB-AAA spread widened 11bps to 235bps. In the cash segment, furthermore, high yield bonds noticeably outperformed investment grade bonds, with ASW spreads tightening 114bps to 707bps on the Merrill Lynch Euro HY index, led by the CCC and lower rated bonds, which tightened 338bps to 1,299bps, followed by the BB-rated bonds, tightening 100bps to 587bps, and the B-rated bonds, -63bps to 901bps. 1Q12 sustained by the ECB's two LTROs, but 2Q12 blindsided by return of risk aversion Year-to-date performance still positive, despite the retreat in 2Q12 Cash IG: corporate, financials and industrials (ASW spreads) 400 bps IG Industrial IG Financial 350 IG Corporate Source: Intesa Sanpaolo Research calculations on Bloomberg data ML Euro HY All index, BB, B, CCC (ASW spreads) bps Euro HY MLynch CCC MLynch Source: Intesa Sanpaolo Research calculations on Bloomberg data But the derivatives sector underperformed the cash sector. In detail, the itraxx Main index and senior financials were the worst performers: the former widened 10bps to 179bps and the latter 26bps to 291bps on the 5Y. In contrast, the itraxx Crossover index was the best performer, tightening 31bps to 706bps on the 5Y, followed by the subordinate financials, tightening 20bps to 472bps on the 5Y. Finally, across the itraxx indices we notice that the short-end of the curve outperformed, allowing the Crossover curve to flatten, but it is still slightly inverted. Derivates sector underperformed cash Intesa Sanpaolo Research Department 3

4 5Y SovX WE, Main, Crossover indices bps SovX WE Main Crossover Source: Intesa Sanpaolo Research calculations on Bloomberg data 5Y Main, senior and subordinate financials indices 700 bps SovX WE Sen Fin Sub Fin Source: Intesa Sanpaolo Research calculations on Bloomberg data 2H12 Outlook In our view, the outlook for the European credit markets in 2012 is mixed, with two factors having an offsetting impact: fundamental factors with a negative impact, technical factors with a positive impact. In detail, as for the fundamentals, our economists forecast deterioration in the macroeconomic environment, with a modest recession in the eurozone and a deeper recession in the peripheral countries, including Italy. In this environment, Moody s forecasts an increase in default rates from 1.7% to 2.7% under its baseline scenario and 4.5% under its pessimistic scenario, and an increase in the number of downgrades, as reflected in the deterioration in rating drift and the distressed index. Finally, though corporate earnings growth forecasts for Europe call for 8.5% on an adjusted EpS basis on the EuroStoxx 300, downward revisions are very likely in the coming months in the wake of what already happened in 2011.As a result, these factors could have a negative impact on corporate fundamentals, though they appear more solid compared to the previous financial crisis in (higher liquidity and lower refinancing risk in the short term). In contrast, the technical factors could provide greater support to the bond markets, namely the ECB s accommodating monetary policy, the sharp increase in the net issuance of corporate bonds from EUR 5.2Bn to EUR 17.5Bn in 1H12, and the currently wide spreads which discount a pessimistic scenario (11.8% implicit default rate in the Crossover with a 40% recovery rate assumption). With the global economy slowing, we believe that developments in the European sovereign debt crisis will continue to be the key European credit market driver in 2H12. We believe that until investors perceive a clear will among political leaders to structurally resolve the eurozone's problems, the credit markets will continue to feature high uncertainty and volatility, together with low liquidity and high risk aversion. As a result, our view remains cautious and we see no reason to add risk right now, especially on peripheral names. Hence we expect the more risky assets to underperform the more defensive ones: peripheral country corporate bonds vs. core country corporate bonds; derivatives vs. cash; HY bonds vs. IG bonds; financials vs. nonfinancials; and subordinate financials vs. senior financials. However, we do not rule out a shortlived relief rally, triggered by short-covering and driven by the more risky assets classes, in case of good news from the macro data and/or political events. Fundamental drivers worsening Positive technical factors Strategic view negative Intesa Sanpaolo Research Department 4

