Equity Markets and Alternative Investments Teaching ...docenti.luiss.it/protected-uploads/973/2017/04/20170410144738-LUI… · YTM (%) Volcan / Anglo American Mar-17 Metals and Mining

Equity Markets and Alternative Investments Teaching Program 2016-2017 Week 9 – April, 11 2017

Equity Linked Overview and Rationale

Marco Morelli – Chief Executive Officer Banca Monte dei Paschi di Siena SpA

Gianluca Iuliano

Introduction

1

Convertible Market Current Trends

3,0% 2,9%

1,7% 1,5% 1,3%

0,3%

29% 30%

31%

37%

34% 34%

20%

25%

30%

35%

40%

0,0%

0,5%

1,0%

1,5%

2,0%

2,5%

3,0%

3,5%

2012 2013 2014 2015 2016 2017YTD

___________________ (1) As of 6th April 2017. Sources: BofAML Capital Markets, Bloomberg. Transaction size > $100m. (2) Source: BofAML Capital Markets/Dealogic. (3) Source: BofAML Capital Markets/Dealogic. Excluding mandatory convertible bonds. Transaction size > $100m.

Robust convertible bond market

conditions have enabled issuers

to achieve premium pricings,

taking advantage of the currently

very attractive secondary market

trading dynamics

Eleven issuers have tapped the

market since the beginning of the

year

o Six have achieved zero

coupon or negative yield

financing

o Three have been able to

upsize issue on the day on

the back of exceptional

demand

Some of those issuances have

been offset by liability

management exercises increasing

current need for paper

80

85

90

95

100

105

110

115

gen-16 giu-16 nov-16 apr-17

Rebased to 100

DJES 600 Global Convertibles Exane European Convertibles

Convertible Performance Remains Resilient

Yield (%)

Premium (%)

Average Yield Average Premium

($m)

Issuer Date Issuer

Country Issuer Sector Size (m) Issuer Rating

Maturity/ Put

Premium (%)

Coupon/ YTM (%)

Volcan / Anglo American

Mar-17 Metals and

Mining £2,000 nr 2020 10.0% 4.125%

Snam Mar-17 Utilities €400 Baa1/BBB/BBB+ 2022 26.0% 0.00%

Rag-Stiftung / Evonik

Mar-17 Chemicals €500 nr 2023 30.0% (0.65)%

BASF Mar-17 Chemicals $600 A1/ A/A+ 2023 25.0% 0.925%

Deutsche Wohnen

Feb-17 Real Estate €800 A3/A- 2024 53.0% 0.325%

Severstal Feb-17 Metals and

Mining $250 Ba1/BBB-/BBB- 2022 35.0% 0.00%

Vinci Feb-17 Industrials $450 A3/A-/A- 2022 22.5% 0.375%

Fresenius SE Jan-17 Healthcare €500 Baa3/BBB-/BBB- 2024 45.0% 0.00% / (0.14)%

Immofinanz Jan-17 Real Estate €300 nr 2024/ 2022

30.0% 2.00%

Prysmian Jan-17 Industrials €500 nr 2022 41.25% 0.00%

Michelin Jan-17 Auto Parts $500 A3/A-/A- 2022 28.0% 0.00%

Greenyard Dec-16 Consumer €125 nr 2021 27.5% 3.75%

Unicredit / Pekao Dec-16 Financials €518 Baa1/BBB-/BBB+ 2019 15.0% 0.00% / 4.75%

BESI Nov-16 Technology €125 nr 2023 40.0% 2.50%

2.134

1.202 1.153

732

0

836 911

1.924

4.163

85

1.285

0 0

500

1.000

1.500

2.000

2.500

3.000

3.500

4.000

4.500

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Recent Transactions (1) Convertible Market Performance (1)

Potential Redemptions in EMEA in 2017 (2) Average Convertible Premium and Yield Evolution (3)

Convertible Bonds Structuring

Convertible Bonds

2

Overview

Who?

What?

Why?

Interest cost lower compared to equivalent straight debt given the option component effectively subsidies the cost of the bond

In case the share price increases and the bond converts, no redemption (and therefore no cash outflow) of the bond

Tap an alternative investor base of specialized convertible investors

‘Easy’ to execute

Bond convertible into a fixed number of shares at the conversion price

Economically a convertible bond is equivalent to the issue of a straight bond plus a call option on the underlying shares

Conversion takes place at the conversion price

Interest bearing instrument

Investors have the right to converts the bonds (no obligation)

Investment Grade (Rated) Sub Investment Grade (Rated) Investment Grade (Non-Rated) Sub Investment Grade (Non-Rated)

3

Components of a Convertible Bond

Overview of Payoff Profile Economic Profile

Bond Conversion Right Convertible Bond

Valuation of Bond Component

Valuation of call option component

Value of Convertible

c.90% of value c.10% of value 100% of value

Bond Component

Conversion Right

Gives investor the right to convert at any time during the

lifetime, the convertible into a fixed number of shares

In exchange for a lower coupon, investors are allowed to convert

their bonds into shares

Has a lower coupon than equivalent straight bond

Conversion Price

Share Price

Bond

Share Price

Conversion Right (Call Option)

