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Guarantee Schemes
and how they can help SME
getting better access to
financing
OECD SEE Conference on Access to Finance Skopje, Macedonia
8 June 2010
José Fernando Figueiredo António Gaspar President AECM Member of the Board of SPGM Portugal
Why guarantees ?
– SME are key actors in the EU economy (also worldwide):
– They represent an important part of employment and GDP and are generally important for maintaining the economic and social fabric throughout the territory.
– Credit finance is important to SME in the EU, as they:
– have no or little access to venture capital, mezzanine capital, bond issues, etc.
– Have weak own funds positions => limited capability to auto-finance investment or working capital needs
– Rely predominantly on loan finance
– Usually have a relative lack of bankable collateral
– Due to the relative lack of collateral, loan finance is more difficult to obtain than for larger companies
WHY GUARANTEES? ...STRENGTHEN MARKET MECHANISMS...
SM
E
Sa
vin
gs
Why guarantees ?
– Guarantee schemes facilitate access to finance by
providing credit default guarantees for SME that :
– Are economically healthy
– Have an economically meaningful project but at the
same time do not dispose of sufficient collateral to
access bank credit
– Guarantee schemes’ philosophy:
– “Help for self-help” principle
What Guarantee products are offered ?
– Generally Credit default guarantees for SME are:
– Guarantee issued on behalf of SME to bank to
substitute missing collateral
– Offered for all stages of SME life-cycle (Start-up –
Transfer)
– But also other types of guarantee products are
offered by some Guarantee schemes:
Guarantees for:
Micro loans, leasing, factoring, mezzanine finance, risk
capital, internationalization, projects, EU funding, etc.
Added value of Guarantee schemes
Advantages to SME:
– Access to finance for economically sound projects
– Recognition of qualitative factors in MGS risk analysis
– Support services and third party analysis by sector analysis of business plan and model
– Non-profit orientation of Guarantee scheme
– Intermediary function of Scheme towards lender
– In mutual schemes, participation in management of scheme
Added value of Guarantee schemes Advantages to banks:
– Reduction of bank’s risk exposure, improvement of credit quality
– Build-up of SME-Retail portfolio
– Financial supervision of MGS => Trust and sustainability vis- a-vis lending partners
– MGS provides specific sector knowledge of SME customer in addition to traditional B/S analysis
– Specialization in guarantee business
– Mitigation effect on risk-asset ratio, thus reduction on capital
consumption by the banks (depending of the qualification of the guarantee scheme)
– High level of liquidity of guarantee in contrast to other
types of collateral (most of the times guarantees are first demand)
Added value of Guarantee schemes
Advantages to Public authorities :
– Individual risk assessment and follow-up
– Financial intermediary for public policies:
• Counter-guarantee element (reg., nat., EIF-CIP)
Cost effective leverage effect of MGS’ regulatory own funds:
Example:
Leverage effect of 10 x € 1 with e.g. a 50% coverage :
– € 10 of guarantees
– € 20 of bank loans
– even higher amount of final investment
Typologies of Guarantee Schemes
In general, we can observe a great variety of different legal and operational frameworks for guarantee schemes, reflecting local needs.
Nevertheless it is possible to identify three main models:
1. Mixed model of with Private Guarantee entities and Public counter-
guarantee (a sort of PPP) – very frequent in older EU member states and
the more significant in volumes and number of SME supported;
2. Public Guarantee Scheme or Guarantee Fund – also very frequent,
mainly in new EU member states;
3. Fully Private (Mutual) Guarantee Scheme, without any kind of support
from public authorities – not very frequent - the remaining existing
situations try to find counterguarantee at national or EU level, for example
through the EIF.
Typologies of Guarantee schemes
Main differences between public and private schemes:
PUBLIC GUARANTEE SOCIETIES
• Initiative taken by Public Authorities (State,
Region..)
• Mainly public shareholding
• Directory Board elected or nominated by
state authorities
• Mission: SME support
• Solvency: responsibility through own
funds + public umbrella
• Ltd company with majority from state or
endowment from public budget
• Other goal: sometimes the management of
public subsidies
PRIVATE GUARANTEE SOCIETIES
• Initiative from SMEs and representative
organizations, also banks
• Mainly private shareholding
• Directory Board composed of SMEs,
bankers, private managers …
• Mutuality principles
• Mission: support member SME
• Self protected solvency through own
funds and provisions + public support
(normally) through counterguarantee
• Cooperative or Ltd Company normally
under financial regulation
• Other goal: no
Example of Guarantee Schemes
1. Private Guarantee Societies (private shareholding and management), with support through public counterguarantee:
Mutual Guarantee Societies (MGS) + Counterguarantee Fund (managed by SPGM), Portugal: Mission: Guarantees to member SME (mutual) + students loans + advisory
– Ownership: mutual SME (majority) + SPGM + Main national banks
– Statutes: Legislation SGM; Bank Act; Ltd companies
– Board: Full Board: Professional Managers + representatives shareholders.
