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Securitisation as tool to support SME financing

Helmut Kraemer-Eis

Head of Research & Market Analysis

WPFS – Workshop on Securitisation

2 /19

Content

Introduction/SME financing/the EIF

Overview

EIF’s role

Origination Focus

Underwriting Criteria

Pool Criteria

Portfolio Summary

Concluding Remarks

Contacts

3 /19

Introduction: The challengeFinancing Innovation amongst SMEs in Europe

Importance of SMEs as the Foundation Stone for Tomorrow’s Prosperity

Source: Eurostat, Commission Communication on Modern SME policy for Growth and Employment

SMEs account for a large proportion of Europe’s economic activity

Micro-businesses dominate employment in countries such as Italy (48%) and Greece (57%)

Successive EU summits put issues of growth, employment, innovation and competitiveness high on agenda

EIF is the SME arm of the EIB Group

4 /19

Introduction: EIF at a glance

Dual Objective of Meeting EU Policy Goals & Generating a Satisfactory Return on Equity

EU specialised institution for SMEs, risk financingVenture Capital and Mezzanine (fund of funds)Structuring and Guaranteeing portfolios of SME and microfinance loans/leases

Authorised Capital € 3bn

Geographic Focus /IntermediariesEU 27, EFTA, Candidate CountriesDistributing through Banks and Funds

AAA rated

Staffing, Culture and ValuesLeading-edge modern institutionAdapting to changing market conditionsAttracting talented staffHigh standards of compliance and integrity

5 /19

Introduction: EIF’s Shareholders

EIB: Main Shareholder (61%) European Investment Bank’s shareholders:

27 EU Member States

European Community represented by the European Commission (29%)

30 public and private financial institutions from 17 countries (9%)

6 /19

Introduction: Operating Model of EIFTransformational Role of EIF

VALUE ADDED

Own resourcesMandates by

EIB, EC, MAs, …

Productdevelopment

Mandate management

Transaction execution

Risk management

Follow-up and relationship focus

Commercial banks

Development & Promotional banks

Guarantee Institutions

Fund Managers

SMEs

Suppliers / Mandators

Transformational

Key Success Factors

Intermediaries

7 /19

Introduction: EIF Tool Kit for SMEs Public Stock

Markets

SM

E C

ash

Flo

ws

SME Development Stages

HIGHER RISK

Seed Phase

Start-up Phase

LOWER RISK

Emerging Growth

Development

Portfolio Guarantees & Credit Enhancement

Formal VC Funds & Mezzanine Funds

VC Seed & Early Stage

Business Angels, TT

Microcredit

8 /19

Overview – SecuritisationStatus European Investment Fund (EIF) is part of the EIB

Group and serves as:

“Europe's leading developer of risk financing for entrepreneurship

and innovation“

Multilateral Development Bank (MDB) status

Basel II 0% risk weighting

Aaa/AAA/AAA ratings (Moody’s/S&P/Fitch)

9 /19

Overview – Why SME Loan Securitisation? Transforming illiquid SME loans into liquid asset class.

Alternative source of funding for the originating banks.

Economic and regulatory capital relief.

Smaller banks are able to tap the capital markets.

Portfolio management, risk diversification.

Overall: increase of lending capacity.

Advantages for investors.

Securitisation of an individual loan does not improve the access to finance for the individual SME, but on a portfolio level banks are able to expand their SME lending.

Positive impact on the overall availability and conditions of loans to SMEs.

10 /19

Overview – Market Environment

European SME securitisation market has dropped since 2007 with reduced investor demand.

Still negative perception of securitisation in Europe; contagion effects.

Restart depends on macroeconomic developments, investors’ demand, and regulatory environment.

Public sector support to complement private sector activities.

Replicable tool for SME support that provides efficient multiplication of public money.

EIF expects to play a key role in rebuilding the market.

11 /19

EIF as “deal facilitator” (for any SME-backed transaction)

Credit enhancer of typically mezzanine tranches, either with ABS wrap or as bilateral protection seller.

Unconditional, irrevocable guarantee of timely payment of interest and ultimate payment of principal.

Transaction Manager for the EIB Group, with potential involvement of EIB as cash investor at senior (AAA) level.

“Deal maker” with active structuring role

Small, bilateral and work-intensive deals unattractive for investment banks, but which contribute to the development of the SME securitisation market.

EIF’s Role

12 /19

External guarantor

External guarantor

InvestorsInvestorsAAAAAA

BBBBB

unrated

AAAAAA

BBBBB

unrated

InvestorsInvestors

Sale of Portfolio or

Aaa/AAACredit Default Swap

ReferenceSME

Portfolio

Originator

SPV

EIF’s Role(example)

Typical EIF intervention in a securitisation transaction

13 /19

WHO SME Finance Providers (mainstream + 2nd tier

originators)

WHAT

HOW Through Investment Banks for public deals / private

placements Direct origination with established FIs Direct origination for bilateral transactions

Origination Focus

We do We don’t

Financial Guarantees Cash investments

Granular Portfolios Non granular portfolios (<500)

SME-loans / - leases, - trade receivables

Mezzanine loans; healthcare receivables; direct loans to originators

14 /19

Underwriting Criteria

Minimum tranche rating

Typically: BB (exceptionally: BB- / B+)

External rating is not required but preferred EIF always assigns its internal rating to the tranches guaranteed and performs own due diligence.

Max. amounts

BB up to EUR 10-15m

BBB-AA up to EUR 15-100m

AAA up to EUR 150m (larger tickets possible for senior positions)

Max. term

Typically: 3-5 years WAL

Up to 10 years WAL; exceptionally up to 15 years

Competitive/Commercial pricing

15 /19

Pool Criteria

Eligible countries and currencies

All EU Member States

Candidate and potential candidate countries (Turkey, Croatia, Western Balkans, etc.)

All European currencies

Obligor Entities

SMEs* (EU definition)

Middle-market companies eligible, but to a limited extent

* ie < 250 employees and < EUR 50m turnover or < EUR 43m assets

The portfolio should be SME focused!The portfolio should be SME focused!

16 /19

Pool Criteria

Originator must be committed to new SME lending!

Typical underlying pool Credit quality supported by PD, LGD, or historical

data Granularity of >500 names Max. obligor exposure of 50bps Industry diversification

17 /19

Portfolio Summary

EIF’s securitisation portfolio

Outstanding commitment EUR 2.7

bn

Number of outstanding tranches 124

Average transaction commitment EUR

24.2 m

Countries covered 18

18 /19

Concluding Remarks

SME financing/Securitisation

The revitalisation of SME securitisation is a systemic approach to strengthen banks’ capacities and capacities to supply long-term financing to SMEs.

The support of this market is very important for the future of SME financing.

Securitisation as efficient way of deploying public support.

The EIF…

is a stable specialist, long term investor and guarantor.

plays a catalytic role in enhancing access to finance for SMEs.

intends to play a key role in rebuilding the SME securitisation market in Europe.

supports the introduction of “quality signals”, e.g. Prime Collateral Securities (PCS).

19 /19

Contacts – EIF’s Securitisation

European Investment Fund96, Blvd. Konrad Adenauer L-2968

Luxembourgwww.eif.org

Alessandro Tappi

Markus Schaber

a.tappi@eif.org

+352 42 66 88 352

m.schaber@eif.org

+352 42 66 88 478

20 /19

Thank you for your attention!

Helmut Kraemer-EisEuropean Investment Fund

Head of Research & Market Analysish.kraemer-eis@eif.org

+352 42 66 88 394