Coupon

Share Price

Convertible Bond

Conversion Price

Zone A: Redemption Zone B: Conversion

Payoff

Payoff

Payoff

4

Pricing Drivers of Convertibles The Bond Component

Calculating the Bond Component Value Drivers of Bond Component

A

B

C

D

Interest Rates

Credit Spread

Maturity of Convertible

Coupon Payment Frequency

0,0%

0,5%

1,0%

1,5%

2,0%

gen-14 mar-14 mag-14 lug-14 set-14

(%)

75

100

125

150

175


(bps)

Coupon Convertible Coupon of

Straight Bond Bond Component Value

< 100%

Assumptions: Coupon: 0.5% Maturity: 5 years Redemption Price: 100% Coupon Frequency: Annual

Cost of Debt: 2.59% (swap rate + credit spread) 5 year Swap: 0.59 Credit Spread: 2.00%

<

Example

Maturity: 7 Years

Issue Size: €1bn

Coupon Frequency: Annual

7y Swap Rates: 1.26%

Credit Spread: 75bps

Coupon: 0.6%

Bond Floor: 90.8%

Year Coupon (%)

Redemption

Price (%)

Cash Flows

(%)

Discounted Cash Flows

(%)

1 0.50%

0.50% 0.49%

2 0.50%

0.50% 0.48%

3 0.50%

0.50% 0.46%

4 0.50%

0.50% 0.45%

5 0.50% 100% 100.50% 88.44%

Present Value of Cash Flows (Bond Floor) 90.32%

Risk-Free Interest Curve (Illustrative)

Credit Default Swap (Illustrative)

Bond Value = Net Present Value of Cash Flows Assuming Redemption

EUR 7Y Swaps EUR 5Y Swaps

5-year CDS

5

Pricing Drivers of Convertible (Cont.) The Option Component

Sensitivity to Pricing Drivers Value Driver of Option Component

By valuing a convertible, investors mainly solve for the implied volatility

Conversion Premium Fix A

Volatility Variable B

Dividend Yield Fix C

Stock Borrow Cost Fix D

Maturity Fix E

Interest Rates Fix F

Credit Spread Fix G

How Do You Observe Volatility ?

Historical Equity Volatility

Option Market Volatility

Trading of comparable bonds in the market

15

20

25

30


Historical Equity Volatility (%)

Value of Option Convertible Coupon

Higher Conversion Premium

Higher Volatility

Higher Dividend Yield

Higher Stock Borrow Cost

Longer Maturity

Higher Interest Rates -

Higher Credit Spread -

A

B

C

D

E

F

G

Black Scholes Formula:

Convertibles are typically valued using binomial valuation models; a simplistic approach would be to value the option via Black Scholes

Example

Conversion Premium: 30%

Maturity: 7 years

Stock Borrow: 25bps

Implied Volatility: 26% Convertible

Option

Bond

100%

90d Volatility 260d Volatility

9.2%

90.8%

6

Typical Termsheet for Convertible

7 Years

Issue Size: €1,000 million

Status: Senior, unsecured

Assumed Bond Rating: BBB+ (S&P) / Baa2 (Moody’s)

Issue Price: 100%

Redemption Price: 100%

Maturity: 7 Years

Coupon/YTM: 0.00% - 0.50%

Conversion Premium: 30.0% - 35.0%

Issuer Call: (2)

After 5 years at par, 130% trigger (based on conversion price, i.e. €50.7 - €52.7)

Investor Put: (2)

At the 5th

anniversary at par

Dividend Protection: Threshold of 3% yield

Redemption: (2)

Physical settlement or cash settlement upon conversion

Conversion Period: At any time during the life of the convertible

Results:

Conversion Price: (1)

€39.0 - €40.5

Underlying Shares: c.24.7m - 25.6m shares

____________________ (1) Based on a reference share price of €30.0. (2) See appendix for further explanation of these features.

Percentage difference between the conversion price and the reference price (typically between 20-40%)

Reference share price x (1 + conversion premium)

Issue size dividend by conversion price

100% when issue / redemption value is equal to the nominal value

Physical settlement means delivery of shares at the time of conversion; possibility for paying the equivalent value in cash by including a cash settlement option

Economically the right for the issuer to force conversion ahead of maturity

One-off redemption right for investor

Measures to dividend yield used for pricing

Assumed credit rating of the convertible; unrated is also possible

Trading Profiles

Out-of-the-Money

(Debt-Like)

At-the-Money

(Well-Balanced)

In-the-Money

(Equity-Like)

Underlying share price significantly below the conversion price

Convertible has low equity sensitivity and behaves like fixed-

income security

The main price factors are the interest rate level and the issuer’s

credit spread

Underlying share price close to the conversion price

Convertible is considered well-balanced

Medium sensitivity to changes in the underlying equity

These bonds are affected by the share price movements as well

as changes in interest rates and the issuer’s credit profile

Underlying share price significantly above the conversion price

Highly sensitive to changes in the equity, whereas their sensitivity

to changes in interest rates and / or credit spreads is low

Trade at an insignificant premium to parity

Deep in-the-money convertibles will almost certainly be

converted into the underlying shares at maturity

Trading Patterns of Convertibles

7

Illustrative Overview

20%

40%

60%

80%

100%

120%

140%

160%

5 7 9 11 13 15 17 19

Delta > 80% Delta < 40% 40% < Delta < 80%

‘Debt-Like’ ‘Well-Balanced’ ‘Equity-Like’