5 Italian corporate bond market Performance 1H12 In 1H12 the main Italian corporate bonds continued to underperform their European competitors due to renewed tensions on Italian sovereign debt starting in March. In terms of 5Y CDS, all Italian IG issuers underperformed the Main Euro 5Y index (10bp wider to 179bps). In addition only Telecom Italia (widening 33bps to 513bps) and ENI (widening 36bps to 214bps), overperformed the Italian 5Y CDS (37bps wider to 529bps), due to good 1Q12 results and, for ENI only, expectations of de-leveraging following the agreement to sell its 30% stake in Snam to Cassa Depositi e Prestiti. In contrast, ENEL was the worst performer, widening 131bps to 466bps, due to its high exposure to Italy and Spain sovereign risk and pressure on electricity generation margins. Also the 5Y CDS of Atlantia widened 98bps to 370bps, due to high exposure to Italy country risk, reflected in the sharp decrease in traffic volume in 1Q12 due to Italy s economic recession. Renewed tensions in 2Q12 on the Italian sovereign debt Change in 5Y IG corporate CDS vs. Main Europe in 2012 (bps) ENEL Atlantia Italy ENI Telecom IT Main Source: Intesa Sanpaolo Research calculations on Bloomberg data Current IG corporate 5Y CDS (bps) Main ENI Atlantia ENEL Telecom Italy Source: Intesa Sanpaolo Research calculations on Bloomberg data Finally, it is worth emphasising that right now Italy's 5Y CDS (Moody's A2/negative, S&P BBB+/negative) is still higher than that of the main Italian IG corporates, except Finmeccanica (Moody s Baa2/stable, S&P BBB-/negative), which became part of the Crossover index as of March In the HY sector, we note that only Wind and CIR underperformed the Crossover index (31bps tighter to 706bps), with Wind the worst performer, widening 192bps, due to its total operating exposure to Italy sovereign risk. In contrast, Fiat Industrial was the best performer, tightening 295bps to 524bps, attributable to strong fundamentals and the potential merger with CNH into a new Netherlands-law company listed on the NYSE. Finally, we note that all Italian HY companies have 5Y CDS higher than the Crossover, except Fiat Industrial which discounts an upgrade into investment grade territory. Italy 5Y CDS still wider than main Italian IG corporates Fiat Industrial outperforms by far Change in 5Y HY corporate CDS vs. Crossover in 2011 (bps) Current HY corporate 5Y CDS (bps) Wind CIR X-Over Fiat Finmeccanica Fiat Industrial Fiat Ind. Finmeccanica X-over CIR Fiat Wind Source: Intesa Sanpaolo Research calculations on Bloomberg data Source: Intesa Sanpaolo Research calculations on Bloomberg data Intesa Sanpaolo Research Department 5

6 Outlook 2H12 We stand by our Credit View Neutral on the Italian corporate bond market based on our expectation that the overall credit profile will remain steady in 2012 for most companies that we cover (eight Credit View Neutral, three Negative, two Positive). In detail, we note that they on average they have adequate liquidity, and low refinancing risk in the short term, in part reflected in the fact that bond maturity volume in 2012 is 24% lower at EUR 6.4Bn. Adequate liquidity and low refinancing risk in short term Credit View on issuers covered Investment grade Positive Neutral Negative ENI Atlantia Acea Lottomatica Enel Finmeccanica EXOR Hera High Yield Positive Neutral Negative Cir Seat Fiat Fiat Industrial Wind Note: Credit View on Telecom Italia is not assigned. Source: Intesa Sanpaolo Research. However, we point out that Italy's GDP is forecast to sharply contract in 2012, and Italian corporates could be adversely affected by fiscal austerity measures, with a probable increase in the tax rate, a decrease in consumer demand, and higher risk of regulatory changes in regulated industries, especially utilities, motorways, and telecommunications. It is also worth emphasising the negative impact of the increase in the cost of refinancing due to the renewed tensions on Italian government debt and application of increasingly tighter lending standards by Italian banks. So the rating agencies could further downgrades the ratings of the companies that we cover, especially those more highly exposed to Italy sovereign risk since their revenues are concentrated in Italy and/or their businesses are in regulated industries, hence more exposed to risk of changes to current regulations. Possible new downgrades due to Italy country risk exposure Strengths Adequate liquidity. Low refinancing risk in short term. Technical factors supportive (sharp increase in net issuance in 1H12, smaller amount of bond maturities in 2012, and very wide credit spreads). Weaknesses Italian recession worse than forecast in Regulatory risk and increase in tax rate. Higher refinancing costs, triggered by sovereign debt crisis and tighter lending standards applied by banks. Pressure on ratings of companies more exposed to Italy country risk. In our view, then, the main drivers of Italian corporate bond performance in 2012 are still: i) low exposure to Italy country risk (broad geographical diversification and/or presence in nonregulated businesses; ii) high financial flexibility (low refinancing risk, positive FCF, and deleveraging targets). In the IG sector, our best picks are ENI, EXOR, and Lottomatica. In detail, ENI has modest sovereign risk exposure, broad geographical diversification, and a high possibility to de-leverage after selling its equity stake in Snam. We also stand by our BUY recommendation on EXOR and Lottomatica bonds based on their still attractive spreads and high financial flexibility. Finally, we note that EXOR has low exposure to Italy country risk, and Lottomatica is committed to further de-leveraging as the gaming sector holds up very well in Italy. In contrast, we stand by our SELL recommendation on Acea bonds because of pressure to downgrade its ratings due to Italy sovereign risk exposure and the ongoing deterioration in its fundamentals. Finally, we stand by our HOLD recommendation on the bonds of all the other 2012 driver: low exposure to sovereign risk and high financial flexibility Best pick: ENI, EXOR, Lottomatica SELL on Acea bonds Intesa Sanpaolo Research Department 6

7 issuers that we cover because we believe that current spreads correctly reflect risks due to Italy sovereign risk exposure and/or fundamentals performance. Investment recommendations on Italian corporate senior bonds Investment Grade BUY HOLD SELL ENI Atlantia Acea EXOR Lottomatica Enel Finmeccanica Hera High Yield BUY HOLD SELL Cir Fiat Fiat Industrial Seat Wind Note: No recommendation assigned on Telecom Italia bonds. Source: Intesa Sanpaolo Research. Intesa Sanpaolo Research Department 7

