The SME Initiative

A joint Commission presentationSME Initiative workshopBrussels, 23 April 2015

SMEs are the backbone of EU economySMEs employ 2/3 of private sector workforce and create 58% of gross value added

75% of SMEs dependent on external financing'access to finance' the second most pressing problem for

Eurozone SMEs, right after getting customersSupply of credit to SMEs is constrained as banks deleverage, accumulate capital and repair balance sheets SME lending volumes are low and declining Market gaps and deficiencies exist in debt and equity markets for financing of enterprises, and especially SMEsTherefore, the EU's approach is to

Ensure banking and macroeconomic stabilityAdopt legislation supporting entrepreneurshipSupport SME lending 2

Financing SMEs: The EU expertise with Financial Instruments

EU-level financial instruments for SMEs implemented since 1998

Guarantees increasing SME lending and leasing, almost 600,000 SMEs supported up to date

Equity instruments supporting highly innovative and fast-growing SMEs, more than EUR 4bn of investment volume supported so far

Close and successful cooperation between the Commission and the EIB/EIF since thenLessons learnt: dedicated framework and optimised design of Financial Instruments, best practices for efficiency and effectiveness, auditsFinancial Instruments under Structural Funds

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Historical background to the SMEI: a unique crisis-response instrument

ECB President Draghi, May 2013: "The key obstacle to a growth recovery seems to be the blocked credit channel to the small and medium-sized enterprises (SMEs)" European Council (June and December 2013)Conclusions of the High Level Expert Group Ex-ante assessment (EU wide)Model Funding Agreement (Implementing Act to the CPR)Signature in Spain on 26 January 2015, Malta soon to follow

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Objective of the SME Initiative: Increase rapidly the volume of lending to SMEs in the EU

Achieve significant impact to stimulate SME financing, economic growth and job creationContribute European Structural Investment Funds (ESIF) to EU-level instrument(s). An innovative change in the use of ESI Funds: the first joint instrument. For the achievement of the same policy objectives as EU instruments, using the same delivery mechanism (i.e. involving the same counterparties) and applying the same requirements (e.g. terms, reporting, audit, etc.). Differences apply only to eligibility criteria related to the final beneficiaries, in particular the geographical criteria.Plug in to what we already have: COSME and Horizon 2020In addition, use EIB/EIF and possibly NPBs' resources

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Financial Instruments for 2014-2020

Research, Development Innovation

Growth, Jobs and Social Cohesion

Infrastructure

Horizon 2020Equity and Risk Sharing Instruments

(EUR 2.7 bn, including at least EUR 710m for InnovFin SME Guarantees)

Horizon 2020Equity and Risk Sharing Instruments

(EUR 2.7 bn, including at least EUR 710m for InnovFin SME Guarantees)

Instruments under European Structural and

Investment Funds

Contribution to EU-level

instrument(s)Off-the shelf instruments

Tailor made instruments

Instruments under European Structural and

Investment Funds

Contribution to EU-level

instrument(s)Off-the shelf instruments

Tailor made instruments

Competitiveness & SME (COSME)

Equity & guarantees(EUR 1.4 bn, incl. EUR

700m for SME guarantees)

Competitiveness & SME (COSME)

Equity & guarantees(EUR 1.4 bn, incl. EUR

700m for SME guarantees)

Connecting Europe Facility (CEF)Risk sharing (e.g. project bonds) and equity

instruments

Connecting Europe Facility (CEF)Risk sharing (e.g. project bonds) and equity

instruments

Social Change & Innovation

(EASI)

Social Change & Innovation

(EASI)

Creative EuropeGuarantee Facility

(EUR 121m)

Creative EuropeGuarantee Facility

(EUR 121m)

Erasmus for allGuarantee FacilityErasmus for allGuarantee Facility

Regional / National InstrumentsEU-level Instruments

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Main features of the SME Initiative

Legal basis: Article 39 CPRVoluntary contribution (ERDF/EAFRD, up to 7%) from MSIndirect management by Commission and EIFEx-ante assessment carried out EU wideSingle dedicated OP at MS level Two instruments available: uncapped guarantees and securitisation

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Uncapped Guarantee Instrument (Option 1)Objective: improve SME access to finance for new loans; provides (counter-)guaranteesCovers up to 80% of the losses from the portfolios; financial intermediary retains 20%Contributions from MA remain ring-fenced to support SMEs in that Member StateESIF covers the highest riskHorizon 2020 (or COSME) contributionsEIF, EIB (and possibly NPBs) share the residual riskBenefit passed onto SMEs:

lending to riskier SMEs (e.g. innovative SMEs, start-ups, etc. )reduced pricing and reduced collateral