Option Time Value

Convertible Price Curve

Value of Underlying Shares

Bond Component Value

The Delta expresses the percentage change in the convertible’s bond price per per-cent change in the underlying share price

Convertible Price: 100%

Delta: 50%

Example:

Share Price increase 1%

Convertible Price = 100.5%

A B C

A

B

C

Share Price

The Delta

Convertible Bond Price (% of par)

8

Convertible Bonds Return Profile

From a Long-Only Investors Perspective, one could think of a Convertible of …

Illustration of IRR

(15%)

(10%)

(5%)

0%

5%

10%

15%

20%

(10%) (5%) 0% 5% 10% 15% 20%

Convertible IRR (1.00% coupon, 35% premium)

Debt IRR (cost of debt 4.00%)

Equity IRR

IRR %

Zone 1 Zone 2 Zone 3

IRR can be viewed as cost of capital for the issuer

The Equity angle: a bond with accelerator

The Credit angle: an Equity with a mattress Share price CAGR (%)

Who Buys a Convertible Bond ?

9

Arbitrage

Long-Only

May hedge the underlying equity exposure

by entering into “Delta Hedging” and may

buy CDS to hedge the embedded credit risk

Dominate liquidity in the secondary market

More sophisticated approach to valuation

Typical ticket sizes of up to 10% of deal size

Dominate the convertible bond market

since the credit crisis

Holding a portfolio of convertible bonds

and looking for a risk/return profile

between equity and bonds

Long-term holders of the bonds

Typical ticket sizes of up to 10% of deal size

Key Investors Description Typical Investor Split

By Sector

Long- Only

Arbitrage

70%

30%

UK/US

France

Swiss

Germany

Other

40%

25%

15%

10%

10%

By Sector

Key Buyers of Convertibles Are Dedicated Convertible Funds

Documents Required for Convertible

10

Example for Launch Termsheet Key Documentation for Convertible Issue

Launch Termsheet

c.4-6 page document given to investors at launch including key features and marketing ranges for coupon and conversion premium

Used by investors for valuation of the convertible

Terms and Conditions

Long-form version of termsheet including detailed description of features including conversion mechanics, credit clauses and anti-dilution provisions

Subscription Agreement

Agreement between the Issuer and the underwriters, which specifies the terms and conditions under which the securities will be offered as well as fee and expense arrangements

Press Releases

Launch and pricing press releases published at launch and pricing of the convertible via news wires

Due Diligence Questionnaire

Question list that is provided to the Issuer and used as a basis for the due diligence session

Prospectus

Typically an offering prospectus is not required for a convertible; depending on the jurisdictions and transaction structure a prospectus may be required

In the UK and France for instance a prospectus is made available

How to Execute a Convertible Bond

11

Key Considerations Overview Timeline

Reference Price Mechanism

Convertibles are executed in an accelerated bookbuilding format

Launch and pricing within 1-day / several hours

Launch pre-market open and pricing during the course of the day, depending on progress of bookbuilding

Possibility to execute convertible overnight and outside of market hours but less common in Europe

Typically convertibles are ‘pre-sounded’ with a small number of key accounts one day before launch in a confidential wall-crossing process

In order to calculate the conversion price, a reference price will have to be determined

The reference price is the volume weighted average share price (“VWAP”) between launch and pricing

Sales Force Briefing

Equity Markets Open

Pricing Call

Bookbuilding Starts Termsheet Circulated Press Release on Screen

Go / No Go Call

9am-11am: Regular Update

Calls

Book Close

Pricing Guidance Message on

closing of books

Publish Press Release

Allocations Released

Management / Supervisory Board Resolution Launch

Management / Supervisory Board Resolution Pricing

6am 7am 8am 9am 10am 11am 12pm 1pm 2pm

Day of Execution

The Bookbuilding of Convertible Bonds

12

Illustrative Example of Order Book Marketing Ranges

Convertible bonds are offered with a marketing range for coupon and premium

Investor submit orders within the range

Coupon range typically 0.5%

Premium range typically 5%

Coupon Range

Premium Range 0.0% 0.5%

30% 35%

Book Analysis and Pricing

3,0x

1,8x 1,5x

0,7x 0,6x

0,0x

1,0x

2,0x

3,0x

0.50% Coupon30% Premium


0.25% Coupon32.5% Premium

0.0% Coupon32.5% Premium


Pricing Point

Demand Face – EUR (0.88%–30.00%)



