Assessing the Credit Worthiness of Italian SMEs and Mini-bond Issuers

A number of innovations have been introduced in the last five years to counter the devastating impact of credit rationing in Europe, particularly from traditional bank lending. This is a major problem for the small and medium size firms’ sector in Europe, which has also suffered from bank regulatory concerns of capital adequacy, heightened emphasis on default risk of bank counterparties and the general malfunctioning of credit extension and private sector growth. In Italy, some of these less traditional sources of funding for SMEs have started to become more popular and the development of the mini-bond market is a clear example. We believe “mini-bonds” can be a success in Italy as long as the market supplies an attractive risk/return tradeoff to investors as well as affordable and flexible financing for borrowers. Assessments of credit risk must be convincing and objective, providing complements to the traditional rating agency process. In this study, we develop a new innovative model to assess SMEs’ creditworthiness and we test it on the companies that have issued mini-bonds so far. Our findings confirm that the amount of information asymmetry is still high in the market and is affecting the level of risk/return trade off potentially reducing the number of investors and small businesses that would be interested in using this new channel to fund their business growth.