Onorato Armatori – initiation of coverage

14 June 2016 Credit Research

Credit Flash – Euro High Yield

UniCredit Research page 1 See last pages for disclaimer.

Onorato Armatori – initiation of coverage ■ We initiate coverage of MOBYIT with a Buy recommendation. We believe

the MOBYIT 7.75% 02/23 is undervalued relative to its main peer, HRGNO, and is trading closer to lower “B” rating levels with a mid-YTW of 8.9%. We therefore believe that significant short-term headwinds are already priced in. The value of the company’s fleet has been assessed at EUR 893mn, which provides strong asset backing for the bond. Onorato Armatori shows moderate leverage of 2.1x on the senior secured level and 3.2x on the total level as of 1Q16. The company is targeting total net leverage of around 2.0x in the medium term.

■ Onorato Armatori is a holding company that owns and operates two main subsidiaries: Moby S.p.A. and Tirrenia-CIN. The company is 100% family owned and provides ferry transportation and related services within Italy and some limited routes to France. Much of this business has a stable infrastructure-like characteristic, as the company provides essential passenger and freight transport services between the Italian mainland and the islands. A significant share of the company’s revenues are generated on routes to and from Sardinia (LTM 9M15: 71%). These routes tend to be highly seasonal as traffic surges during the vacation season. Competition on these routes is intensifying, with one of the company’s main competitors – Grimaldi – adding new capacity to Sardinia in 2016. We expect that this will result in a loss of market share for Onorato Armatori on these routes, although we do not currently expect a damaging price war. Moby will offer new routes to France and Sicily in 2016, which should help to partially offset the loss of volumes in Sardinia. Nevertheless, the competitive dynamic in the Mediterranean is evolving. We expect the company to show a low single-digit revenue decline in FY 16-17 due to weak volume and pricing trends.

■ We expect Onorato Armatori to generate strong FCF in the coming years. The company has taken a proactive stance toward its fuel-price exposure by hedging around 89% of its bunker fuel costs through 2018 at low rates. Fuel accounted for around 30% of total costs in recent years, and the fall in oil prices has had a highly positive impact on margins and cash flow generation. The company also has a favorable working-capital cycle, with significant prepayments in the first half of the year. Capex should rise somewhat in the near term as the company invests more in the recently acquired Tirrenia-CIN and for refitting of some newly acquired vessels. Changes in environmental regulations could require a more significant increase in capex eventually but are not expected in the medium term.

■ A number of regulatory reviews are likely to ensure that legal “noise” continues to surround the company in the coming years and is likely one factor that led to a high coupon for MOBYIT relative to its rating category. Of particular importance is an EC investigation on excessive state aid at Tirrenia-CIN, which predates the company’s ownership. Onorato Armatori negotiated a reduction in the purchase price if the subsidies received are reduced. This should offset any loss in subsidies to a degree via a cancellation of the deferred payments. We estimate that more than EUR 21mn (current worst-case estimate of the company’s lawyers) of the EUR 73mn in subsidies would need to be declared illegitimate before senior secured leverage would rise meaningfully above 3.0x.

Recommendation Buy (Initiation of coverage) Major bond issues Mat Cpn Swap MOBYIT Feb 23 7.75 864 Ratings L-T S-T Outlook Moody's Ba3 STABLE S&P B+ DEVELOP Company website www.moby.it Financial calendar 2Q16 results: 12 September 3Q16 results: 12 December

HY BUSINESS SERVICES CASH CURVE

MOBYIT 7.75% 02/23 PERFORMANCE

Source: UniCredit Research

Author Jonathan Schroer, CFA (UniCredit Bank) +49 89 378-13212 [email protected] Bloomberg UCGR Internet www.research.unicredit.eu

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http://www.research.unicredit.eu/


Credit Flash - Onorato Armatori


Issuer summary and relative-value considerations Overview of Onorato Armatori Onorato Armatori is the family holding company that owns the companies Moby S.p.A.

and Tirrenia-CIN. Onorato Armatori is the largest operator of ferries in Italy, providing transportation services between mainland Italy, Sardinia, Sicily, the Tuscan Archipelago and Corsica. Currently, Onorato Armatori offers 24 routes through 25 ports. The company operates 64 vessels, of which 54 are owned and 10 are operated under bareboat charters. Of this total, 47 vessels are ferries and 17 are tugboats. The market value of the fleet has been assessed at around EUR 893mn by independent shipbrokers. Onorato Armatori is the leader for Sardinian passenger and RoRo (roll on/roll off) ferry transportation services, with a market share of 82% in terms of passengers transported and 86% in terms of linear meters of freight transported. Moby was founded as a joint stock company in 1985 by Vincenzo Onorato, who is the company’s chairman. His son, Achille Onorato, was named the company’s CEO in April. The company has acquired several related businesses in recent years, most notably Tirrenia-CIN. In June 2015, Onorato Armatori was incorporated as a joint stock company via a EUR 110.5mn capital increase by a contribution in kind from Ale1 B.V. of 68% of Moby S.p.A.’s share capital (see organizational chart on page 15). In July 2015, the issuer received a EUR 101mn cash contribution from its sole shareholder, which it used to acquire the remaining 32% stake it did not own in Moby and 60% of the share capital of Tirrenia-CIN not already held by Moby.

PRIMARY FERRY ROUTES FOR MOBY AND TIRRENIA-CIN

Source: company data, UniCredit Research

Genoa

Bonifacio

NaplesS.T. Gallura

LivornoRavenna

Bastia

Tremiti Island

Termoli

CataniaPalermo

Cagliari

Porto Torres

Piombino

Civitavecchia

Tirrenia-CIN RoutesMoby RoutesRoutes Operated by Tirrenia-CIN and Moby

TuscanArchipelago

Olbia




MOBYIT issue and company refinancing in February 2016

The MOBYIT bond was issued in February 2016 as part of a broad refinancing of the company. Proceeds of the EUR 300mn bond and a EUR 200mn term loan were used to repay previous debt of EUR 325mn (EUR 192mn at Moby and EUR 133mn at Tirrenia-CIN). The bond and bank debt rank parri passu and are senior to the EUR 180mn in deferred debt installments for the Tirrenia-CIN acquisition. The refinancing included a distribution of reserves to the shareholder of EUR 143mn to repay prior debt. These amounts do not reflect a further cash inflow of EUR 39mn in proceeds from the sale of a vessel (Albayzin) in January 2016, which was also credited toward debt repayment in the pro forma leverage figures.

Market value of fleet provides strong asset backing

Onorato Armatori’s fleet value was estimated by independent shipbrokers as having a market value of EUR 893mn as of 31 October 2015. Only EUR 63.1mn of this is not pledged as collateral to secure the notes (including the Albayzin vessel, which was sold in January 2016 for EUR 38.5mn in net proceeds). We believe that this provides strong asset backing for the bond. Of this, Tirennia-CIN’s fleet was valued at EUR 526mn and Moby’s at EUR 366mn. It appears that there is a real market value for these ships, considering recent market transactions, including Moby’s acquisition of three vessels for EUR 17.2mn in addition to the Albayzin sale. Other shipping operators have also been active buyers and sellers of used vessels recently.

FLEET MARKET VALUE AND ASSET COVERAGE


MOBYIT looks attractive in a relative-value comparison

For relative-value considerations, determining the appropriate peer group for MOBYIT is complicated. While we believe that the broader high-yield business services peer group would ordinarily provide the best context, a number of the bonds in the peer group are currently range-bound near their call prices (e.g. TCHEN, ISTAGR, TMFG), limiting its usefulness. We see the appropriate peer context as a more limited group focusing on high-yield bonds in the transport and logistics sector. These include Hapag Lloyd (HPLGR) and Hurtigruten (or Silk Bidco, HRGNO). However, we should also note that, within this peer group, MOBYIT has the strongest ratings, with corporate ratings of Ba3s/B+(developing) and instrument ratings of Ba2/BB- (HRGNO: B2s/Bn corporate and instrument/HPLGR: B2p/B+CWN corporate and Caa1/B- instrument). We discuss the most relevant peer, HRGNO, below. HPLGR trades much tighter than MOBYIT, despite a much lower instrument rating. However, this mainly reflects the stable retail nature of the bond and the fact that the cash price has now approached the bond’s call price, with reasonable prospects that the bonds will be called in the near future.