Subscription Level 2.83x 1.39x 0.43x

Total Demand 850,050,000 415,799,999 128,800,000

AMUNDI 31,900,000

LOMBARD ODIER 30,000,000 30,000,000

JPMORGAN AM 30,000,000 30,000,000

ODDO 30,000,000 30,000,000

BLUECREST 30,000,000 20,000,000 10,000,000

D.E. SHAW 30,000,000 15,000,000

GLG PARTNERS 30,000,000

UNION BANCAIRE 26,600,000

ELLIPSIS 25,000,000 25,000,000 25,000,000

ARROWGRASS 25,000,000 10,000,000

GAM 20,000,000 12,500,000 5,000,000

CITADEL 20,000,000 10,000,000

SCHELCHER 20,000,000 10,000,000

BLUEBAY 20,000,000

CQS 20,000,000

GIC 20,000,000

CLAREN ROAD 15,000,000 15,000,000

ILMARINEN 15,000,000 15,000,000

OCEANWOOD 15,000,000 15,000,000

WHITEBOX 15,000,000 15,000,000 15,000,000

DAIWA 15,000,000 8,000,000

LINDEN 15,000,000 7,500,000

CASTLE CREEK 15,000,000 5,000,000

AVIVA 15,000,000

HIGHBRIDGE 15,000,000

OCH ZIFF 15,000,000

Trading of Convertibles Constantly Monitored by Investors

13

Investors constantly

monitor trading patterns

of convertibles to assess

appeal of opportunities

and / or arbitrage

windows

Not all convertibles are

traded on an exchange,

so significant volumes

are often over the

counter (differently from

shares)

Equity-Linked Structured Products Overview

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Equity-Linked Products Overview

14

Mandatory Convertible and Exchangeable

Mandatory Convertible

Traditional

Exchangeable

Debt obligation that will convert into shares at maturity

Conversion obligation, no option

Price at which the instrument converts into shares is within a range (i.e. Minimum and Maximum Conversion Price)

Upside retained through delivery of decreasing number of shares

Typical Terms: 3 year maturity, 20-25% premium, 4.5-5% coupon

Less dilutive and more economical than a straight equity raise in a rising share price

Tax deductible coupons (depending on jurisdiction)

Rating agency equity credit of 100% [depending on structure]

Typically used for M&A financing

Investor demand for high yielding securities

Minimum Conversion Price

Maximum Conversion Price

Share Price

Payoff

Senior bond exchangeable into shares

Issuer and underlying are different

Exchange price set at a premium to the current market price of c.30-40%

Bond is redeemed at par if embedded call option not exercised

Typical Terms: 3-5 year maturity, 30-40% premium, coupon of 0-1% (depending on credit quality)

Monetise listed equity stakes in case embedded call option exercised

Dispose shares at a premium to the prevailing market price

Raise cheap financing at low coupon costs

Crystallize value through the sale of optionality

Current Share Price

Share Price

Payoff

Full

downside

protection

No upside Full upside

Exchange Price

Call Option Exercised Call Option Not

Exercised

Recent Precedent:

(€1.5bn)

Recent Precedent:

(€600m)

Description Payoff for Issuer Rationale for Issuer

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Equity-Linked Products Overview

15

Call Spread Overlay and Equity-Neutral Convertible

Convertible + Call Spread Overlay

Equity-Neutral Convertible

Increase the effective conversion premium of a convertible issue to up to 100%

All-in cost below straight debt

Diversification of funding sources

Call spread is a private transaction between bank and the Issuer, therefore no market risk

Combination of

Sale of a cash settled convertible bond; and

Concurrent purchase of a cash settled call option, matching the call option embedded in the convertible

Exposure from exercise of conversion right embedded in convertible fully offset with exercise of purchased call option by the Issuer

Resulting economic profile equal to a straight bond

Take advantage of strong convertible investor demand

Lower funding costs than equivalent straight bond (i.e. coupon of convertible + purchase of call option < cost of straight debt)

Diversification of funding sources

Recent Precedent:

(€400m)

Lower call strike (e.g. 30%

Premium)

Upper Call Strike(e.g. 100% Premium)

Share Price

Payoff

Recent Precedent:

($730m)

Initial Conversion Price

Effective Conversion Price

Payoff

Share Price

Share Price

Call Option Payoff (Long)

Convertible Payoff (Short)

Net Result: Straight Bond

Issue of a traditional convertible bond combined with the purchase of a call spread to boost the effective conversion price

Call spread is a combination of a long call option with a low strike and a short call option with a high strike

Purchase of call option matching the terms of the call option embedded in the convertible (Lower strike call)

Sell a call option at a higher strike, partially funding the purchase of the lower strike call (Upper strike call)

Description Payoff for Issuer Rationale for Issuer

Examples of Recent Italian Transactions

Key Terms Transaction Highlights

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Beni Stabili Up to €270m Senior Unsecured Convertible Bonds

16

Transaction Summary

Date Launch Date: 8

th October 2013

Expected Settlement Date: 17th

October 2013

Issuer Beni Stabili S.p.A. SIIQ (“Beni Stabili”)

Issuer Rating Unrated

Key Deal

Details

Base Deal Size: €230m

Increase Option: €20m

Greenshoe: €20m

Status: Senior, unsecured

Maturity: 17 April 2019 (5.5 years)

Coupon – Marketing Range: 2.625% - 3.375%

A – Final at Pricing: 2.625%

Premium – Marketing Range: 32% – 37%

– Final at Pricing: 37%

Reference Price: €0.4811 per share, the VWAP between launch and pricing, corresponding to 1% discount vs. previous close