8 Italian corporate primary bond market The Italian corporate primary market was brilliant in 1H12, with 10 new issues for a total of EUR 9.9Bn, up 33% on 1H11, by far exceeding the EUR 6.4Bn maturing in However, we note that bond market access is still shaped by the new heightening of tensions on Italian sovereign debt. As a result, the biggest and most well-known companies managed to issue in 1H12 because of the greater capacity to contain the cost of funding and quickly take advantage of windows of opportunity on the market. In detail, only Luxottica managed to issue in 1H12, along with the frequent issuers, including Atlantia, ENEL, ENI, Fiat, Telecom Italia and Terna. Sharp rebound in 1H12 Italian IG and HY corporate bond issuance/maturities (EUR Bn) Gross Maturity FY11 1H11 1H12 FY11 FY12 Source: Intesa Sanpaolo Research calculations on Bloomberg data Italian corporate bond maturities in (EUR Bn) Source: Intesa Sanpaolo Research calculations on Bloomberg data In our view, the health of the Italian corporate primary market in 2H12 still depends on developments in the European sovereign risk crisis and especially the risk of contagion from the Italian government debt crisis. Moreover, the ongoing recession could trigger a decline in business investment spending, in turn leading to a reduction in refinancing requirements. Finally, we note that, on average, the Italian companies under our coverage have adequate liquidity and low refinancing risk in the short term, as also reflected by the lower amount of bonds maturing in compared with As a result, Italian corporates that we cover will have less need to tap the bond market in However, it is worth emphasising that increasing bank disintermediation could be a valid support factor for the Italian corporate primary market because Italian banks will be forced to reduce their assets in view of recapitalisation requirements imposed by the new Basel III rules and the EBA which will have a deeper impact on companies with HY ratings. We also point out that the bigger companies are tending to reduce their dependency on the banking system, preferring to tap the bond market for the dual purpose of further diversifying their sources of financing and to lengthen average debt duration. Hence we expect the big corporates to continue to tap the bond market, with possible pre-refunding of maturities, taking advantage of windows of opportunity. Another potentially growing trend among Italian corporates, even unrated, is private placements abroad, thanks to high brand recognition and broad geographical diversification (Barilla, Luxottica, and Piaggio made private placements in the US in 2011), also in order to diversify debt denomination (USD, JPY, CHF) to protect against the risk of a euro break-up. 2H12 outlook favourable if Italian government debt tensions ease Support factors: increasing bank disintermediation and possible pre-refunding of maturities Intesa Sanpaolo Research Department 8

9 Bonds issued by Italian corporates in Euro in 1H12 (only institutional) Launch date Issuer EUR M Coupon (%) Maturity Spread at issue* Jan.27 ENI 1, Feb.02 Atlantia 1, Feb.03 Enel 500 floater Feb.13 Terna 1, Feb.16 Enel 2, Mar.12 Luxottica Mar.20 Fiat Finance & Trade Jun.11 Telecom IT Jun.11 Telecom IT Jun.20 ENI Notes: 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 amounting to a minimum of EUR 100M are included; Source: Intesa Sanpaolo elaboration on Thomson One/Bloomberg data Italian Corporate bonds denominated in euro maturing in 2012 Name Country EUR M Coupon (%) Maturity ENEL (ENTNZENEL) IT 400 floater (M) ENEL (ENTNZENEL) IT (M) FIAT FIN & TRADE LX 1, FIAT FIN & TRADE LX POSTE ITALIANE IT (M) TELECOM ITALIA IT 1, (M) TELECOM IT FIN LX 108 floater (M) TELECOM IT FIN LX (M) TELECOM ITALIA IT 1,000 floater Note: M=matured. Source: Intesa Sanpaolo elaboration on Bloomberg data (only issues amounting to a minimum of EUR 50M are included) Italian Corporate bonds denominated in euro maturing in 2013 Name Country EUR M Coupon (%) Maturity AEM SPA IT DOLOMITI ENERGIA IT ENEL SOC AZIONI IT ENI SPA IT HERA SPA IT IMPREGILO INTL NE 150 floater SAFILO CAP INTL LX TELECOM FIN. ITALIA LX TELECOM ITALIA IT TELECOM ITALIA IT 500 floater Source: Intesa Sanpaolo elaboration on Bloomberg data (only issues amounting to a minimum of EUR 50M are included) Italian Corporate bonds denominated in euro maturing in 2014 Name Country EUR M Coupon (%) Maturity ACEA SPA IT ASM BRESCIA IT ATLANTIA IT 2, EDISON SPA IT ENEL (ENTNZENEL) IT 1,000 floater ENI SPA IT 1, GRUPPO ESPRESSO IT TELECOM ITALIA IT TELECOM ITALIA IT TERNA SPA IT Source: Intesa Sanpaolo elaboration on Bloomberg data (only issues amounting to a minimum of EUR 50M are included) Intesa Sanpaolo Research Department 9

