Financial Engineering Instruments in the new perspective

Sofia, 24 June 2014

Hristo Stoyanov, Mandate Manager, European Investment Fund

Agenda

EIF approach to SME finance

JEREMIE experience in Bulgaria

2014-2020 Central EU instruments

SME Initiative

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EIF approach to SME finance

Section One

3

EIF objectives

To support smart, sustainable andinclusive growth “ ”

Working with a broad rangeof financial intermediariesto provide credit enhancementand invest in venture andgrowth capital

Being Europe’s cornerstone venture and growth capitalinvestor, leading catalystto promote SME lendingand microfinance

Promoting cohesion and regional and social development

Bringing together nationalpublic and private partners tosupport innovation and entrepreneurship

Filling the financing gaps in Europe’s economy

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Our counterparts

We work with a wide range ofcounterparts to support SMEs“ ”

micro-enterprises,

SMEsand small mid-caps

Fund providers and Mandators European Investment

Bank

European Commission

Member States

Managing Authorities

Funds of Funds

Corporates/private

Public institutes

Intermediaries and counterparts Commercial Banks

Development &Promotional Banks

Guarantee Institutions

Leasing Companies

Fund Managers

Microfinance Institutions

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Helping businessesat every stage

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SME Development StagesPRE-SEED PHASE SEED PHASE START-UP PHASE EMERGING GROWTH DEVELOPMENT

HIGHER RISK LOWER RISK

Public Stock Markets

Business Angels,Technology Transfer

Microcredit

VC Seed & Early Stage

Portfolio Guarantees & Credit Enhancement

Formal VC Funds & Mezzanine Funds

JEREMIE experience in Bulgaria

Section Two

A portfolio approach

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SME Development StagesPRE-SEED PHASE SEED PHASE START-UP PHASE EMERGING GROWTH DEVELOPMENT

HIGHER RISK LOWER RISKEquity products Product under development

EUR 350m Holding Fund

5 different financial products are being

deployed

Via 14 different financial

intermediaries

Producing a leveraging effect of

x 2.5

Allowing for a revolving nature to

the funds

EUR 22.6m Accelerator/Seed Fund

EUR 21m Venture Fund

EUR 60m Mezzanine

EUR 300m Funded Products

EUR 392m Guarantees

Co-investment Equity Funds

Debt products

Two lending products for EUR 700m

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First Loss Portfolio Guarantee (FLPG) Portfolio Risk Sharing Loan (PRSL)

MFF 2014 – 2020Central EU Instruments

Section Three

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Overview of future EU-EIF financial instruments

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Horizon 2020Pilot Equity Facility for

Tech Transfer (GIF successor)

SME and Small Mid Caps Guarantee Facility for RI(RSI successor) (700m)

EUR 3bn Min. 1/3 (EUR 1bn) for SME/small mid caps

EUR 325bn

Competitiveness & SME (COSME)

EUR 1.4bn

Equity Facility for GrowthEUR 690m

Loan Guarantee FacilityEUR 700m

Social Change & Innovation

Progress Microfinance II Social enterprise investing

EUR 192m

Erasmus for allStudent Loan Guarantee

Facility517m

European Structural Investment Funds -ESIF

Central EU instruments

Source: EC, adapted

Jobs, Growth and Social Cohesion

Creative EuropeCultural and Creative

Sector Guarantee Facility121m

Research, Development,Innovation

Off-the shelf instruments

Tailor-made instruments

EU level instruments(contribution of Member State (MS) funds from Operational Programmes to centrally

managed EU

SME Initiative: improving SME lending in times of crisis

Section Four

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The SME initiativeEU structural funds + EU budget + EIF & EIB

Key objectives Better access to finance for SMEs through capital relief, loss protection and liquidity Increased multiplier on public budget through participation of EIF/EIB and private sector Reduction of financial markets fragmentation

Optional programme, at the discretion of each Member State

Eligibility criteria: Most sectors eligible for support – including agriculture business Special attention to innovative small business and finance of R&D in

EIF and EIB participate Own funds (for guarantees and direct investments) Expertise in deal structuring, execution, implementation and monitoring throughout EU

Participation of private investors: important medium-term objective (Option 2)

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Two risk-sharing instruments

Two risk-sharing instruments endorsed by the European Council:

1. Guarantee facility for portfolios of new SME loans;

2. Securitisation instrument for portfolios of both new and existing SME loans;

Eligible assets: SME Loans, leasing and guarantees

Timing: SME initiative to be operational in beginning of 2015

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Option 1: SME Guarantee Facility

Provides uncapped portfolio guarantees and partial capital relief to banks building up new portfolios of loans, guarantees for loans [and leasing] to SMEs

Both direct guarantees and counter-guarantees

Description: Originator (gradually) builds-up a portfolio of new SME loans EIF issues uncapped portfolio guarantees and shares (hedges) the risk with various risk-takers:

ESIF: first-loss piece ESIF and EU funds (COSME/Horizon 2020): second-loss tranches EIF own funds: (upper) mezzanine tranche EIB and national/regional development banks and private investors : senior tranche

Instrument can cover up to 80% of each loan included in the portfolio. Originator must retain at least 20% of each loan included in the guaranteed portfolio

Originator will have to demonstrate the transfer of benefit of the instrument to the SMEs in the form of acceptance of higher risk clients, reduction of collateral requirements and/or reduced pricing

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Risk guaranteed by EIF (up to 80%)

EIFguarantee

Loan 1 Loan 2 Loan n Guarantee

Risk Covered by the Financial Intermediary

Financial Intermediary

Beneficiaries

SM

E 1

SM

E n

SM

E 2

EIB risk (plus

promotional banks)