Other Deal

Features

Issuer Call: After 3 Years, subject to a 130% trigger

Dividend Protection: Conversion Price adjusted for cash distributions exceeding €0.022 per share per year

Change of Control: Change of control ratchet and put at par

Issue / Redemption Price: 100% of par / 100% of par

Transaction

Rationale

Proceeds of the Bonds will be used for the optimization of the financial structure and the cost of capital of the Issuer primarily by financing the potential repurchase of certain of the Issuer’s outstanding €225 million convertible bonds due 2015 (if any) and reimbursing (at maturity or otherwise) any such bonds not repurchased

BofAML Role Joint Bookrunner

____________________ Source: Company data as of 30 June 2013, Press Release and Public Filings (1) As at 7 October 2013

On 8th October 2013, BofAML acted as Joint Bookrunner on an up

to €270m convertible bond placement for Italian real estate

company Beni Stabili

With a market cap of over €900m(1), Beni Stabili is the largest REIT

listed on the Milan Stock Exchange; Beni Stabili is also listed on

the NYSE Euronext Paris Stock Exchange

The transaction which was launched pre-European market open,

received an exceptional response from investors with books being

covered within the first few hours and the final book being

multiple times oversubscribed

Robust investor demand for equity-linked issues enabled the deal to be upsized from €230m

to €270m (assuming full exercise of greenshoe) with pricing coming in at the best terms for

the issuer and the coupon being below the 3% average yield paid by real estate issuers in

EMEA since 2010

Concurrent to the new issue, there was an independent reverse bookbuilding process to

repurchase the existing 2015 Convertible Bonds of Beni Stabili

The transaction was particularly significant on a relative basis, with underlying shares

representing c.56% of free float and almost 270 days trading

Distribution was targeted at long-only accounts, which was reflected in the high quality order

book and minimum share price impact of c.1% between launch and pricing

Despite volatile markets on the back of local political instability, Beni Stabili achieved its target

conversion premium, representing the highest in the real estate sector in the last 5 years and

the highest in EMEA YTD

The transaction is the largest real estate issue in EMEA YTD, raising the gross sector proceeds

to €1.8bn YTD

With this transaction, BofAML has successfully executed three convertible bond issues for Beni

Stabili since 2006, reinforcing its market position as the advisor of choice in the EMEA equity-

linked market and proving the strength of its global distribution platform

Italy

2.625% Convertible Bonds due 2019

Joint Bookrunner

Up to €270m

8 Oct 2013

Deal Summary

Company Overview

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Case Study: Fiat Chrysler Automobiles NV (“FCAU”)

17

Concurrent $2.5bn Mandatory Convertible and $957mm Common Stock Offerings

Fiat Chrysler Automobiles, (“FCA” or “FCAU”), is a global automotive group engaged in designing, engineering,

manufacturing, distributing and selling vehicles, components and production systems

The Company is the seventh largest automaker in the world, operating both in the mass-market and in the luxury sport

cars segments, through a broad portfolio of brands (including Abarth, Alfa Romeo, Chrysler, Dodge, Fiat, Fiat

Professional, Jeep, Lancia and Ram for the mass-market, Ferrari and Maserati for the luxury segment)

The group is also engaged in the production and sale of automotive components, mainly through the companies

Magneti Marelli, Comau and Teksid

Listed both in New York and Milan, the FCA group is the result of the combination between the Chrysler Group and the

Fiat S.p.A, completed in October 2014

On December 10, 2014, BofA Merrill Lynch, acting as Joint Bookrunner priced a 2-year $2.5 billion of SEC-Registered

Mandatory Convertible Securities (excluding $375mm greenshoe) and $957 million of Common Stock Add-On (excluding

$143mm greenshoe) for Fiat Chrysler Automobiles NV (“FCAU” or the “Company”)

The mandatory convertible is structured uniquely as a 2-year maturity. The shorter duration is a reflection of FCAU’s

bullish view on its future stock price

FCAU had previously announced its intention to spin-off Ferrari SpA. Subject to completion of the spin-off, mandatory

holders will be entitled to participate in the spin-off and receive shares of Ferrari

Exor SpA, the number one shareholder of FCAU, purchased $886mm in aggregate notional amount of the Mandatory

Convertible Securities to preserve its ~30% fully-diluted interest in the Common Shares

The transactions were extremely well received and the order books were oversubscribed from a mix of equity

investors, dedicated convertible investors, credit investors and hedge funds, primarily in the US. As a result:

BofAML was able to price the full size deals on both mandatory and common offering, despite the combined

offering representing approximately a fifth of the Company’s market cap

Mandatory offering represented largest mandatory offering since 2011

BofAML acted as Joint Bookrunner in the Transaction, which marks the continuation of BofAML’s strong relationship

with the Company, being the 4th capital market transaction in the year after having been Left Lead Joint Bookrunning

Manager for Chrysler’s $2.8bn add-on notes, Joint Lead Arranger for Chrysler’s $2.0bn Senior Secured Credit Facilities

and Joint Bookrunner on a €850m notes offering for Fiat

Mandatory Convertible Securities

Base Deal Size $2,500mm

Greenshoe $375mm

Maturity 2 years

Put Features None

Payment Rate 7.875%

Premium 17.5%

Settlement Method Stock Settled

Holders w ill receive a number of SpinCo

Shares based upon the Spin-Off Ratio

Marketing 4-Day Marketed

Common Stock Offering

Base Deal Size 87,000,000 shares

Greenshoe 13,000,000 shares

Discount to Last Sale (4.3%)