10 Italian corporate bonds: relative value ideas We believe that the current credit markets do not reflect the fundamentals of individual companies, especially in the case of Italian names, skewed by sovereign debt contagion risk. Hence in the short term, we recommend a relative value approach, with a preference for names less exposed to Italy country risk because of their broad geographical diversification and high financial flexibility. In the IG sector, we stand by our BUY recommendation on ENI, EXOR and Lottomatica bonds, SELL on ACEA, and HOLD on all the others. In the HY sector, we stand by our HOLD recommendation on bonds of all the issuers that we cover. Finally, we maintain open our relative value recommendations (see table) on the different bonds of the same issuer in view of existing spread misalignments along the maturity curve. Pursue relative value ideas in a difficult market environment Investment ideas Date Bond/CDS Type Spread Rate Buy/ Sell Utility Entry level Current level 1 Pick-up ATLIM 4 1/ Sen ASW FX BUY OPEN We recommend buying ATLIM 02/19 and selling ATLIM 5 7/ Sen ASW FX SELL ATLIM 06/24 bonds, given the curve inversion despite 5-yr shorter tenor ENIIM 4 7/ Sen ASW FX BUY OPEN We recommend buying ENI 10/17 bond and ENIIM 3 1/ Sen ASW FX SELL Status selling ENI 01/18 bonds, due to higher ASW spread and higher YTM of the former, despite shorter maturity ENIIM 4 7/ Sen ASW FX BUY OPEN We recommend buying ENI 10/17 bond and ENIIM 4 3/ Sen ASW FX SELL selling ENI 11/17 bond, due to higher ASW spread, higher YTM and lower price of the former, despite same maturity. High Yield FIAT Sen ASW FX BUY OPEN We recommend buying the Fiat 03/17 bond and FIAT 5 5/ Sen ASW FX SELL selling Fiat 06/17 bond, given the higher ASW spread and YTM, despite similar maturity FIAT 7 3/ Sen ASW FX BUY OPEN We recommend buying Fiat 07/18 bond and FIAT 5 5/ Sen ASW FX SELL selling Fiat 06/17 bond, given the much higher ASW spread and YTM of the former that more than compensate the 1 year maturity extension FIAT 6 3/ Sen ASW FX BUY OPEN We recommend buying Fiat 04/16 bond and FIAT 5 5/ Sen ASW FX SELL selling Fiat 06/2017 bond, given the higher ASW 0.3 spread and YTM, despite shorter maturity. Note: FX = fixed rate. 1) "Current level" at the open of Source: Intesa Sanpaolo Research elaboration on Bloomberg data Intesa Sanpaolo Research Department 10

11 Company Section ACEA (Moody s Baa1/Negative, S&P BBB+/Negative, Fitch A-/Negative) 12 ATLANTIA (Moody s A3/Stable, S&P BBB+/Neg., Fitch A-/Stable) 13 CIR (S&P BB/Stable) 14 ENEL (Moody s Baa1/under review, S&P BBB+/Stable, Fitch A-/under review) 15 ENI (Moody s A2/Negative, S&P A/Negative, Fitch A+/Stable) 16 EXOR (S&P BBB+/Stable) 17 FIAT (Moody s Ba2/Negative, S&P BB-/Stable, Fitch BB/Negative) 18 FIAT INDUSTRIAL (Moody s Ba1/Stable, S&P BB+/Negative) 19 FINMECCANICA (Moody s Baa2/Negative, S&P and Fitch BBB-/Negative) 20 HERA (Moody s Baa1/Negative, S&P BBB+/Stable) 21 LOTTOMATICA (Moody s Baa3/Stable, S&P BBB-/Positive) 22 SEAT (Moody s Ca/under revision for upgrade, S&P D) 23 TELECOM ITALIA (Moody s Baa2/Neg., S&P and Fitch BBB/Neg.) 24 WIND (Moody s B1/Stable, S&P BB-/Stable, Fitch BB/Negative) 25 Note: Meris Tonin (tel. 02/ ) compiled the Acea, Enel and Hera snapshots; Melanie Gavin (tel. 02/ ) compiled the Seat, Telecom Italia and Wind snapshots. Intesa Sanpaolo Research Department 11

12 ACEA (Moody s Baa1/Negative, S&P BBB+/Negative, Fitch A-/Negative) EBITDA breakdown (2011) Trend in profitability Not EBITDA margin EBIT margin regulated 24% 10% 21% 20.2% 19.8% 19.0% 18.5% 18.5%18.1% 18% Regulated 90% 15% 12% 9% 6% 11.4% 12.2% 6.3% 8.8% 6.3% 8.2% 3% Q12 Credit view, rating, and bond recommendation Credit View Negative. We maintain a Credit View Negative on ACEA in view of its poor financial profile, ongoing tariffs uncertainty in the water industry, and exposure to Italy country risk since the company's operations are almost exclusively domestic. Ratings under pressure. The most recent action was an S&P downgrade to BBB+ in March, aligning it with Italy's rating, outlook negative, the same as the City of Rome (main shareholder with 51%), due to its weakening financial profile. Market focus. We maintain a SELL recommendation on ACEA bonds because of high regulatory risk and its poor financial profile, aggravated by the deterioration in Italy's economy. Strengths One of Italy s biggest multi-utilities and leader in the Italian water industry. High cash flow visibility, driven by heavy contribution from regulated businesses (around 90% of total business in 2011). Weaknesses Almost total business exposure to Italy. Increase leverage due to higher net working capital needs. High tariffs uncertainty in water division (around 50% of EBITDA), after referendum result. High dividend pay-out and high exposure to public sector customers. Leverage trend (x) Debt repayment schedule at (EUR M) Net debt/ebitda Net debt/ffo Q12 Bank debt Bond 1,500 1, >2015 Intesa Sanpaolo Research Department 12