Gradual capital relief to financial intermediaries to support new lending to SMEs

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Securitisation instrument for new and existing loans (Option 2)

Combines ERDF-EAFRD, COSME, Horizon 2020, EIF, EIB and possibly NPBs in one instrumentTwo steps: a) securitisation of an existing/new portfolio and b) construction by the bank of a new portfolioERDF-EAFRD take 50% of the riskier tranche (Junior tranche)Bank would retain a material interest in the transaction (typically of the Junior tranche) to help ensuring alignment of interest and good origination standardsEU resources together with EIF own resources guarantee the Mezzanine tranche EIB and other institutional investors invest in the Senior tranche

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Advantages for SMEs

Fast roll-outIncreased amount of funding available, i.e. more liquidity for investmentsReduced pricingReduction of collateral requirementsAccess to credit also for "riskier" SMEs

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Advantages for financial intermediaries

Gradual capital relief (incentive for new lending/enabling new debt finance to SMEs)Extend volume of loans with limited impact on risk exposureAdditional funding in case of true securitisationExpertise of EIFAlignment of interests

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Advantages for Managing Authorities:A unique crisis-response instrument with unique advantages

Voluntarily opt-in until end 2016Contributions from Managing Authorities remain ring-fenced to support to SMEs in their respective region or countryZero co-financingState Aid clearance upfrontNo need for a further ex-ante assessmentLeverage of ESIF resourcesMore SMEs supported and more beneficial terms for SMEs thanks to risk-sharing with the EU and EIB GroupPossible way out

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Outlook to the future

More MS to join the SME Initiative?How to better use ESI Funds for more efficiency in SMEs financing: Juncker Plan

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The role of ESIF – Juncker Plan

Investment Plan for Europe ("Juncker Plan") is driven by two central questions:

How to use scarce public resources in the most effective and efficient way to promote investment and economic growth?How to use them as a catalyst, as a multiplier - how can we leverage scarce public resources and generate additional, private funding on top?

The Juncker Plan aims at an overall doubling of the use of financial instruments precisely because of their capacity to leverage additional funds and generate higher impactThe SME Initiative is a key tool to accelerate the use of financial instruments and to increase their impact via leveraging additional funds for the benefit European SMEs 14

The role of ESIF in the SME Initiative

Given their role to cover the most risky parts of a loan portfolio, the ESIF act as an invaluable catalystAlso, most of the EU funding in the SME Initiative will come from the ESIF (e.g. EUR 800 million in the case of Spain)Why do the ESIF participate and play this important role?

For many years, SME support has been a top priority of Cohesion PolicyIn 2014-20, EUR 57 billion or around 20% of funding from the European Regional Development Fund (ERDF) will be dedicated explicitly to SMEsCohesion Policy is under shared management and largely decentralised it is closely connected to national, regional and local stakeholders and focuses on impact on the ground

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The main advantages of the ESIF contribution

No national co-financing required for the contributions from ERDF-EAFRDLeverage effect on the ERDF-EAFRD contribution by a combination of resources (leverage definition in Art. 39(5) of the CPR)Higher number of SMEs supported and more beneficial terms for SMEs thanks to risk-sharing with the EU and EIB GroupComplement the existing financial instruments to address market failure (often "mainstream OP" guarantees are capped and there is no securitisation)

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…cont'd

Through Investors Board, Managing Authorities retain control and define the investment policyEarly deployment and frontloading of ESIF support

Ex-ante assessment carried out alreadyModel Funding Agreement availableClear and tight deadlines for signature of various documents and for paymentsIntense preparatory work done (plus concrete experiences already made by Spain and Malta)Very light OP (Single Dedicated National Programme)

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Key steps – Single Dedicated National Programme (SDNP)

Each participating Member shall provide the COM with a single dedicated national programme (SDNP) per financial contribution by ERDF and EAFRD supporting thematic objective 3If contributions at regional level (covering several regions), then the SDNP shall highlight the appropriate amounts by regionsContributing regions shall agree to designate "single authorities" as: managing authority, certifying authority (where applicable), audit authorityApproval of the Single dedicated national programme by the COM

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The SDNP – some more detail…CPR (Article 97) foresees specific provisions regarding the SDNPprogramming – it is a much lighter and shorter OP than the mainstream OPs: only some of the programming requirements of Art. 96 CPR have to be metOnly one thematic objective (3), one investment priority (3d), one specific objective

Article 96.2 (b) i: Investment priority "Supporting the capacity of SMEs to grow in regional, national international market and engage in innovation process".Specific objective "Facilitate SMEs access to finance through the implementation of Financial Instrument[s] i.e. uncapped guarantee / securitization