Offering Price $11.00

Ferrari Spin-Off

Adjustment

Offering Overview

December 10, 2014

$3,457,000,000

Concurrent Offerings of $2.5bn Mandatory Convertible and $957mm Common Stock

Joint Bookrunner

____________________ Source: Company fillings.

Appendix

Terminology

18

Typically 20-40% above reference share price at the time of issue Conversion Premium

Conversion Price

Conversion Ratio

Parity

Bond Floor

Delta

Implied Volatility

Par Value

Issue Price

Redemption Price

Reference share price x (1 + conversion premium)

Number of shares received upon conversion of each bond. Determined at issuance

Market value of the underlying shares

Value of convertible calculated by considering fixed income attributes alone (i.e.: excluding the embedded option). Equal to present value of cash flows (including remaining coupons and cash redemption at par)

Measures the rate of change in convertible bond price with respect to movements of the underlying share price

Volatility when input in the pricing model will result in a value equal to the current market price

Face nominal value of one bond

Price at which the convertible is issued. Normally a percentage of par and most frequently 100%

Price at which the convertible can be redeemed if the security has not been converted into shares (i.e.: 100%)

Calculating Key Convertible Terms

19

Conversion Price

Shares Underlying

Conversion Ratio

Parity

Share Price x ( 1 + Premium) = Conversion Price

Share price €20.0

Premium = 30%

Conversion Price = €20.0 x 1.3 = €26.0

Issue Size of Convertible Bond / Conversion Price = Shares Underlying

Issue Size of the Convertible Bond = €1.0bn

Conversion Price = €26.0

Share Underlying = €1.0bn/ €26 = 38.46 million

Par Value of Convertible Bond / Conversion Price = Conversion Ratio

Par Value of Convertible Bond = €100,000

Conversion Price = €26

Conversion Ratio = €100,000 / €26 = 3,846.15

Underlying Share Price/ Conversion Price = Parity

Share Price (assumed) = €15.0

Conversion Price= €26

Parity = €15.0/ €26.0 = 57.7%

€500m Airbus Convertible €500m Haniel/Metro Exchangeable €500m RAG/Evonik Exchangeable

Interesting Transaction Themes – Negative Yield Offerings

20

Launch / Pricing Date:

26 June 2015

Issuer Rating: A (S&P) / A2 (Moody’s) / A- (Fitch)

Size: €500 million

Maturity / Put: 1 July 2022 (7 years) / None

Issue / Redemption Price:

102% (vs. marketing range: 100% - 102%) / 100%

Coupon: 0.00%

YTM: -0.28% (vs. marketing range: -0.28% to 0.00%)

Premium: 62.5% (vs. marketing range: 47.5% - 62.5%)

Dividend Protection:

Above €1.20 for CY’15 with 15% growth thereafter p.a.

Issuer Call: From year 4, subject to a 130% trigger

Use of Proceeds: General corporate purposes, optimise financing costs and diversify funding sources

Benchmark offering by first time issuer amidst volatile market backdrop with books covered in less than two hours

High quality long-only funds formed the backbone of demand, representing 70% of order book

Exceptional demand enabled pricing at negative yield with 62.5% premium, reflecting the peak of new issue valuations and premium investors are willing to pay above the historical volatility


6 May / 7 May 2015

Guarantor Rating: BB+ (S&P) & Ba1 (Moody’s)


Maturity / Put: 12 May 2020 (5 years) / None


102.75% (vs. marketing range: 100.75% - 102.75%) / 100%

Coupon: 0.00%

YTM: -0.54% (vs. marketing range: -0.54% to -0.15%)

Premium: 37.0% (vs. marketing range: 32% - 37%)


Full dividend protection


Use of Proceeds: Balance guarantor portfolio and enhance Metro’s free float

Launched with a concurrent equity offering, the exchangeable transaction was covered within 90 minutes post launch

Significant interest from long-only accounts representing 60% of the final book

Bonds were trading at 101-102% in the grey and 104% post pricing

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11 February 2015

Issuer Rating: Not rated

Size: €500 million (upsized from €400m initially)

Maturity / Put: 18 February 2021 (6 years) / None


101% (vs. marketing range: 100% - 102%) / 100%

Coupon: 0.00% (vs. marketing range: 0.00% to 0.50%)

YTM: -0.17% (vs. marketing range: -0.33% to 0.50%)

Premium: 35.0% (vs. marketing range: 32.5% - 37.5%)




Use of Proceeds: Diversify Issuer’s assets

/

Strength of demand and a multiple times oversubscribed book enabled the deal to be upsized from a base deal size of €400m to €500m

First benchmark negative yield transaction in Europe with final pricing at 0% coupon/YTM (0.17%) and 35% premium

Long-only convertible funds dominated demand, with a balanced geographic split dominated by French, UK and German accounts