13 ATLANTIA (Moody s A3/Stable, S&P BBB+/Neg., Fitch A-/Stable) Credit Sector Report Revenues by geographical area (2011) Abroad 4.5% Italy 95.5% Trend in profitability 70% EBITDA margin EBIT margin 60% 50% 60.8% 61.3% 61.0% 60.0% 62.1% 40% 46.5% 47.8% 47.1% 49.1% 44.7% 30% 20% 10% 0% Q12 Credit view, rating, and bond recommendation Credit View Neutral. Atlantia s 1Q12 results deteriorated due to a fall in traffic volume in Italy, and the company expects leverage to slightly increase in Nonetheless, we stand by our Credit View Neutral on Atlantia based on the higher contribution expected from its foreign concessionaires and low refinancing risk until But we point out that Atlantia is highly exposed to Italy country risk (83% of EBITDA estimated in 2012), with potential negative fallout due to possible industry regulatory changes or further deterioration in macroeconomic conditions in Italy with a negative impact on traffic volume. S&P's rating under pressure. S&P s negative outlook reflects the possibility of a further downgrade if it further downgrades Italy s BBB+/negative rating or country risk continues to increase, triggering a deeper contraction in traffic volume in Italy than S&P currently forecasts. On the other hand, Fitch and Moody s maintain a stable outlook, despite their negative outlook on Italy's A-/A3 rating, reflecting the possibility that Atlantia's rating is higher than the sovereign rating. Market focus. We stand by our HOLD recommendation on Atlantia bonds in view of its high operating exposure to Italy country risk. Strengths Autostrade per l Italia concession (84% of 2011 consolidated EBITDA) does not expire until Low refinancing risk until Increase in tariffs in Weaknesses High concentration in Italy (96% of 2011 revenues and EBITDA). Recession in Italy weighs on traffic volume. Regulated industry, exposed to risk of changes. High planned investment limits possibility of de-leveraging. Leverage trend (x) Net Debt Repayment Schedule (EUR Bn, ) 8.0 Net debt/ebitda Net debt/ffo Q Bank debt Bond Other > 2025 Intesa Sanpaolo Research Department 13

14 CIR (S&P BB/Stable) CIR Group: Revenues by division (2011) CIR Group: trend in profitability (%) Sogefi 25.6% Espresso 19.7% Kos 7.7% Sorgenia 46.9% 14% EBITDA margin EBIT margin 12% 10.7% 12.0% 10.4% 9.8% 10% 8.6% 8.0% 8% 6.9% 8.2% 9.1% 6% 6.8% 4% 4.6% 5.7% 2% 3.5% 3.8% 0% Q12 Credit view and rating Credit View Neutral. Though the 1Q12 results show deterioration and the outlook for Sorgenia and L Espresso in 2012 is dim, we stand by our Credit View Neutral on CIR because of its very low medium-term refinancing risk and its holdings' high liquidity. Stable ratings. We expect stable ratings in the short term. According to S&P, it depends on whether CIR can keep its loan-tovalue ratio below 20%. S&P as well does not take into account the compensation payment received from Fininvest in its rating. Market focus. We stand by our HOLD recommendation on the CIR 2024 bond in view of its high recovery rating (more than 70% according to S&P) and the expected Supreme Court ruling on the EUR 564M damage award received from Fininvest, expected in the next12-18 months. Strengths Low refinancing risk in medium term. Investment portfolio diversified by industry. Possible confirmation of compensation payment from Fininvest. Weaknesses Weak quality of main portfolio investments. Sorgenia s high leverage. Appetite for risk and investment in start-ups. CIR Group: Leverage trend (x) CIR Holdings: Net financial position at (EUR M) 900 Net debt/ebitda Net debt/equity Q12 Liquidity Fin. debts NFP Intesa Sanpaolo Research Department 14

15 ENEL (Moody s Baa1/under review, S&P BBB+/Stable, Fitch A-/under review) EBITDA by geographical area (YE11) Latin America 18% Holding 1% EGP 9% International 9% Italy 40% Trend in profitability 30% 26% 22% 18% 14% EBITDA margin EBIT margin 21.6% 22.5%23.4% 25.4% 23.8% 22.3% 20.3% 15.0% 15.5% 15.6% 17.1% 15.3% 14.3% 13.7% Spain 23% 10% Q12 Credit view, rating, and bond recommendation Credit View Neutral. Despite high operating exposure to Italy and Spain (around 63% of total EBITDA), we stand by our Credit View Neutral on Enel because of the new business plan s focus on strengthening capital and its high percentage of regulated operations (around 50% of total EBITDA). Ratings under pressure. Moody s has put its Baa1 rating under review for a possible downgrade as part of its review of utility companies with significant exposure to Spain (Endesa accounts for around 23% of consolidated EBITDA). If Moody s further downgrades Spain, currently Baa3/under review, it could cut Enel's rating, but limited to one notch. Back in March, S&P also downgraded Enel s rating after it downgraded Italy s rating to BBB+/neg., but its outlook is stable. Market focus. Despite high exposure to Italy and Spain country risk, we stand by our HOLD recommendation on Enel bonds in view of its focus on de-leveraging and in expectation of assessing the negative impact of new regulatory measures by the Spanish government aimed at reducing the electricity tariff deficit. Strengths Low refinancing risk until Stable cash flow from a defensive business mix (50% of revenues from regulated businesses). Good geographical diversification with increasing exposure to high growth potential countries in Latin America. Focus on strengthening capital and de-leveraging. Weaknesses High exposure to Italy and Spain (63% of EBITDA). High regulatory risk in Spain linked to resolution of electricity tariff deficit. Moody s and Fitch may downgrade Enel s rating. Narrower margins in electricity generation in Italy and Spain. Leverage trend (x) Net debt/ebitda Net debt/ffo Q12 Debt repayment schedule at (EUR Bn) 25 Endesa Enel > 2016 Intesa Sanpaolo Research Department 15