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High-yield business services cash curve High-yield transport and logistics


Main peer: HRGNO The best peer for Onorato Armatori is Hurtigruten (HRGNO). Hurtigruten (via its parent company Silk Bidco) is a Norwegian cruise-ship operator that – like Onorato Armatori – receives support from the government for providing transportation services that would otherwise be unprofitable. The European Free Trade Association launched an investigation against Hurtigruten regarding a potential breach of state-aid rules in December 2015. The three-notch difference in the rating is largely attributable to Hurtigruten’s higher leverage (S&P adjusted FY16-17: 7.0-7.5x, Moody’s: FY16-17: 5.0-5.5x) relative to Onorato Armatori (S&P: 3-4.0x in FY16-17; Moody’s: 3.7-4.2x in FY16). In April 2016, S&P changed its outlook on Hurtigruten to negative due to a disappointing FY15 report, where the expiration of oil forward contracts led to weaker credit metrics and showed potential for more earnings volatility than S&P previously expected. S&P rates Hurtigruten’s business risk profile as “weak” compared to Onorato Armatori’s “fair” and financial risk as “highly leveraged” compared to Onorato Armatori’s “significant.” In May 2016, Moody’s revised its outlook on HRGNO down to stable from positive due to weaker-than-expected credit profile and liquidity. We see the fact that MOBYIT is trading 228bp wider than HRGNO for a 1Y longer maturity as unjustified considering Onorato Armatori’s overall stronger credit profile, which further supports our Buy recommendation.

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Competitive environment and positioning Onorato Armatori has a dominant market position in Italy, especially on Sardinian routes

Onorato Armatori is the largest operator of RoRo ferries in Italy and is one of the leading operators globally. It transported 6.3mn passengers and 7.4mn tons of cargo in 2015. Operations are focused on connecting mainland Italy to Sardinia, Sicily, the Tuscan Archipelago and Corsica. In Sardinian passenger and RoRo ferry transportation services, the company has a market share of 82% of passengers transported and 86% of linear meters transported, according to management information.

TRANSPORT CAPACITIES OF TOP 20 RORO OPERATORS

PAX capacity Car capacity

Source: ShippaxDatabase

Business segments Three main business segments Onorato Armatori has three main business segments, with one dominant segment,

Ferries. The Ferries segment accounted for 94.9% of group revenues and 96.6% of EBITDA in the most recent year. The other two segments are Tugboats, which generated 3.6% of revenue and 3.0% of EBITDA, and Olbia Port Operations, which generated 1.5% of revenues and 0.5% of EBITDA. The Ferries segment includes all of the company’s passenger and freight business. Tugboats includes harbor and offshore tug services, including port security. The Tugboat concessions last, on average, 15 years and are due to expire between 2022 and 2029. The segment Olbia Port Operations consists of long-term concessions (up for renewal in 2018) from the Italian Port Authority. Revenue comes from port charges, maintenance and rental fees for commercial real estate leases, including cafes, restaurants and gift shops. The EBITDA margin at Ferries was 26.7% as of LTM 9M15, 22.5% at Tugboats and 12.7% at the Olbia Port Operations. The company has not provided an EBITDA breakdown by segment for FY15.

SEGMENT SPLIT DOMINATED BY FERRY BUSINESS

Revenue by segment (FY15) EBITDA by segment (LTM 9M15)


- 10,000 20,000 30,000 40,000

TallinkColor Line

Fjord 1Hellenic Seaways

Moby LinesDFDS Seaways

Blue Star FerriesShandong Bohai

P&O FerriesBrittany FerriesIstanbul Deniz

ANEK LinesViking Line

Corsica FerriesGrandi Navi Veloci

JadrolinijaTirrenea

BC FerriesStena Lines

Moby + TirreniaWashington State Ferries

- 2,000 4,000 6,000 8,000 10,000 12,000

Irish FerriesTransmediterranea

ArmasMoby Lines

Washington State FerriesSNCM

Color LineJadrolinija

China ShippingBlue Star Ferries

Fjord 1DFDS SeawaysCorsica FerriesBrittany Ferries

BC FerriesANEK Lines

TirreneaGrandi Navi Veloci

P&O FerriesMoby + Tirrenia

Stena Lines

Ferries94.9%

Tugboats3.6%

Olbia Port Operations

1.5%

Ferries96.6%

Tugboats3.0%

Olbia Port Operations

0.5%




Ferries divided into further subsegments

Within the main segment, Ferries, there are a number of subsegments that better reflect the company’s main business drivers. After merging Moby and Onorato Armatori (which includes Tirrenia-CIN), the major segment remains income from passenger and vehicle transportation (46.2%) followed by freight (28.5%). Subsidies for operating otherwise unprofitable routes are the other major revenue component at 14.3%. It is worth noting here that 83% of these subsidies go to Tirrenia-CIN. All other revenue components each account for less than 4% of total group revenue. In geographic terms, we should also note the high importance of Sardinia for the company, as Sardinian routes currently generate 71% of total group revenue.

REVENUES DOMINATED BY SARDINIAN FERRY ROUTES

Revenue by subsegment (2015) Revenue by route (LTM 9M15)


Competitive dynamics Competition intensifying on main routes

Although barriers to enter the RoRo market are high – considering the major investments necessary in shipping capacity – we expect competition on Moby’s main routes to increase in the near future. In particular, privately owned Grimaldi is making a concerted push to take market share from Moby on its key Sardinian routes. So far, Grimaldi has mainly been active in freight transportation, but is now raising capacities in the passenger market as well. Grimaldi is not as concentrated in Italy and operates routes in Spain, Greece, Morocco, Tunisia, and within Italy. Until recently, Grimaldi only offered transportation to Sardinia between Civitavecchia and Porto Torres and a freight route between Salerno and Cagliari, but is now offering passenger routes from Civitavecchia and the main Sardinian port of Olbia and an Olbia-Livorno route. On the Livorno-Olbia route, Grimaldi is running two ferries per day, the same as Onorato Armatori, but on other routes Grimaldi’s capacity is far below Onorato Armatori’s. For example, Grimaldi currently has no direct service between Genoa and Sardinia and it is running two ferries per day between Civitavecchia and Olbia, while Onorato Armatori is running six ferries. A comparison of prices on the Livorno-Olbia route shows that Moby and Grimaldi are offering comparable prices during the high tourist season. However, Grimaldi had been offering a 30% early booking discount through 31 May. Moby said that it has no intention of lowering prices for now apart from normal promotions. Nevertheless, this is a developing situation that will continue to unfold over the coming four months.

New Corsican and Sicilian routes should support revenue trend

Onorato Armatori opened a new passenger route in June connecting Nice and Bastia in Corsica and will open two new cargo routes to Sicily later in 2016. The Nice-Bastia route will be the first the company offers that is exclusively in France and was previously operated by SNCM, a French company that was forced into bankruptcy in 2014.

Income from PAX and vehicle

46.2%Income from

freight28.5%

Income from on-board services

3.0%

Income from chartering

2.8%

Income from subsidies

14.3%

Other revenue0.2%

Tugboats3.6%

Olbia port operations

1.5%

Sardinia71.0%

Sicily11.0%

Corsica3.0%

Tuscan Archipelago

10.0%

Tremiti Islands1.0%

Other4.0%




While this could result in improved top-line growth prospects for Onorato Armatori, it could also be seen as an encroachment into Corsica Ferries’ main area of activity. Corsica Ferries already provides some service to different locations in Italy, notably Livorno, Porto Torres and Golfo Aranci. Therefore, a push into Corsica Ferries’ key area of operation could trigger a response with stepped-up competition on the Sardinian connections. The two new Sicily routes are Catania-Malta, which will start at 6 trips per week, and Livorno-Catania, which will initially offer 8 trips weekly. Both are planned to become daily connections in 2017.

We see price war as unlikely Although competition is increasing in Sardinia and Corsica, we do not expect a damaging price war at this point. Low-price strategies have previously failed in the market and have been one factor behind a number of bankruptcies by smaller, less well-financed players in recent years. These bankruptcies have led to the relatively consolidated market positions of the main ferry operators. Grimaldi – as a larger, diversified operator – can probably support lower prices initially, but companies with weak margins are poorly able to adjust to volatile oil prices, in particular, and therefore are not likely to have a robust enough credit profile to withstand periods of market stress. We therefore do not believe that deep price discounts are a viable strategy over the longer term and that Grimaldi’s prices are likely to come more into line with Onorato Armatori’s once it has established a market for its new passenger routes. Other companies that have a smaller presence in the market include Gruppo Grendi and Grandi Navi Veloci.