Article 96.2 (b) ii: Expected results for the specific objectives

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…cont'dArticle 96.2 (b) iv: Output indicators

Number of SMEs receiving supportERDF amount committed to cover the New Debt Finance portfolio (option 1)ERDF amount used to cover the existing portfolios of debt finance to SMEs and other enterprises with less than 500 employees (option 2)

Article 96.2 (d): performance reserve - not applicable under SME InitiativeCommitment period: recital 40 CPR, SME Initiative phased over 2014-2015-2016Article 96.5 (a), (b), (c): MS needs to identify MA, Certifying authority, Audit authority, Body to whom payment are to be made by the COMArticle 96.6 (b): Assessment of the ex-ante conditionality at the date the PA / SDNP is submitted for approval at the COM (fulfilled? If not, description of the envisaged actions)

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There is a model Funding Agreement available (COM Implementing Decision 2014/660/EU of 11 September 2014) for interested parties to use

Negotiation of the funding agreement between the participating MS and the EIB

Positive: Signature of the Funding Agreement (the signature shall occur within 6 months following the approval of the single dedicated national programme by the COM). If SME Initiative set up at regional level, this should be clearly specified in the SDNP and in the FANegative: Member State shall submit a request for amendment of the single dedicated national programme and reallocate the contribution to other programmes and priorities in accordance with requirements for thematic concentration

Request for payment from the EIB to the participating MSTransaction approved with the selected financial intermediary

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Key steps – Funding Agreement

Horizon 2020 contribution to the SME Initiative - rationale and added value

Additional guarantee option for more loan and lease finance to innovative SMEs and small midcaps in Horizon 2020 participating countriesSMEI uncapped guarantees and guarantees for securitization transactions complementary to guarantees available under InnovFin SME Guarantee facilityTarget group (SMEs, small midcaps) and eligibility criteria (innovative company or innovative investments) remain unchanged (InnovFin innovation criteria apply)

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Eligibility criteria for final recipients

Eligible transactions: Loans or leases between EUR 25,000 and 7.5 millionLoan duration between 1 and 10 years in case of a fixed repayment schedule; up to 3 years for revolving transactionsFinal recipients must be an innovative company or make investments into innovative products, processes or services

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Innovation criteria for final recipients

SME intending to invest in producing or developing new or substantially improved products, processes or services that carry a risk of technological or industrial failure orSME or small midcap that is a 'fast-growing enterprise' orSME or small midcap operating in a market for less than 7 years and R&I costs represent at least 5% of its total operating costs orSME or small midcap having innovation potential or being 'R&I-intensive' (9 different criteria of which one must be met)

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Consequences of opting for COSMEAdditional guarantee option for financial intermediaries in participating countries:

COSME Loan Guarantee Facility (LGF): capped portfolio guarantees, guarantees for securitization transactionsSME Initiative: additional option of uncapped guarantees

Sub portfolio (20x COSME contribution) to be made up of COSME-compliant transactionsFocus on higher risk SME transactions (COSME sub-portfolio) in Option 1, no additional criteria applicable for Option 2

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Eligible transactions (1/3)

Sub-portfolio must target higher risk profile clients/products:

Starting point credit risk policy of each Financial Intermediary

Financial Intermediary must commit to provide new lending which significantly increases expected losses when compared to existing SME loan book

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Eligible transactions (2/3)

Must cover higher risk products/clients:

New product set up for start-ups; or

Transactions which are provided to with existing features but cover previously excluded final recipients; or

Transactions which are provided with new features which result in higher expected losses (e.g. increased maturities, reduced collateral requirements)

New products previously not offered due to higher risk (e.g. subordinated and participating loans)

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Eligible transactions (3/3)

Transaction size:

Lending up to and including EUR 150,000

Lending above EUR 150,000 may be included provided InnovFin SME Guarantee Facility criteria are not fulfilled

Maximum lending amounts: Transactions with duration < 5 years max. EUR 1,500,000 (EUR 750,000 for SMEs performing road freight transport)Transactions with duration > 5 up to 10 years max. EUR 750,000 (EUR 375,000 for SMEs performing road freight transport)

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Conclusions and outlook:SME Initiative workshop

This slideshow presented the background to the SME Initiative, its overall architecture and its many advantages, and the role of the different funds and DGsNow we will move on to

the essential role played by the EIB Group in the processto the experiences made by Spain and Malta

After this, we will have two in-depth Q&A sessions where you can ask your questions regarding the SME Initiative, with all the presenters (Commission, EIB Group, Spain, Malta) at your disposalThe main objective of this workshop is to set in motion a true interactive discussion, learning and exchange of experiences – let's make good use of it!

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