16 ENI (Moody s A2/Negative, S&P A/Negative, Fitch A+/Stable) Revenues by geographical area (2011) Africa 9% America 9% Asia 10% Other 2% Italy 31% Rest of Europe 39% Trend in profitability EBITDA margin EBIT margin 35% 29.1% 30% 27.6% 27.3% 24.9% 26.3% 25% 20% 15% 20.0% 15.8% 17.6% 16.4% 19.3% 10% 5% 0% Q12 Credit view, rating, and bond recommendations Credit View Positive. In the wake of the agreement to sell its 30% stake of Snam to CDP, ENI s credit profile is set to improve in view of de-leveraging and its focus on E&P operations where the outlook is very favourable because of recent significant oil & gas discoveries. After the sale of Snam, ENI will also benefit from lower exposure to Italy country risk, though it will give up stable and predictable income (10% of 2011 EBITDA). Rating at risk. S&P s negative outlook reflects the possibility of a further downgrade of ENI s rating if Italy s is downgraded further since in S&P s methodology the two ratings cannot differ by more than two notches. Moreover, S&P could cut ENI s rating if FCF after dividends is lower than expected (around EUR -1.0/-2.4Bn), or FFO/net debt is 50%. Moody s negative outlook reflects ENI s poor liquidity in a deteriorating economic and financial environment. In contrast, Moody s could upgrade its outlook on ENI to stable if the company increases liquidity and/or achieves a 40% RCF/net debt ratio and a 35% gross debt/total capital ratio. Market focus. We stand by our BUY recommendation on ENI bonds because the spreads are still attractive and the company continues to de-leverage. However, we also recommend opening relative value and not outright positions because we expect peripheral corporate bonds to remain under pressure due to risk of contagion risk from Italian sovereign debt. Strengths Strong position in E&P sector, very profitable. Good position in G&P sector in Europe. Favourable oil price trend. De-leveraging expected after sale of Snam and Galp. Weaknesses E&P division increasingly dependent on high risk non-oecd countries (52% of EBIT in Africa). Some exposure to Italy country risk (31% revenues and 9% EBIT in 2011). Poor performance in the gas, refining, petrochemicals divisions. Leverage trend (x) Debt repayment schedule at (EUR M) 2.0 Net debt/ebitda Net debt/ffo Q Bank debt Bond & CP Other > 2016 Intesa Sanpaolo Research Department 16

17 EXOR (S&P BBB+/Stable) NAV of top four investments by geographical area (2011) Breakdown of NAV by equity investment (prices at ) Other 29% Nafta 33% Treasury shares Cushman 4.0% & Wakefield 6.8% Other 6.3% Fiat 20.2% Europe 38% SGS 24.5% Fiat Industrial 38.2% Credit view, rating, and bond recommendations Credit View Neutral. We stand by our Credit View Neutral on EXOR based on its mixed performance in 1Q12, cautious but still positive outlook for 2012, and high financial flexibility. Our view on EXOR is closely linked to our views on Fiat and FI, EXOR s main investments (around 58.4% of NAV), on which we maintain a Credit View Neutral. Stable rating. S&P s stable outlook reflects management's prudent investment policy, its long-term strategy, and low tolerance for increasing leverage, allowing EXOR to keep its loan-to-value ratio below 20% in recent years, despite high equity market volatility. In addition, S&P believes that the Fiat Industrial spin-off from Fiat has improved the EXOR investment portfolios diversification, liquidity, and stability. Market focus. We stand by our BUY recommendation on the EXOR 2017 bond based on its attractive spreads and low refinancing risk until Strengths One of Europe s major investment holding companies. Investment portfolio highly liquid (listed companies comprise 84.5% of NAV). Low refinancing risk until Conservative investment and financial policy. Weaknesses Investment portfolio not broadly diversified, though improved after the Fiat Industrial spin-off from Fiat. Cyclical businesses, exposed to economic slowdown, especially in Europe. Possible negative impact as Fiat s and Chrysler s credit profiles converge. NAV breakdown by listed and unlisted investments Holding System: Debt repayment schedule at (EUR M) Unlisted 15.5% Bank debt Bond Other Listed 84.5% Intesa Sanpaolo Research Department 17