Legal proceedings EC subvention investigation Another key concern with Moby and Tirrenia-CIN involves legal risk from a number of

court cases that have been initiated against the company. We believe that ongoing legal risk was a major reason why the MOBYIT bond priced high relative to its rating category. Two of these cases involve antitrust issues and one is an investigation by the European Commission (EC) into the inappropriate allocation of state subsidies for CIN prior to Onorato Armatori’s ownership of the company. An important component of CIN’s revenue base is subsidies from the state for providing transportation on routes that would otherwise be unprofitable. These agreements mostly pertain to the Tirrenia-CIN business before Onorato Armatori’s ownership. Tirrenia-CIN receives annual subsidies of EUR 72.7mn, and Moby group receives annual subsidies of EUR 14.4mn per year (i.e. via its Toremar subsidiary). However, the EC is challenging the Tirrenia-CIN subsidies on the grounds that they may cover some services that are not deemed to be part of a public service obligation that cannot be fulfilled by market forces alone. The EC is expected to announce its decision on the matter sometime later in 2016.

EUR 21mn in subsidies are reportedly under review

Independent legal advisors have said that up to EUR 21mn of these subsidies are contentious. Since Onorato Armatori believed that some subsidy payments could be challenged, the company required in the purchase agreement that the EUR 180mn deferred price for Tirrenia-CIN be reduced in line with the subsidies lost. Since the subsidy regime was extended from 2012 to 2020, each EUR 1mn in subsidies lost reduces the deferred purchase price by EUR 8mn. Moreover, if the subsidies received in the future are lower than EUR 55mn per year (i.e. EUR 22.5mn less than the current EUR 72.5mn received annually), the full amount of the EUR 180mn deferred payment would be eliminated. In addition to a reduction in leverage, if Onorato Armatori were to lose the subsidies, the company would have further options to recoup the lost revenue. For example, the restrictions agreed to under the subsidy regime would be removed, and the company could decide not to provide service on those routes or could raise prices. The company would likely reroute vessels and could even decide to sell a vessel used to service those routes, generating a further significant cash inflow.




Potential back payment for subsidies

Onorato Armatori would also have to pay back previous subsidy payments with interest if the subsidy regime were ruled excessive. The subsidy regime began in 2012 and is scheduled to run through 2020. While both Moody’s and S&P do not expect the fines to substantially exceed the EUR 180mn of deferred compensation for Tirrenia-CIN, Onorato Armatori did mention a potential worst-case scenario in the offering memorandum, according to which the company could be required to repay the full EUR 72.7mn it has received annually since 2012 (and potentially a lesser amount for 2009-12). Although we also consider this scenario highly unlikely – since it would presume that none of the state aid was legitimate – the amount of the potential fine remains an uncertainty, which is likely to weigh on the bond price in the near term. Onorato Armatori would be able to appeal in the event of a negative decision but could be required to make a prepayment of that amount while awaiting a definitive decision. The uncertainty concerning the amount and timing of this potential fine is the main factor behind S&P’s “developing” outlook in its rating.

Antitrust cases In December 2015, the Italian Antitrust Authority approved the acquisition of Tirrenia-CIN under certain conditions. It ruled that Onorato Armatori has a dominant position on the Genoa-Olbia and Civitavecchia-Olbia routes and imposed a number of conditions on the company that it has agreed to implement: 1. The group has accepted a routes plan approved by the antitrust authority in 2016-17. 2. It will sell 10% of its capacities at a 20% discount to the retail price to competitors on the Civitavecchia-Olbia route. 3. Between April and September 2016, it will not charge prices that are higher than the maximum price during the same period of 2014. As a result, we believe that this review has been settled with acceptable conditions for Onorato Armatori and that it will not be reopened.

An antitrust complaint was raised in April 2016 by two customers of Onorato Armatori – Trans Isole and Nuova Logistica – which wanted to switch cargo services to Grimaldi. The case alleges that Onorato Armatori abused its dominant market position by bundling the routes it offers to clients and refusing to provide transportation to customers of Grimaldi on certain routes where Grimaldi does not provide service. This case has just begun and is expected to remain undecided for some time, especially if it goes through the full Italian appeals process. In the meantime, Onorato Armatori has said it is confident that a favorable decision will be reached by Italy’s antitrust authorities and that it has engaged in no wrongdoing.

At this point, we do not see either of these antitrust reviews as especially detrimental to Onorato Armatori’s long-term prospects. The case brought by Grimaldi could last for up to two years if it goes through the full appeals process. Based on previous Italian antitrust precedents, we would not expect a significant fine in the case, even in the event of a definitive guilty verdict (i.e. typically up to a high single-digit million figure). The case does not seem comparable to that of Manutencoop, which received a preliminary EUR 48.5mn fine – and was thus the largest fine, by far, to be levied against a private company in Italy’s recent history. The key difference is that Manutencoop was accused of conspiring with co-bidders to raise the price in a government auction for a school-cleaning contract. However, even if the potential fines in Onorato Armatori’s antitrust cases turn out to be lower, we expect that legal noise will remain something that investors will have to become accustomed to – as with Manutencoop.




Credit profile Revenue and margin trends

Steady, single-digit revenue growth through 2015

Onorato Armatori has shown a steady, low-to-mid-single-digit revenue-growth trend in recent years. The financial data for 2012 – and thus the comparative basis for 2013 – are distorted by the fact that Tirrenia-CIN only reflects the Tirrenia acquisition as of July 2012. In 2014 and in 2015, the consolidated group showed top-line growth of 3.1% per year. A number of positive factors have been working in the company’s favor recently, including 1. a nascent recovery in Italian tourism, as the difficult macro conditions there have started to ease; 2. the relative attractiveness of Sardinian holiday destinations compared to North African and Turkish ones, following a recent spike in terrorist attacks targeting tourist sites; 3. a steady increase in the company’s market share in recent years as a number of competitors have exited the market following the financial stresses since 2009.

Despite the positive overall market conditions, rising competition in the Mediterranean is likely to result in tougher competition for market share in the near term. For example, in its 1Q16 results release, Onorato Armatori reported that freight income was down 31%. Volumes were down 9% in the period, which the company attributed to tougher competition. We expect that the rest of the revenue drop was largely attributable to the collapse in freight rates yoy, meaning that this part of the company’s business is likely to be under pressure throughout FY16. Freight represented around 29% of total revenues in FY15. In the 1Q16 conference call, the company said that it expects freight revenues to be down 20% yoy, but for costs also to be down proportionately, due to the fall in bunker-fuel costs. We think that this guidance appears realistic, as the company is set to open new freight routes across the course of the year (e.g. Genoa-Cagliari in 2Q16), which should lead to some improvement in volumes. On the other hand, the passenger business (46% of FY15 revenue) had a good start into the year, with volumes up 8% and pre-bookings through 31 May accounting for 44% of total FY15 passengers. However, pricing has also been under pressure in this segment – largely due to the increase in competition. The company’s guidance calls for a flat revenue trend in the passenger business in FY16.

STEADY REVENUE GROWTH WITH A STRONGER EBITDA TREND

Revenue trend EBITDA trend


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Bunker fuel is the most important cost component

EBITDA growth has been disproportionately stronger than revenue growth in recent years, mainly due to the rapid fall in the oil price. The largest item in Onorato Armatori’s cost block is bunker fuel costs. In 2012-14, these averaged around 30% of Moby’s total costs. The volatility of oil prices in recent years has therefore had a strong effect on the company’s adjusted EBITDA margins, which have fluctuated from 10% in 2012 to 27% in 2015. With the recent plunge in oil prices, the company has decided to hedge its oil-price exposure to a greater extent than it had previously. Moby has now hedged around 89% of its 2015 bunker volumes each year from 2016-18. Tirrenia-CIN has a similar cost structure but benefits from a pricing-adjustment mechanism that covers 80% of its bunker volumes. Tirrenia-CIN has hedged 75% of the bunker fuel costs that are not covered by this agreement. This hedging policy is expected to lock in solid margins and to ensure strong cash-flow generation in the coming years. If the oil-price environment remains benign, we would expect the group to continue hedging its oil-price exposure on a rolling basis in the future. However, over the longer term, the threat of higher oil prices will remain a challenge that the company will need to contend with as these hedges phase out.