Mezzanine(ESIF,

COSME/H2020, EIF)

Junior (ESIF)

SME Guarantee Facility (2)

Risk tranching

Risk allocation

Partial guarantee (up to 80%) on new loans

Uncapped, AAA, zero weighting

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SME Guarantee Facility (3)

Objective: improve SME access to finance by addressing challenges that banks face and which impede their credit appetite

More specifically, by: Covering 80% of losses for defaulted loans (with no cap at portfolio level), addresses credit risk

concerns and/or lack of collateral at the SME level Providing capital relief to the banks due to the involvement of EIF (0% risk weighting on the

guaranteed part of each loan under CRD IV), addresses regulatory capital scarcity at the banks’ level

Improvement in the access to finance for SMEs is materialised through: Attractive guarantee pricing due to zero pricing on the ESIF first-loss contribution, attractive pricing

for the ESIF second-loss contribution and EIB Group’s competitive pricing Higher-risk SMEs gaining access to credit, reduced collateral requirements and/or improved

pricing (strict conditionality for the deployment of EU funds) More flexible eligibility criteria: no geographical restrictions will apply, working capital may be

financed, credit line facilities will be permitted

Constraints: Does not provide liquidity to the banks (but could be combined with e.g. EIB funding) Covers only new loans Provides gradual capital relief to banks as portfolios of new SME loans are being built up

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Option 2: Securitisation

Securitisation can be backed by portfolio of new and existing SME loans

Can take the form of : “True sale” (funded): transfer of a portfolio of SME assets to a dedicated securitisation vehicle; or Synthetic risk transfer (unfunded) – providing credit risk protection in the form of guarantee (unfunded structure)

Description : 50% of the first-loss piece of the securitised portfolio is retained by the originator and 50% is covered by ESIF The second-loss risk is covered by ESIF, EU funds (COSME/Horizon 2020) and EIF. Originator possibly retains 5%

of the risk EIB and national/regional development banks and/or third-party investors purchase or guarantee the senior tranche

Undertaking by the Originator: “Additional Portfolio”. The Originator undertakes to provide new financing (corresponding to a multiple of the ESIF contribution) to SMEs in the relevant region in line with the eligibility criteria of the EU funds.

For funded structures, amount of new financing will be equal to the funding raised through the securitisation. For cap relief transactions, amount of new financing will be equal to the volume that could be financed with the

capital relief achieved via the securitisation

Securitisation (2)

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Securitisation transactions

Either “true sale” (funded structure);

Or “synthetic” risk transfer (unfunded structure, providing credit risk protection;

Securitised portfolio: existing SME debt finance

Commitment to originate new SME loans (Additional Portfolio)

“Option 3” Similar to Option 2 but with pooling of ESIF resources and risks

EIB risk (plus

National Promotional

banks)

ESIF + EU Funds (Target Rating: B3)

ESIF risk Retained risk

Third-party risk

New SME loans

(Additional Portfolio)

Securitisation

Pricing ESIF cover for the Junior tranche will be granted

for free ESIF Mezzanine tranches will be priced in a way to

sustain the risk EIF and other risk takers will charge according to

their respective pricing policies and objectives

SME Loans

Financial Intermediary

Risk tranching

Beneficiaries

SM

E 1

SM

E 2

SM

E n

EIF (Target Rating: Baa3)M

EZZ

FLP

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Securitisation (3)

Objective: improve access to finance for SMEs by Addressing challenges that banks face and which impede their credit appetite through

Diversification of banks’ funding sources through access to debt capital markets Capital relief to the banks, through risk transfer to third parties

Revitalisation of the SME securitisation market in Europe Freeing up lending capacity, creating headroom in the balance-sheet for new lending Attractive pricing

ESIF participation the Junior tranche at zero cost and Mezzanine tranche at *sustainable cost” EIB Group’s competitive terms on mezzanine/senior tranches

New financing to SMEs stimulated by more flexible eligibility criteria and Originator’s undertaking to use the mobilised resources for new lending To transfer the financial benefit to the SMEs

“Penalties” in case of non-achievement of targets Obligation to repay non utilised ESIF (multiplier 1:1) Commitment fees on the shortfall

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The SME initiativeHow is the risk tranching set?

The First Loss Piece (FLP) is partially covered by ESIF, up to 80% for Option 1 and indicatively 50% for Option 2; The full mezzanine tranche will be around 10%-15%. Lower mezzanine tranches will be covered by ESIF, COSME

and H2020. ESIF, COSME and H2020 will be junior to EIF. Upper Mezzanine tranche will be covered by EIF own risk and will be around 4%-8%;

The size of FLP and mezzanine tranches will be set in order to achieve certain target ratings: for EIF mezzanine at least Baa3 and for senior tranches at least Aa3. For a portfolio quality equivalent of B1/B2 portfolio rating, the FLP is envisaged to be around 15-20% on average in order to allow investment grade attachment point for EIF. The senior tranche (EIB) is envisaged to be around 60-70% (AA).

Senior tranche

Mezzanine tranche

First loss pieceMax 7% of ERDF + EARDF

Member State contribution

Option 1 guarantee risk tranching

ESIF risk

EIF own risk

EIB risk

European Investment Fund

Guarantor

At least 20% risk retained by originator

Newly originated loan portfolios

Financial Institution 1

Financial Institution N

Uncapped guaranteeon portfolio level

Up to 80% guarantees on a loan-by-loan basis.

EIF guarantee

EIF guarantee

SME1

SME2

SME3

SME1

SME2

COSME, H2020 risk