18 FIAT (Moody s Ba2/Negative, S&P BB-/Stable, Fitch BB/Negative) Credit Sector Report Revenues by geographical area (2011) Trend in profitability Mercosur 19% Nafta 36% Other 9% Italy 15% Rest of Europe 21% 12% 10% EBITDA margin EBIT margin 10.5% 8% 8.5% 9.2% 9.4% 6% 4% 5.7% 4.3% 2% 2.3% 3.1% 0% Q12 Credit view, rating, and bond recommendation Credit View Neutral. We expect Fiat s credit profile to mostly hold steady in 2012 as Chrysler's performance continues to improve in North America which should offset Fiat's sharp deterioration in Europe (2012 targets at risk). Fiat will probably increase its equity stake in Chrysler by 3.3% to 61.8% for around USD 200M in July, but with EUR 12Bn in liquid assets we expect no impact on its credit profile. Ratings under pressure. We do expect S&P to leave Fiat's and Chrysler's ratings unchanged, though Moody's and Fitch could downgrade Fiat s ratings due to execution risks on the Chrysler integration plan and Fiat's growing challenges in its main markets, Italy and Brazil. But Moody s could upgrade Chrysler s rating one notch (currently B2/positive). Market focus. We stand by our HOLD recommendation on Fiat bonds in view of still attractive spreads and no refinancing risk until 2015 on a stand-alone basis, though Fiat's stand-alone performance is expected to deteriorate in Strengths Leader in Italy and Brazil. Strong position in small car segment with low fuel consumption. Broader geographical and production diversification with the acquisition of Chrysler. No refinancing risk until 2015 for Fiat and 2016 for Chrysler on a stand-alone basis. Weaknesses Highly dependent on Italy and Brazil. Revenues concentrated in small car segment. Car market expected to remain sluggish in Italy and Europe, little presence in Asia targets at risk in Europe. Moody s and Fitch may downgrade Fiat s rating. Trend in leverage of Industrial division (x) Net Debt Repayment Schedule (EUR Bn, ) Net debt/ebitda Net debt/ffo Q Bank debt Bond Other > 2016 Intesa Sanpaolo Research Department 18

19 FIAT INDUSTRIAL (Moody s Ba1/Stable, S&P BB+/Negative) Revenues by geographical area (2011) Mercosur 16.9% North America 24.9% Other 15.2% Italy 10.2% Rest of Europe 32.8% Trend in profitability 12% EBITDA margin EBIT margin 10% 8% 10.4% 9.7% 8.2% 6% 6.9% 7.5% 4% 5.3% 5.1% 2% 1.8% 0% Q12 Credit view, rating, and bond recommendation Credit View Neutral. We expect Fiat Industrial s credit profile to hold mostly steady in 2012, attributable to the strong performance at CNH and the group's broad geographical diversity which should offset poor performance at Iveco, especially in Europe. FI could raise CNH s 2012 targets in July/October. By YE12, FI aims to merge Fiat Industrial and CNH into a Netherlands-based NewCo, listed on the NYSE, with a view to improving access to international capital markets and reducing the cost of funding. Stable ratings. S&P s stable outlook reflects expectations of a steady credit profile in 2012, but it rules out a rating upgrade in the short term due to unfavourable macroeconomic conditions in southern Europe. Moody s stable outlook reflects FI s solid position in its rating category and its high liquidity. Moody s has a favourable view of the possible FI/CNH merger since FI would benefit from greater control over CNH (around 70% of consolidated operating profit) and CNH could benefit from a rating upgrade to FI s level (currently Ba2/stable). Market focus. We stand by our HOLD recommendation of FI bonds as spreads already discount a rating upgrade to investment grade territory, but the rating agencies rule it out in the short term. Strengths World s third largest manufacturer of agricultural and construction machines and trucks. CNH s outlook still positive in High liquidity and no refinancing risk until Possible rating upgrade to investment grade in medium term. Weaknesses Cyclical and highly capital-intensive businesses. Demand for industrial vehicles in decline in Europe and Brazil in Frequent need to fund captive finance business. M&A risk for CNH and Iveco Jointly liable with Fiat for the group s pre-split debts. Leverage trend (x) Net Debt Repayment Schedule (EUR Bn, ) Net debt/ebitda Net debt/ffo Q Bank debt Bond Other > 2016 Intesa Sanpaolo Research Department 19