In the 1Q16 conference call, Onorato Armatori gave guidance for a flat EBITDA margin of 27% in FY16. Considering the expectation of a revenue drop of around EUR 35mn in FY16, due to the weakness in the freight business, this would amount to a decline in EBITDA yoy of EUR 9mn to EUR 155mn.

Low taxes Onorato Armatori pays low taxes in Italy because it benefits from a special tax regime for transportation companies. The company expects tax expense of around 10% of earnings before tax per year. Tax expense came to EUR 5.6mn in 2015.

Working-capital cycle results in positive inflows early in the year

Working capital tends to be strongly seasonal but follows a positive cycle for the company. Prepayments in advance of the vacation season lead to significant working capital inflows, particularly in the second quarter. These inflows tend to reverse, notably in the third quarter, once the vacation traffic hits its high point. As a result, the company does not need any special financing facilities to fund its working-capital needs.

Capex to rise in the near term Capex has been low at around 4-5% of sales in recent years. Onorato Armatori is unlikely to have significant expense for new ship acquisitions in the near term as even its oldest ships (1970s) are still within their useful life. Ships are continually refurbished, with the oldest refurbishment done in 2005. Older ships are used for shorter routes, while newer ships are used for the more important long-haul routes. The company has also said that it will redeploy ships to service new routes to Sicily and will not need to acquire new vessels. Nevertheless, we expect capex to rise somewhat because the company said that it intends to increase investment levels at Tirrenia-CIN (2014 capex/sales: 3.4%) to levels that are more consistent with the Moby brand (2014 capex/sales: 5.9%). Currently, the company is not expected to need to make major investments in new vessels, but this could become an issue later for the company’s older ships if the EU tightens environmental regulations. Group capex in recent years has ranged from EUR 26mn in 2014 to EUR 36mn in 2013 (excluding vessel acquisitions). Onorato Armatori has said that it expects maintenance capex to be around EUR 25mn per year, which excludes refitting.

Capex at the beginning of FY16 is clearly running ahead of these levels, with EUR 24mn as of 1Q16 (1Q15: 6.8mn). However, the main reason for this is due to high refitting costs, which accounted for EUR 15mn of this amount. The majority of these costs applied to two of the recently acquired vessels, Moby Zaza and Moby Kiss. In the 1Q16 conference call, Onorato Armatori said that capex is expected to be unusually high in FY16 at around EUR 75mn due to the significant refitting needs. Refitting expense is a moving target for the company. While the company has not provided guidance beyond FY16, we would expect capex to return to more normal levels starting in FY17. However, to be cautious, we are forecasting EUR 50mn in capex in FY17, which would also be significantly above the average of recent years.




CASH CONVERSION* VS. CAPEX/SALES RATIO

*Cash conversion is defined as FFO/EBITDA Source: company data, UniCredit Research

Moderate leverage with medium-term target of 2.0x

Onorato Armatori currently has moderate leverage following the bond issue. Net senior secured leverage, which includes the bond, was at 2.1x as of 1Q16. Total net leverage, which includes the deferred Tirrenia-CIN acquisition payments, was at 3.2x. During the original investor roadshow, the company’s management said that it is targeting total net leverage of closer to 2.0x over the medium term. Interest coverage has also improved with rising EBITDA in recent years, although this metric should weaken somewhat as of 2016 due to the higher interest expense associated with the bond.

IMPROVING CREDIT METRICS ON RISING EBITDA AND CASH GENERATION

Strong deleveraging profile Rising EBITDA margin and interest coverage


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Forecasts for 2016-17 FY16-17 revenue outlook Our FY16 forecasts are in line with the company’s guidance for now, which calls for a

revenue decline of 6% yoy. This is based on the expectation of 20% lower revenues in the freight business and stable passenger revenues. In FY17, we expect less price pressure, due to a stabilization in freight rates, although competition for the passenger business should remain strong. We are therefore forecasting a further revenue decline of 2% in FY17, despite the expectation of overall market-volume growth in the Mediterranean in the coming years. For example, Roland Berger is assuming 1.5% passenger growth and 1.1% freight growth in Sardinia from 2014 to 2020. The company’s new routes from Nice to Bastia, Genoa to Cagliari as well as the two new Sicilian routes should provide some support to revenues as well, starting in 2016. However, a number of factors could offset this and to lead to a weaker growth environment in the near term: 1. Lower oil prices should allow Moby and Tirrenia-CIN to pass on some of the savings to customers via lower ticket prices in the passenger business, while also keeping freight rates under pressure for at least one more quarter in a yoy comparison. We expect this to impact FY16 more strongly than FY17. 2. Rising competition with Grimaldi is likely to lead to an erosion in Onorato Armatori’s market share in Sardinia, as Grimaldi attempts to establish its position in the market with promotional offers on some key routes.

Oil-price hedging should stabilize EBITDA margin

We think that it will be difficult for Onorato Armatori to reach its target of maintaining its margin of 27%, but we do not expect a significant drop currently. The EBITDA margin rose to 27% in FY15, from 20% in FY14. We are expecting the EBITDA margin to fall to 26% in 2016-17, in line with the 1pp margin decline yoy in 1Q16. A more significant margin erosion should be prevented due to the fuel-hedging arrangements that are now in place. In addition, the ongoing integration of Tirrenia-CIN should lead to further cost savings, which should support the EBITDA trend. Onorato Armatori has said that it expects to generate revenue synergies by modifying the pricing strategies of the two companies and from lower maintenance costs, among other things. In 1Q16, Onorato Armatori said that it achieved EUR 3.5mn in synergies from maintenance costs. We have not factored these into our forecasts at this point, but they could represent upside to our forecasts if they materialize.

OCF should meaningfully exceed capex

Higher EBITDA relative to previous years (except 2016) should set the stage for improving cash flow generation and deleveraging. We expect OCF of around EUR 110mn in FY16-17. Considering our expectation for higher capex of EUR 75mn in 2016 and EUR 50mn in 2017, this should result in FOCF generation of around EUR 35-60mn per year. The result would be a small increase in senior secured net leverage to 2.3x by 2017 from 2.1x as of 1Q16 and stable total net debt/EBITDA of around 3.2x by the end of 2017. This scenario also assumes that the deferred payments for the Tirrenia-CIN acquisition, which are currently on hold, will be made by the end of 2016 (EUR 55mn due as of April 2016, pending the outcome of the EC’s investigation).

EC ruling on subsidy payments or fines are not factored into our forecasts

However, this scenario does not factor in any possible outcome of the EC investigation nor any fines or loss of the subsidy payments, due to the unpredictability of the ruling. If there is a reduction of subsidies, the impact of this would cascade through the model. For example, if EUR 21mn in subsidies were deemed excessive, we would need to lower our revenue forecast by this same amount. Since the company would then likely scale back service on these routes, or would raise prices to make them economical, we assume an impact on EBITDA of 50% of this amount (in line with company guidance). This would amount to a loss in EBITDA of EUR 11mn per year. In this case, leverage would also increase. We estimate that this would result in a 0.2x increase in senior secured leverage. In this scenario, unsecured leverage (i.e. the deferred Tirrenia-CIN payment) would be completely eliminated.

Potential back payment would also negatively impact senior secured leverage

In addition, the loss of subsidies would require a back payment for the previous subsidies. If we were to assume a back payment of EUR 105mn (i.e. EUR 21mn from 2012-16), this would result in a further increase in leverage at the senior secured level of 0.4x to 2.9x, for a total increase of 0.6x, including the impact from the loss of EBITDA discussed above (this includes the full cancellation of the EUR 55mn payment due in April 2015).




Even in this situation, Onorato Armatori’s leverage would remain below 3.0x and the company should be able to deleverage further, assuming a sustained benign oil-price trend and no detrimental price war in the company’s main area of activity. However, the company would be unlikely to reach its goal of deleveraging to 2.0x in the medium term in this scenario.