•Smaller Executive Board for daily management and risk decisions
– Control: Internal and External Auditors + Portuguese Central Bank supervisor
– Solvency and default coverage: Own Funds + Risk Provisions + average 75% Counterguarantee from public FCGM (this getting EIF Counter-guarantee in small part of portfolio)
– Guarantee rate: up to 80%
– Guarantees considered as risk mitigators to Banks
Example of Guarantee Schemes
2. Public Guarantee Societies or Funds (or state departments)
Invega, ltd., Lithuania:
– Mission: Loan Guarantee + Subsidies to SMEs
– Ownership: Lithuanian State
– Statutes: Ltd Company, 100% public
– Board: Committee with 3 Government representatives + 2 independent experts
– Control: Auditor + Ministry Economy
– Solvency and default coverage: Own funds + Risk Provisions + EIF Counterguarantee (+ State protection against insolvency)
– Guarantee rate: Up to 50% or up to 80% in special programmes
Example of Guarantee Schemes
3. Fully Private (Mutual) Guarantee Societies or Funds
SOCAMA - Sociétés de Cautionnement Mutuel, France:
– Mission: Guarantees to member SME (mutual)
– Ownership: Beneficiary Enterprises (250 000)
– Statutes: Cooperative Co. with limited liability
– Board: 14 entrepreneurs + 1 Banker (Banque Populaire)
– Control: Auditor + Banque de France supervisor
– Solvency and default coverage: Own Funds + Risk Provisions + 50% EIF Counterguarantee (with cap rate) in 1/3 of the operations
– Guarantee rate: 80 – 100 %
Examples of Guarantee Schemes
Details of the functioning of the
Mutual Guarantee Scheme
PORTUGAL
16
... PRESENCE OVER THE LIFE CYCLE OF THE COMPANY
Business Angels
Venture Capital
M & A
Venture Capital
Maturity
Private Equity
17
Evolution of activity of the Mutual Guarantee Societies
201 254
408
651
966
1631
3904
4341
126 142 227
358 491
913
2 749
3 040
0
200
400
600
800
1000
1200
1400
1600
1800
2000
2200
2400
2600
2800
3000
3200
3400
3600
3800
4000
4200
4400
4600
4800
5000
2003 2004 2005 2006 2007 2008 2009 Mar - 10
milhões de euros
Guarantees Issued Outstanding portfolio
Million Euros
Counterguarantees
issued
€ 2 932 Public
Investment
Private
Investment
Mutual SME: > 42 500
Employment: > 565 000
Students: 11 272
€ 524
€ 82
The multiplying effects of the scheme
Guarantees
issued by the
MGS
€ 3 904
Bank
financing to
SME
€ 8 398
Investment
induced by
the SME
€ 8 877
About AECM
34 active schemes in 18 countries
AECM Key figures (provisional 31.12.2009, in €1.000.000)
– Own Funds € 7.000
– Guarantees issued in 2009 € 33.601
– Outstanding commitments € 70.000
Leverage Cap / commitments > 10 x
– SMEs beneficiaries ~ 2 Million
Evolution of portfolio of AECM members
A Special note on the solutions using
Guarantees during the current crisis
Changing market environment for SMEs due to crisis:
– Increase of payment delays
– Uncertain evolution of market demand for products and services
– Decreasing exports
Changing situation in access to finance:
– Reduced access to loan finance, especially short term
– Increased risk premiums and interest rates
– Higher demands in collateralisation and guarantees
Impact of guarantees during the crisis
AECM member organisations have played a crucial role:
– Drastic increase of guarantee business in 2009 in general:
• New guarantees activity: + 55,3 % to 33 billion €
• Total guarantees in portfolio: + 25,2% to 70 billion €
– Solid performance of specific guarantee instruments to fight the crisis:
• 11,2 billion € in guarantees issued in 2009
• 90% of which for short or medium term loans related with working capital)
• 117.000 SME beneficiary with more than 686.000 jobs maintained
(based on provisional figures for 2009)
Contacts
AECM Rue Washington 40
1050 Brussels
Belgium
Tel/Fax: 00 32 / 2 640 51 77
E-mail: info@aecm.be
Website: www.aecm.be
Thank you for your attention!
SPGM PORTUGAL
Rua Prof. Mota Pinto, 42 F,
2º, sala 206
4100-353 Porto
Portugal
Tel.: + 351 22 616 52 80
www.spgm.pt
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