20 FINMECCANICA (Moody s Baa2/Negative, S&P and Fitch BBB-/Negative) Revenues by geographical area (2011) Rest of Europe 28% Trend in profitability Other Italy 19% EBITDA margin 20% 15% 13.4% 12.2% 11.7% 10.8% 10% USA 21% UK 12% 5% 0% 8.1% 8.0% 7.7% 6.6% -0.9% 8.2% 3.9% -5% -4.9% Q12-10% EBIT margin Credit view, rating, and bond recommendation Credit View Negative. Based on deterioration in its 1Q12 results, we stand by our Credit View Negative on Finmeccanica, in expectation of concrete progress on the restructuring of problem businesses and the sale of non-strategic assets. In this difficult industry environment, with defence budget cuts in Italy, UK and US, and the rise in competition in emerging countries, Finmeccanica's ability to generate cash could remain under pressure in the medium term, with little possibility of de-leveraging unless it sells non-strategic assets. Ratings under pressure. All the rating agencies maintain a negative outlook, and S&P and Fitch may downgrade Finmeccanica to junk. The negative outlook reflects high execution risks on the restructuring plan that management is pursuing in the current difficult economic environment. As a result, Finmeccanica s rating could be downgraded if the EUR 1Bn asset sales plan is not executed or operating conditions deteriorate further. However management has reiterated that maintaining an investment grade rating remains a top priority. Market focus. Since spreads already discount such a pessimistic scenario in our view, we stand by our HOLD recommendation on Finmeccanica bonds. Strengths Good competitive position in Europe. Favourable business mix, with predominance of military revenues. Backlog covers around 2.5 years of production. Strategic 32.4% stake held by Italian government. Low refinancing risk until Weaknesses Industry outlook negative due to expected defence budget cuts in the main OECD countries. Dependence on Italian military market, expected down. High execution risk to restructuring and EUR 1Bn asset sales plan. Rating at risk of downgrade to junk status. Leverage trend (x) Net Debt Repayment Schedule (EUR Bn, ) 6.0 Net debt/ebitda adj. Net debt/ffo Q Bond Bank debt Intesa Sanpaolo Research Department 20

21 HERA (Moody s Baa1/Negative, S&P BBB+/Stable) EBITDA breakdown (2011) Not regulated 47% Regulated 53% Trend in profitability EBITDA margin EBIT margin 18% 15.7% 15.4% 15.9% 16% 15.6% 13.9% 12.8% 14% 12% 10.7% 10% 8.1% 7.9% 7.6% 7.4% 8% 6.6% 6% 4% 2% 0% Q12 Credit view, rating, and bond recommendation Credit View Neutral. Despite higher operating risk due to the economic slowdown in Italy and the uncertain tariff framework in the Italian water business, we stand by our Credit View Neutral on HERA, given the high contribution from regulated business and the company's solid financial profile. HERA is negotiating a merger with ACEGAS-APS which has a weaker financial profile, though for a complete assessment we need to wait for details on a possible agreement. Ratings under pressure. Moody s negative outlook reflects expectations of a possible deterioration in HERA s financial profile due to the macroeconomic deterioration in Italy, the negative impact of HERA s sizable capex plan, and its high dividend payout. But even after the letter of intent signed with ACEGAS-APS, S&P s stands by its outlook stable in expectation of assessing the terms of an actual merger. Market focus. We stand by our HOLD recommendation on HERA bonds based on expectations that its fundamental will hold mostly steady, despite high exposure to Italy country risk, exacerbated by the economic deterioration. Strengths One of Italy s biggest multi-utilities, leader in waste management, and significant position in water industry. 53% of EBITDA from regulated businesses. Low refinancing risk in De-leveraging ongoing after major external expansion through acquisitions. Weaknesses Total operating exposure to Italy, with possible negative impact from economic slowdown and austerity measures. Uncertain tariff framework in the water division (16% of EBITDA) after the referendum result that abolished the previous framework. EUR 1.8Bn planned investment in and high dividend pay-out. Uncertainty due to possible merger with ACEGAS-APS. Leverage trend (x) Debt repayment schedule at (EUR M) Net debt/ebitda Net debt/ffo Q12 1,500 Bond Bank debt 1, > 2016 Intesa Sanpaolo Research Department 21

22 LOTTOMATICA (Moody s Baa3/Stable, S&P BBB-/Positive) Revenues by geographical area (2011) UK 2.4% USA 18.3% Other 14.7% Italy 64.6% Trend in profitability 45% 40% EBITDA margin EBIT margin 35% 38.5% 42.2% 30% 36.7% 36.0% 35.1% 35.9% 32.6% 25% 20% 23.4% 23.8% 15% 16.5% 16.8% 16.7% 10% 18.1% 21.7% 5% 0% Q12 Credit view, rating, and bond recommendation Credit View Positive. Based on improvement in Lottomatica s 1Q12 results, its commitment to further de-leveraging in , and low refinancing risk until 2015, we stand by our Credit View Positive. We also appreciate management s effort to focus on broader geographical diversification to reduce the company's exposure to Italy country risk and ensure greater sustainability in improving its fundamentals in the medium term, now that the Italian lottery industry has reached the maturity stage. Possible rating upgrade. We believe that if Lottomatica achieves its 2012 leverage target and Italy country risk stabilises, S&P and Moody s could both upgrade the company s rating by one notch. Market focus. We stand by our BUY recommendation on Lottomatica bonds in view of attractive spreads, the improvement in fundamentals, and a possible rating upgrade in the next 12 months. Strengths Global leader in lottery industry. High visibility on cash flow: around 90% of revenues guaranteed by contracts in Commitment to deleveraging in Weaknesses Mature, capital-intensive, and regulated sector. 65% of revenues and 74% of EBITDA concentrated in Italy in Some exposure to EUR/USD exchange rate risk. Low refinancing risk until Leverage trend (x) Net debt/ebitda Net debt/ffo Q12 Debt repayment schedule at (EUR Bn) 1.6 Bank debt Senior bond Hybrid bond Other >2018 Intesa Sanpaolo Research Department 22