■ On the back of the low interest rate environment, robust investor demand especially for investment grade paper and modest primary issuance YTD resulting in rich sec ■ ondary valuations, a number of issuers have achieved negative yield financing opportunistically, demonstrating the market strength despite ongoing macro volatility

■ A prominent feature of all such transactions has been the significant long-only interest, representing over c.60% of the order books on average with minimum share price impact and strong after-market performance

€500m Ingenico Convertible €3bn AMX/KPN Exchangeable €2bn Telecom Italia Convertible

Interesting Transaction Themes – High Premium Convertibles

21


23 June 2015

Issuer Rating: Not rated


Maturity / Put: 26 June 2022 (7 years) / None

Issue Price: 100%


Coupon / YTM: 0.00% (vs. marketing range: 0.00% - 0.50%)

Premium: 55% (vs. initial / revised marketing range: 40% - 50% / 50% - 55%)


Above €1.0 for FY’15 with 10% growth thereafter p.a.


Use of Proceeds: Diversify funding sources, extend debt maturity and finance growth

Strong deal momentum with over 200 order lines enabled the offering to re-price outside the marketing range with a final conversion premium of 55%. Final pricing represents a meaningful premium above the historical volatility

Long-only investors dominated with over 65% of outright demand and several hedge funds taking outright positions as well


20 May 2015

Issuer Rating: A2 (Moody’s) / A- (S&P) / A (Fitch)

Size: €3.0 billion (upsized from €2.5 billion initially)

Maturity / Put: 28 May 2020 (5 years) / None

Issue Price: 100%



Premium: 45% (vs. marketing range: 40% - 45%)


Above €0.08 p.a. (c.2.4% div yield)

Issuer Call: From year 2.5, subject to a 130% trigger

Use of Proceeds: General corporate purposes

Largest equity-linked issue in 5 years with a 2.5x oversubscribed demand book allowing the deal to be upsized from €2.5bn to €3bn within a few hours post launch

Very robust investor demand with orders from every major equity-linked investor. AMX raised zero cost financing opportunistically, whilst retaining 45% of the stock upside in addition to the underlying dividends

/


19 March / 20 March 2015

Issuer Rating: Ba1 (Moody’s) / BB+ (S&P) / BBB- (Fitch)

Size: €2.0 billion

Maturity / Put: 26 March 2022 (7 years) / None

Issue Price: 100%



Premium: 70%




Use of Proceeds: To pre-fund capital expenditures

55% premium

45% premium

70% premium

■ Telecom Italia broke the drought in the European equity-linked market earlier in the year by raising €2bn via a 7 year structure and 70% premium which was received with significant interest, reflecting willingness of convertible investors to test new structures

■ A distinguishing feature relative to market standard, high premium structures have been utilised by a series of corporate issuers recently in combination with zero coupon financing to raise meaningful proceeds

■ Outright participation has been key to such structures with strong demand from French long-only accounts

Revived high premium convertibles with significant interest from the outright investor base as well

Strong deal momentum and quick coverage implied an upsized deal from an initial size of €1.5bn to €2.0bn

Large number of hedge funds participated on light deltas, ensuring minimum share price impact for the reference price

£350m Sainsbury Hybrid Convertible €265m Neopost Hybrid Convertible

Interesting Transaction Themes – Hybrid Convertibles Revive

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Launch / Pricing Date: 23 July 2015

Securities: Perpetual subordinated bonds convertible into ordinary shares of Sainsbury Plc

Issue Size: £250 million

Use of Proceeds: General corporate purposes of the Group, including via on-lending to subsidiaries of the Issuer and by way of contributions to the Group’s pension funds

Status of Bonds: Subordinated, unsecured

Issue / Redemption Price: 100% of the Principal Amount

Maturity: Perpetual / no fixed maturity date

First Reset Date: 30 July 2021 (6 years from Closing Date)

Interest: (i) 2.875% until First Reset Date (vs. marketing range of 2.50% - 3.00%) (ii) 472bps plus 500bps step-up above prevailing 5 year swap rate for every Reset

Period (reset every 5 years)

Conversion Period: From 41st day following Closing Date until 7 days prior to First Reset Date (6 years)

Conversion Premium: 30.0% (vs. marketing range of 30% - 35%)

Optional Redemption: Yes, at Issuer’s discretion on any Reset Date at Principal Amount plus accrued interest

Optional Interest Deferral: Yes, at Issuer’s discretion subject to certain Compulsory Interest Settlement Events as defined in the conditions

Dividend Protection: Full dividend protection

Non-Convertible Hybrid Capital Transaction

Launch of concurrent unrated benchmark GBP denominated non-convertible hybrid capital transaction Interest Rate: 6.50% for first 5 years Initial Spread: 472bps over mid-swaps

Launch / Pricing Date: 11 June 2015

Securities: “ODIRNANE” net share settled undated bonds convertible into new Shares and/or exchangeable for existing Shares of Neopost

Issue Size: €300 million

Use of Proceeds: Extend Issuer’s debt maturity profile, finance general financing needs, including acquisitions and strengthen balance sheet

Status of Bonds: Senior, unsecured

Issue / Redemption Price: 100% of Principal Amount

Maturity: Undated

First Reset Date: 16 June 2022 (7 years from Issue Date)

Interest:

(i) 3.375% until First Reset Date (vs. marketing range of 2.625% -3.375%)

(ii) 6-month Euribor + 800bps annual interest, payable semi-annually (“Floating Interest Rate”)

Conversion Period: From 40th day following the Issue Date until the 18 th trading day (exclusive) preceding the first of (i) date for early redemption; and (ii) First Reset Date

Conversion Premium: 40% (vs. marketing range 40.0% - 47.5%)

Issuer Soft Call: From 9 July 2019 until First Reset Date, 130% trigger

Issuer Hard Call: From 16 June 2022 or at any semi-annually Floating Interest Rate payment date thereafter, at the Early Redemption Price

Dividend Protection: Full dividend protection

Optional Interest Deferral: Yes, at Issuer’s discretion if during the 6-month period preceding the relevant Fixed Coupon Payment Date, no payment of a dividend or interim dividend in respect of the Shares has been decided or paid

■ There has been a revival of hybrid convertible bonds, as demonstrated by three transactions YTD which indicated market appetite for such structures ■ Inclusion of hybrid convertible bonds as financing tools have enabled Issuers such as Sainsbury, Neopost and Assytem to:

■ take advantage of the exceptional equity-linked market environment and arbitrage the market which tends to take a very forgiving view of subordination, rather viewing the structure as a yield enhancement strategy and therefore bidding aggressively for paper

■ maximize demand and sizing tension in both straight hybrid and equity-linked markets as witnessed in the Sainsbury combined offering ■ substantially reduce hybrid funding costs while achieving equity credit for the instrument

■ Hybrid convertibles are a balance sheet strengthening tool, securing 100% equity credit from auditors

£400m National Grid Equity-Neutral Convertible €750m AMX/KPN Mandatory Exchangeable

Interesting Transaction Themes – Equity-Neutral and Mandatory Convertibles

23

Launch / Pricing Date: 24 September 2015

Issue Size: £400 million (vs. initial deal size of £350 million)

Use of Proceeds: General corporate purposes and purchase of cash-settled call options to hedge exposure upon conversion of bonds

Status of Bonds: Unsubordinated, unsecured

Bond Rating: The Bonds are expected to be rated in line with the Issuer’s existing senior unsecured bonds, i.e. Baa1 (Moody’s) and BBB+ (S&P)

Issue / Redemption Price: 100% of the Principal Amount

Maturity: 02 November 2020 (5.1 years)

Coupon/YTM: 0.90% (vs. marketing range of 0.50% - 1.30%)

Conversion Premium: 30.0%

Conversion Right: Either cash settled by the issuer (with back to back settlement between the issuer and the derivative counterparty bank) or via shares obtained from the derivative counterparty bank

Dividend Protection: Conversion price adjusted for any dividend paid above a GBP 0.42 per share p.a.

Equity-Neutral Call Purchase (1)

Estimated Upfront Call Option Cost (% of par) (1)

4.6%

All-in-yield p.a. 1.64%

Spread vs. Straight Debt -59 bps

____________________ (1) Estimated cost savings.

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■ Non-dilutive issue of convertible bonds by simultaneously purchasing cash-settled call options on ordinary shares to fully hedge the company’s exposure upon conversion of the cash-settled bonds

■ The embedded call option in the convertible bond, on one hand, and the call option purchased on the other hand, neutralises the Issuer’s position, allowing it to effectively issue a vanilla straight

bond at a lower cash coupon cost and capitalise on favorable convertible market conditions ■ Captures arbitrage valuation differential that convertible investors are willing to pay for blue

chip names and a privately purchased mirror call option ■ National Grid revived the previously tested structure with books covered within c.2 hours post

launch and final pricing coming at mid terms of the marketing range for an upsized deal size of £400m, allowing the company to achieve savings of c.60bps vs. a straight bond

Launch / Pricing Date: 10 September 2015


Bond Rating: A2 (Moody’s) / A- (S&P) / A (Fitch), in line with Issuer’s rating

Status of Bonds: Guaranteed secured, unsubordinated

Maturity: 17 September 2018 (3 years)

Coupon: 5.50% (vs. marketing range: 5.25% - 5.75%)

Minimum Exchange Price: 100% of Reference Share Price

Maximum Exchange Price: 127.5% of Reference Share Price (vs. marketed range of 125% - 130%)

Structure: US Style / PRIDES, One Put for 0.78 Call

Dividend Protection: 85% pass-through of any gross dividends paid

Coupon deferral: None

Investor Voluntary Exchange: Any time at maximum exchange price

Use of Proceeds: General corporate purposes

Settlement: In cash, shares or any combination thereof

■ Mandatories, as a tool of M&A financing, strengthening balance sheet and achieving equity credit have been well established following offerings from diverse issuers recently

■ Whilst a range of corporate issuers have accessed the market in view of taking balance sheet measures, a number of issuers have also utilised the product to dispose off their

major investment holdings to retain partial upside and protect themselves on the downside

■ Recognising that the largest pool of outright demand for mandatories stems from the US, a significant number of long-only accounts in Europe have demonstrated interest in the

product as witnessed in recent issues with many hedge funds also taking long positions in the instrument at launch, minimising share price impact and making it an attractive value

proposition for issuers