Downside scenario Further downside from these scenarios would assume that competition intensifies strongly in the coming years. Therefore, we offer a final downside scenario in which freight revenues remain down 30% through 2016 and passenger revenues decline 5% relative to 2015, with a further decline in group revenues of 3% in 2017. In this scenario, rising cost pressures would further drag the EBITDA margin down to 24%, assuming limited ability to reduce costs and no synergies from the Tirrenia-CIN merger. In this final scenario, net senior secured leverage rises to 2.9x, assuming no loss of subsidies, or 3.7x, assuming the loss of EUR 21mn in subsidies. In this scenario, we would expect pressure on the corporate rating to the B1/B+ level (with no uplift for senior secured debt as unsecured debt would be eliminated), assuming adequate liquidity and that the company’s business stabilized at these levels. The table below shows the results of this scenario analysis, including the impact of the loss of the EUR 21mn in subsidies in 2017. Since Onorato Armatori has only given guidance through 2016, we have annualized the loss of subsidies across the whole year to make it comparable with the FY17 scenarios. Only the most negative scenario shows an increase to leverage above 3.0x and none results in leverage above 4.0x. Furthermore, interest coverage comfortably exceeds 3.0x even in the most negative scenario.

SCENARIO ANALYSIS

Company guidance (2016) UniCredit base case (2017) Downside scenario (2017) No loss of

subsidies Loss of EUR 21mn subsidies/year

No loss of subsidies

Loss of EUR 21mn subsidies/year

No loss of subsidies

Loss of EUR 21mn subsidies/year

Revenues 574 553 563 542 527 506 EBITDA 155 144 145 134 124 113 Interest -30 -30 -30 -30 -30 -30 Tax -6 -5 -5 -4 -3 -2 FFO 119 109 110 100 91 81 Capex -75 -75 -50 -50 -50 -50 FCF 44 34 60 50 41 31 Net senior secured leverage 2.5x 2.7x 2.3x 2.9x 2.9x 3.7x Interest coverage 5.2x 4.8x 4.8x 4.5x 4.1x 3.8x


Outlook of credit-rating agencies

S&P and Moody’s have taken somewhat different stances toward Onorato Armatori in their initial ratings reviews. The main difference is that Moody’s has a stable outlook on the company while S&P has a developing outlook. Moody’s has a Ba3 corporate credit rating with a Ba2 instrument rating for the bond. Moody’s sees the company as having good deleveraging prospects in the next 12-18 months and believes that the company will be able to meet its upcoming debt repayments due to solid FCF generation and a conservative liquidity profile. Moody’s notes that, while Onorato Armatori might have to reimburse part of the past subsidies, the fact that this would also lead to relief from the EUR 180mn of deferred payments is an offsetting factor. S&P has a B+ corporate credit rating and a BB- instrument rating. The developing status of the outlook reflects that S&P is likely to change its rating in a positive or negative direction depending on the outcome of the EC’s investigation, as discussed previously. In particular, S&P sees the company’s liquidity as less than adequate in the event that the EC requires repayment for the subsidies that far exceeds the EUR 180mn deferred payment. If the required repayment does not, in S&P’s words, “considerably exceed” the deferred amount of EUR 180mn, then S&P is likely to take positive ratings action. Downside rating potential would come if the EC requires a repayment that is “significantly more” than the EUR 180mn deferred payment. S&P believes that the downside scenario is less likely than the upside scenario.

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Onorato Armatori Analyst: Jonathan Schroer, CFA (UniCredit Bank), +49 89 378-13212 Corporate Ratings Rating Outlook Credit Profile Trend Recommendation Index Mcap Ba3/B+/-- STABLE/DEVELOP/-- Stable Buy --/iBoxx HY/-- Not listed

Company description: Onorato Armatori is the family holding company that owns Moby S.p.A. and Tirrenia-CIN. The company is the largest operator of ferries in Italy, providing transportation services between mainland Italy, the Italian islands and Corsica. As of 31 March 2016, the company operated 24 routes through 25 ports and transported 6.3mn passengers and 7.3mn linear meters of cargo annually. The company operates 64 vessels, of which 55 are owned and 9 are operated under bareboat charters. The market value of the fleet has most recently been assessed at around EUR 893mn. It is the leader for Sardinian passenger and RoRo ferry transportation services, with a market share of 82% of passengers transported and 86% of linear meters transported.

The company has three main business segments: 1. Ferries (including freight transported), which accounts for 95.5% of revenue; 2. Tugboats, with 3.5% of revenue, and 3. Olbia Port Operations, with 1%. The company generated EUR 609mn in revenues and EUR 165mn in adjusted EBITDA pro forma in 2015. Moby was founded as a joint stock company in 1985 by Vincenzo Onorato, who is the current company chairman. Since then, the company has acquired several related businesses, most notably Tirrenia-CIN. After initially acquiring a 40% stake in July 2012, the company has now fully acquired Tirrenia-CIN but still has EUR 180mn in scheduled back payments for the acquisition through March 2020.

PASSENGERS AND FREIGHT TRANSPORTED

REVENUE AND EBITDA TRENDS

Strengths/Opportunities – Leading market positions in main areas of activity, with high barriers to entry – Infrastructure-like business model provides essential transport services

within the Italian economy – Significant exposure to oil prices is hedged at attractive prices for several

years – State subsidies support unprofitable routes during low season – Moderate leverage levels, with potential for relief in the event of a negative

decision on EC state-aid case – Good FCF generation should be supported by hedging policy

Weaknesses/Threats – Geographic concentration in Italy, with a particularly high share of

revenues generated on Sardinian routes – Major exposure to oil prices within overall costs – Highly seasonal cash-flow generation, with some routes inherently

unprofitable in low season – Significant regulatory oversight of pricing and business practices at

national and EU levels – Several court cases outstanding could impact future leverage and cash

flow, including EC state-aid and antitrust case DEBT MATURITY PROFILE AS OF 31 MARCH 2016


LIQUIDITY ANALYSIS

– As of 1Q16, the company had EUR 142mn in cash on its balance sheet, with an additional EUR 3mn in other financial assets.

– The company has a EUR 60mn RCF, which was completely undrawn as of 1Q16. There is, however a EUR 4.4mn guarantee given on the facility.

– Working-capital inflows tend to be positive in the beginning of the year, as the company receives upfront payments for summer holidays. This position then unwinds over the course of the year.

– A EUR 55mn payment is due in 2016 for the first payment on the Tirrenia-CIN acquisition but is on hold pending the outcome of the EC state-aid investigation.

– The company has a EUR 200mn term loan that begins amortizing in 2017 with EUR 10mn due. Installments then rise to EUR 40mn in 2018 and EUR 50mn annually in 2019-21.

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CAPITALIZATION

Debt Instrument Ccy Interest Maturity First call Outst. (EUR mn) Net Lev. Moody's* S&P* Onorato Armatori SpA (EUR 60mn RCF)

EUR EURIBOR+300bp Feb-21

Onorato Armatori SpA EUR EURIBOR+300bp Feb-21 200 Total Loans 200 1.2x Onorato Armatori SpA EUR 7.75% Feb-23 [email protected] 300 64% 70-90%

Total Senior Secured 300 1.9x Capitalized costs EUR -15 Total Secured 485 3.0x Total Net Secured 340 2.1x Other unsecured financial liabilities

EUR 10

Tirrenia-CIN deferred payment

EUR 173

Total Senior Unsecured 183 1.1x Total Senior 668 4.1x

Cash & Cash equivalents EUR -145 Total Net Debt 522 3.2x Adjusted EBITDA LTM EUR 162

*Recovery Rate Source: UniCredit Research

CORPORATE STRUCTURE


Onorato Armatori SpA

Moby SpA Tirrenia-CIN

Non-consolidated subs and JVs

Other consolidated subs Toremar SpA

Ale1 BV

100%

100%

100%

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40%

EUR 300mn 7.75% due 23 call 19

EUR 180mn deferred payment

EUR 260mn credit facilities

Restricted Group

EUR 5.5mn existing indebtedness EUR 4.0mn existing indebtedness

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PROFIT AND LOSS (ONORATO ARMATORI)

EUR mn 2012 2013 2014 2015 1Q16 2016E 2017E Sales 413 573 588 609 96 574 563

EBITDA clean 42 83 120 165 14 148 145 EBITDA exceptionals -19 -4 2 8 0 0 0 EBITDA reported 61 88 118 157 14 148 145 EBIT 3 25 57 80 -1 81 78

Net income -15 0 27 53 -10 46 43

PROFITABILITY RATIOS

EBITDA margin clean 10.2% 14.6% 20.4% 27.0% 14.8% 25.8% 25.8% EBITDA margin reported 14.8% 15.3% 20.0% 25.8% 14.8% 25.8% 25.8%

