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...

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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