EBIT margin 0.7% 4.4% 9.6% 13.1% -0.7% 14.2% 13.9%

CASH FLOW

EUR mn 2012 2013 2014 2015* 1Q16 2016E 2017E EBITDA clean 42 83 120 165 14 148 145 Adjustments/restructuring 0 -2 2 -8 -1 0 0

Interest -20 -26 -28 -21 -5 -30 -30 Tax 1 0 -2 -6 0 -5 -5 FFO (funds from operations) 24 56 92 131 8 113 110 Change in working capital -6 -21 11 24 43 -3 0

Operating cash flow 18 35 102 162 51 110 110 Capex -32 -36 -26 -32 -24 -75 -50 Free operating cash flow -15 -1 76 131 26 35 60 Dividends 0 0 0 0 -143 0 0

Acquisitions/disposals -65 21 3 -17 39 39 0 Share buybacks/issues 36 0 0 0 0 0 0 FCF -43 20 78 113 -78 73 60

CAPITALIZATION

EUR mn 2012 2013 2014 2015 1Q16 2016E 2017E Equity 164 166 197 242 85 130 174 Senior secured bank debt/bonds 633 645 585 481 500 481 471 (Structural) Sub secured notes/2nd lien 0 0 0 185 10 130 130

Total debt 633 645 585 480 668 611 601 Cash 36 29 47 74 142 94 144 Net debt (total debt minus cash) 596 616 538 406 526 517 457

LEVERAGE RATIOS

Senior secured debt leverage 15.0x 7.7x 4.9x 2.9x 3.1x 3.2x 3.2x

Subordinated secured debt leverage 15.0x 7.7x 4.9x 4.0x 3.1x 4.1x 4.1x Net debt leverage (unadjusted) 14.1x 7.4x 4.5x 2.5x 3.2x 3.5x 3.1x Total debt leverage (unadjusted) 15.0x 7.7x 4.9x 2.9x 4.1x 4.1x 4.1x

DEBT ADJUSTMENTS

EUR mn 2012 2013 2014 2015 1Q16 2016E 2017E For pensions 5 4 4 4 4 4 4 For operating leases 4 4 3 4 4 4 4 Others** 0 0 0 0 0 0 0

Total adjusted net debt leverage 13.9x 7.3x 4.5x 2.5x 3.3x 3.5x 3.2x Total adjusted FFO/net debt 4.1% 9.1% 17.0% 31.9% 24.0% 21.8% 24.0%

*Note that the company has released incomplete group cash-flow data for FY15, Source: company data, UniCredit Research so some figures in that year have been estimated. **Contingent liabilities, guarantees

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BOND DOCUMENTATION – MOBYIT 7.75% 02/15/23 – (SENIOR SECURED)

Issuer Onorato Armatori S.p.A. Call/Put Call schedule On or after 15 February 2019: @ 103.875%, 2020: @ 101.938%, 2021 and thereafter: @ 100% Equity clawback Prior to 15 February 2019, up to 40% at 107.75% of principal amount of the notes Make-whole clause Prior to 15 February 2019, Bund plus 50bp Change of control 101% Guarantees The Notes will be guaranteed on a senior basis by Moby and Tirrenia-CIN. For the year ended 31 December 2014,

the Guarantors, collectively, accounted for 92.9% of total aggregated revenue and 91.1% of total aggregated EBITDA. Security The notes will be secured by a pledge over

– all of the share capital of the company and its guarantors – the bank accounts and receivables of the issuer – a pledge over all the insurance claims in respect of the vessels and any other insurance claims of the company

and its guarantors – mortgages over all vessels and the collateral excluded vessels owned by Moby and CIN

Ranking The Notes will be senior obligations of the issuer and will rank pari passu with all existing and future senior debt of the issuer that is not subordinated to the notes, including the Credit Facilities Agreement

Certain covenants Limitation on debt Issuer and its subsidiaries’ PF consolidated senior secured net leverage ratio <3.0x and fixed charge coverage ratio

>2.0x; Most important carve-outs/exceptions: – Indebtedness incurred by the issuer and subsidiaries under credit facilities up to greater of EUR 300mn and

31.0% of total assets – CLO and purchase money obligations up to greater of EUR 50mn and 5.2% of total assets – General baskets: EUR 60mn/6.2% of total assets – Additional acquisition debt basket of EUR 100mn – Indebtedness under hedging agreements entered into for bona fide hedging purposes – Priority debt limitation for CIN and non-guarantors this limit is the greater of EUR 50mn or 5.2% of total assets

Limitation on sale of certain assets Consideration should be at least equal to fair market value and, unless a permitted asset swap, at least 75% of consideration consists of cash or cash equivalents and is applied to debt reduction, investment in additional assets or capital expenditures within 365 days. De minimus threshold: EUR 7.5mn per transaction Carve out for disposition of assets of CIN or restricted subsidiaries of up to EUR 100mn to satisfy any settlement of state-aid investigation

Limitation on restricted payments Aggregate amount of restricted payments may not exceed 50% of consolidated net income and 100% of net cash proceeds, property or securities from equity sales. Most important carve-outs/exceptions: – IPO dividends: greater of (i) 6.0% of the net cash proceeds from IPO and (ii) 6.0% of the market capitalization – Parent expenses, including general expenses up to EUR 2mn/year and management fees of EUR 2mn/year – Any other restricted payment if PF consolidated net leverage is not greater than 2.75x; – Any other restricted payment if amount outstanding not exceeding EUR 20mn

Limitations on transactions with affiliates De minimus threshold: EUR 5mn Transaction may not be less favorable than dealing with non-affiliate. Board resolution if transaction greater than EUR 15mn Fairness opinion required if transaction greater than 30mn

Limitation on sale and leaseback No Fall-away/suspension covenants Yes Negative pledge Yes Anti-layering No Cross-Default Yes

Source: Offering memorandum, UniCredit Research

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UniCredit Research page 18 .

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Regulatory authority: Hong Kong Monetary Authority, 55th Floor, Two International Financial Centre, 8 Finance Street, Central, Hong Kong d) UniCredit Bank AG Singapore Branch (UniCredit Bank Singapore), Prudential Tower, 30 Cecil Street, #25-01, Singapore 049712 Regulatory authority: Monetary Authority of Singapore, 10 Shenton Way MAS Building, Singapore 079117 e) UniCredit Bank AG Tokyo Branch (UniCredit Tokyo), Otemachi 1st Square East Tower 18/F, 1-5-1 Otemachi, Chiyoda-ku, 100-0004 Tokyo, Japan Regulatory authority: Financial Services Agency, The Japanese Government, 3-2-1 Kasumigaseki Chiyoda-ku Tokyo, 100-8967 Japan, The Central Common Government Offices No. 7.

POTENTIAL CONFLICTS OF INTERESTS – Key 1a: UniCredit Bank AG and/or any related legal person owns at least 2% of the capital stock of the analyzed company. Key 1b: The analyzed company owns at least 2% of the capital stock of UniCredit Bank AG and/or any related legal person. Key 2: UniCredit Bank AG and/or any related legal person has been lead manager or co-lead manager over the previous 12 months of any publicly disclosed offer of financial instruments of the analyzed company, or in any related derivatives. Key 3: UniCredit Bank AG and/or any related legal person administers the securities issued by the analyzed company on the stock exchange or on the market by quoting bid and ask prices (i.e. acts as a market maker or liquidity provider in the securities of the analyzed company or in any related derivatives). Key 5: The analyzed company and UniCredit Bank AG and/or any related legal person have concluded an agreement on the preparation of analyses. Key 6a: Employees or members of the Board of Directors of UniCredit Bank AG and/or any other employee that works for UniCredit Research (i.e. the joint research department of the UniCredit Group) and/or members of the Group Board (pursuant to relevant domestic law) are members of the Board of Directors of the analyzed company. Members of the Board of Directors of the analyzed company hold office in the Board of Directors of UniCredit Bank AG (pursuant to relevant domestic law). The application of this Key 6a is limited to persons who, although not involved in the preparation of the analysis, had or could reasonably be expected to have access to the analysis prior to its dissemination to customers or the public. Key 6b: The analyst is on the Supervisory Board/Board of Directors of the company they cover.

RECOMMENDATIONS, RATINGS AND EVALUATION METHODOLOGY Company Date Rec. Company Date Rec. Company Date Rec. MOBYIT 14/06/2016 Buy Overview of our ratings You will find the history of rating regarding recommendation changes as well as an overview of the breakdown in absolute and relative terms of our investment ratings on our website www.disclaimer.unicreditmib.eu/credit-research-rd/Recommendations_CR_e.pdf. Note on the evaluation basis for interest-bearing securities: Recommendations relative to an index: For high grade names the recommendations are relative to the "iBoxx EUR Benchmark" index family, for sub investment grade names the recommendations are relative to the "iBoxx EUR High Yield" index family. Marketweight: We recommend having the same portfolio exposure in the name as the respective iBoxx index. We expect that the average total return of the instruments of the issuer is equal to the total return of the index. Overweight: We recommend having a higher portfolio exposure in the name as the respective iBoxx index. We expect that the average total return of the instruments of the issuer is greater than the total return of the index. Underweight: We recommend having a lower portfolio exposure in the name as the respective iBoxx index. We expect that the average total return of the instruments of the issuer is less than the total return of the index. Outright recommendations: Hold: We recommend holding the respective instrument for investors who already have exposure. We expect that the total return of the instruments of the issuer is equal to the yield. Buy: We recommend buying the respective instrument for investors who already have exposure. We expect that the total return of the instruments of the issuer is greater than the yield. Sell: We recommend selling the respective instrument for investors who already have exposure. We expect that the total return of the instruments of the issuer is less than the yield. We employ three further categorizations for interest-bearing securities in our coverage: Restricted: A recommendation and/or financial forecast is not disclosed owing to compliance or other regulatory considerations such as a blackout period or a conflict of interest. Coverage in transition: Due to changes in the research team, the disclosure of a recommendation and/or financial information are temporarily suspended. The interest-bearing security remains in the research universe and disclosures of relevant information will be resumed in due course. Not rated: Suspension of coverage.

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Trading recommendations for fixed-interest securities mostly focus on the credit spread (yield difference between the fixed-interest security and the relevant government bond or swap rate) and on the rating views and methodologies of recognized agencies (S&P, Moody’s, Fitch). Depending on the type of investor, investment ratings may refer to a short period or to a 6 to 9-month horizon. Please note that the provision of securities services may be subject to restrictions in certain jurisdictions. You are required to acquaint yourself with local laws and restrictions on the usage and the availability of any services described herein. The information is not intended for distribution to or use by any person or entity in any jurisdiction where such distribution would be contrary to the applicable law or provisions. If not otherwise stated daily price data refers to pre-day closing levels and iBoxx bond index characteristics refer to the previous month-end index characteristics. Coverage Policy A list of the companies covered by UniCredit Bank is available upon request. Frequency of reports and updates It is intended that each of these companies be covered at least once a year, in the event of key operations and/or changes in the recommendation.

SIGNIFICANT FINANCIAL INTEREST UniCredit Bank AG and/or other related legal persons with them regularly trade shares of the analyzed company. UniCredit Bank AG and/or other related legal persons may hold significant open derivative positions on the stocks of the company which are not delta-neutral. UniCredit Bank AG and/or other related legal persons have a significant financial interest relating to the analyzed company or may have such at any future point of time. Due to the fact that UniCredit Bank AG and/or any related legal person are entitled, subject to applicable law, to perform such actions at any future point in time which may lead to the existence of a significant financial interest, it should be assumed for the purposes of this information that UniCredit Bank AG and/or any related legal person will in fact perform such actions which may lead to the existence of a significant financial interest relating to the analyzed company. Analyses may refer to one or several companies and to the securities issued by them. In some cases, the analyzed companies have actively supplied information for this analysis.

INVESTMENT BANKING TRANSACTIONS The analyzed company and UniCredit Bank AG and/or any related legal person concluded an agreement on services in connection with investment banking transactions in the previous 12 months, in return for which the Bank and/or such related legal person received a consideration or promise of consideration or intends to do so. Due to the fact that UniCredit Bank AG and/or any related legal person are entitled to conclude, subject to applicable law, an agreement on services in connection with investment banking transactions with the analyzed company at any future point in time and may receive a consideration or promise of consideration, it should be assumed for the purposes of this information that UniCredit Bank AG and/or any related legal person will in fact conclude such agreements and will in fact receive such consideration or promise of consideration.

ANALYST DECLARATION The author’s remuneration has not been, and will not be, geared to the recommendations or views expressed in this study, neither directly nor indirectly.

ORGANIZATIONAL AND ADMINISTRATIVE ARRANGEMENTS TO AVOID AND PREVENT CONFLICTS OF INTEREST To prevent or remedy conflicts of interest, UniCredit Bank has established the organizational arrangements required from a legal and supervisory aspect, adherence to which is monitored by its compliance department. Conflicts of interest arising are managed by legal and physical and non-physical barriers (collectively referred to as “Chinese Walls”) designed to restrict the flow of information between one area/department of UniCredit Bank and another. In particular, Investment Banking units, including corporate finance, capital market activities, financial advisory and other capital raising activities, are segregated by physical and non-physical boundaries from Markets Units, as well as the research department. Disclosure of publicly available conflicts of interest and other material interests is made in the research. Analysts are supervised and managed on a day-to-day basis by line managers who do not have responsibility for Investment Banking activities, including corporate finance activities, or other activities other than the sale of securities to clients.

ADDITIONAL REQUIRED DISCLOSURES UNDER THE LAWS AND REGULATIONS OF JURISDICTIONS INDICATED You will find a list of further additional required disclosures under the laws and regulations of the jurisdictions indicated on our website www.cib-unicredit.com/research-disclaimer. Notice to Austrian investors: This analysis is only for distribution to professional clients (Professionelle Kunden) as defined in article 58 of the Securities Supervision Act. Notice to investors in Bosnia and Herzegovina: This report is intended only for clients of UniCredit in Bosnia and Herzegovina who are institutional investors (Institucionalni investitori) in accordance with Article 2 of the Law on Securities Market of the Federation of Bosnia and Herzegovina and Article 2 of the Law on Securities Markets of the Republic of Srpska, respectively, and may not be used by or distributed to any other person. This document does not constitute or form part of any offer for sale or subscription for or solicitation of any offer to buy or subscribe for any securities and neither this document nor any part of it shall form the basis of, or be relied on in connection with or act as an inducement to enter into, any contract or commitment whatsoever. Notice to Brazilian investors: The individual analyst(s) responsible for issuing this report represent(s) that: (a) the recommendations herein reflect exclusively the personal views of the analysts and have been prepared in an independent manner, including in relation to UniCredit Group; and (b) except for the potential conflicts of interest listed under the heading “Potential Conflicts of Interest” above, the analysts are not in a position that may impact on the impartiality of this report or that may constitute a conflict of interest, including but not limited to the following: (i) the analysts do not have a relationship of any nature with any person who works for any of the companies that are the object of this report; (ii) the analysts and their respective spouses or partners do not hold, either directly or indirectly, on their behalf or for the account of third parties, securities issued by any of the companies that are the object of this report; (iii) the analysts and their respective spouses or partners are not involved, directly or indirectly, in the acquisition, sale and/or trading in the market of the securities issued by any of the companies that are the object of this report; (iv) the analysts and their respective spouses or partners do not have any financial interest in the companies that are the object of this report; and (v) the compensation of the analysts is not, directly or indirectly, affected by UniCredit’s revenues arising out of its businesses and financial transactions. UniCredit represents that: except for the potential conflicts of interest listed under the heading “Potential Conflicts of Interest” above, UniCredit, its controlled companies, controlling companies or companies under common control (the “UniCredit Group”) are not in a condition that may impact on the impartiality of this report or that may constitute a conflict of interest, including but not limited to the following: (i) the UniCredit Group does not hold material equity interests in the companies that are the object of this report; (ii) the companies that are the object of this report do not hold material equity interests in the UniCredit Group; (iii) the UniCredit Group does not have material financial or commercial interests in the companies or the securities that are the object of this report; (iv) the UniCredit Group is not involved in the acquisition, sale and/or trading of the securities that are the object of this report; and (v) the UniCredit Group does not receive compensation for services rendered to the companies that are the object of this report or to any related parties of such companies. Notice to Canadian investors: This communication has been prepared by UniCredit Bank AG, which does not have a registered business presence in Canada. This communication is a general discussion of the merits and risks of a security or securities only, and is not in any way meant to be tailored to the needs and circumstances of any recipient. The contents of this communication are for information purposes only, therefore should not be construed as advice and do not constitute an offer to sell, nor a solicitation to buy any securities. Notice to Cyprus investors: This document is directed only at clients of UniCredit Bank who are persons falling within the Second Appendix (Section 2, Professional Clients) of the law for the Provision of Investment Services, the Exercise of Investment Activities, the Operation of Regulated Markets and other Related Matters, Law 144(I)/2007 and persons to whom it may otherwise lawfully be communicated who possess the experience, knowledge and expertise to make their own investment decisions and properly assess the risks that they incur (all such persons together being referred to as “relevant persons”). This document must not be acted on or relied on by persons who are not relevant persons or relevant persons who have requested to be treated as retail clients. Any investment or investment activity to which this communication related is available only to relevant persons and will be engaged in only with relevant persons. This document does not constitute an offer or solicitation to any person to whom it is unlawful to make such an offer or solicitation. Notice to Hong Kong investors: This report is for distribution only to “professional investors” within the meaning of Schedule 1 to the Securities and Futures Ordinance (Chapter 571, Laws of Hong Kong) and any rules made thereunder, and may not be reproduced, or used by or further distributed to any other person, in whole or in part, for any purpose. This report does not constitute or form part of an offer or solicitation of any offer to buy or sell any securities, nor should it or any part of it form the basis of, or be relied upon in connection with, any contract or commitment whatsoever. By accepting this report, the recipient represents and warrants that it is entitled to receive such report in accordance with, and on the basis of, the restrictions set out in this “Disclaimer” section, and agrees to be bound by those restrictions. Notice to investors in Ivory Coast: The information contained in the present report have been obtained by Unicredit Bank AG from sources believed to be reliable, however, no express or implied representation or warranty is made by Unicredit Bank AG or any other person as to the completeness or accuracy of such information. All opinions and estimates contained in the present report constitute a judgement of Unicredit Bank AG as of the date of the present report and are subject to change without notice. They are provided in good faith but without assuming legal responsibility. This report is not an offer to sell or solicitation of an offer to buy or invest in securities. Past performance is not an indicator of future performance and future returns cannot be guaranteed, and there is a risk of loss of the initial capital invested. No matter contained in this document may be reproduced or copied by any means without the prior consent of Unicredit Bank AG. Notice to New Zealand investors: This report is intended for distribution only to persons who are “wholesale clients” within the meaning of the Financial Advisers Act 2008 (“FAA”) and by receiving this report you represent and agree that (i) you are a “wholesale client” under the FAA (ii) you will not distribute this report to any other person, including (in particular) any person who is not a “wholesale client” under the FAA. This report does not constitute or form part of, in relation to any of the securities or products covered by this report, either (i) an offer of securities for subscription or sale under the Securities Act 1978 or (ii) an offer of financial products for issue or sale under the Financial Markets Conduct Act 2013.

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Notice to Omani investors: This communication has been prepared by UniCredit Bank AG. UniCredit Bank AG does not have a registered business presence in Oman and does not undertake banking business or provide financial services in Oman and no advice in relation to, or subscription for, any securities, products or financial services may or will be consummated within Oman. The contents of this communication are for the information purposes of sophisticated clients, who are aware of the risks associated with investments in foreign securities and neither constitutes an offer of securities in Oman as contemplated by the Commercial Companies Law of Oman (Royal Decree 4/74) or the Capital Market Law of Oman (Royal Decree 80/98), nor does it constitute an offer to sell, or the solicitation of any offer to buy non-Omani securities in Oman as contemplated by Article 139 of the Executive Regulations to the Capital Market Law (issued vide CMA Decision 1/2009). This communication has not been approved by and UniCredit Bank AG is not regulated by either the Central Bank of Oman or Oman’s Capital Market Authority. Notice to Pakistani investors: Investment information, comments and recommendations stated herein are not within the scope of investment advisory activities as defined in sub-section I, Section 2 of the Securities and Exchange Ordinance, 1969 of Pakistan. Investment advisory services are provided in accordance with a contract of engagement on investment advisory services concluded with brokerage houses, portfolio management companies, non-deposit banks and the clients. The distribution of this report is intended only for informational purposes for the use of professional investors and the information and opinions contained herein, or any part of it shall not form the basis of, or be relied on in connection with or act as an inducement to enter into, any contract or commitment whatsoever. Notice to Polish Investors: This document is intended solely for professional clients as defined in Art. 3.39b of the Trading in Financial Instruments Act of 29 July 2005 (as amended). The publisher and distributor of the document certifies that it has acted with due care and diligence in preparing it, however, assumes no liability for its completeness and accuracy. This document is not an advertisement. It should not be used in substitution for the exercise of independent judgment. Notice to Serbian investors: This analysis is only for distribution to professional clients (profesionalni klijenti) as defined in article 172 of the Law on Capital Markets. Notice to UK investors: This communication is directed only at clients of UniCredit Bank who (i) have professional experience in matters relating to investments or (ii) are persons falling within Article 49(2)(a) to (d) (“high net worth companies, unincorporated associations, etc.”) of the United Kingdom Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 or (iii) to whom it may otherwise lawfully be communicated (all such persons together being referred to as “relevant persons”). This communication must not be acted on or relied on by persons who are not relevant persons. Any investment or investment activity to which this communication relates is available only to relevant persons and will be engaged in only with relevant persons. CR e 9

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UniCredit Research* Erik F. Nielsen Group Chief Economist Global Head of CIB Research +44 207 826-1765 [email protected]

Dr. Ingo Heimig Head of Research Operations +49 89 378-13952 [email protected]

Credit Research

Luis Maglanoc, CFA, Head +49 89 378-12708 [email protected]

Credit Strategy & Structured Credit Research

Dr. Philip Gisdakis, Head Credit Strategy +49 89 378-13228 [email protected]

Dr. Christian Weber, CFA, Deputy Head Credit Strategy +49 89 378-12250 [email protected]

Dr. Tim Brunne Quantitative Credit Strategy +49 89 378-13521 [email protected]

Holger Kapitza Credit Strategy & Structured Credit +49 89 378-28745 [email protected]

Dr. Stefan Kolek EEMEA Corporate Credits & Strategy +49 89 378-12495 [email protected]

Manuel Trojovsky Credit Strategy & Structured Credit +49 89 378-14145 [email protected]

Financials Credit Research

Franz Rudolf, CEFA, Head Covered Bonds +49 89 378-12449 [email protected]

Dr. Tilo Höpker Banks +49 89 378-12960 [email protected]

Luis Maglanoc, CFA Regulatory & Accounting Service +49 89 378-12708 [email protected]

Natalie Tehrani Monfared Regulatory & Accounting Service +49 89 378-12242 [email protected]

Dr. Michael Teig Banks +49 89 378-12429 [email protected]

Emanuel Teuber Covered Bonds +49 89 378-12961 [email protected]

Robert Vielhaber Sub-Sovereigns & Agencies, Green Bonds +49 89 378-12004 [email protected]

Dr. Martina von Terzi Banks, Financial Services, Insurance +49 89 378-14245 [email protected]

Corporate Credit Research

Stephan Haber, CFA, Co-Head Telecoms, Technology +49 89 378-15192 [email protected]

Dr. Sven Kreitmair, CFA, Co-Head Automotive & Mobility +49 89 378-13246 [email protected]

Christian Aust, CFA Industrials +49 89 378-12806 [email protected]

Mehmet Dere Oil & Gas, EEMEA Energy, Consumer +49 89 378-11294 [email protected]

Michael Gerstner Utilities, Hybrids +49 89 378-15449 [email protected]

Jonathan Schroer, CFA Media/Cable, Logistics, Business Services +49 89 378-13212 [email protected]

Dr. Silke Stegemann, CEFA Health Care & Pharma, Food & Beverage, Personal & Household Goods +49 89 378-18202 [email protected]

Publication Address

UniCredit Research Corporate & Investment Banking UniCredit Bank AG Arabellastrasse 12 D-81925 Munich [email protected]

Bloomberg UCCR Internet www.research.unicredit.eu

*UniCredit Research is the joint research department of UniCredit Bank AG (UniCredit Bank), UniCredit Bank AG London Branch (UniCredit Bank London), UniCredit Bank AG Milan Branch (UniCredit Bank Milan), UniCredit Bank New York (UniCredit Bank NY), UniCredit Bulbank, Zagrebačka banka d.d., UniCredit Bank Czech Republic and Slovakia, Bank Pekao, ZAO UniCredit Bank Russia (UniCredit Russia), UniCredit Bank Romania. CR 24

Onorato Armatori – initiation of coverage

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