uncapped portfolio guarantees

Report
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
2
EIF approach to SME finance
Section One
3
EIF objectives
“
To support smart, sustainable and
inclusive growth
”
of financial intermediaries
to provide credit enhancement
and invest in venture and
growth capital
Being Europe’s cornerstone
venture and growth capital
investor, leading catalyst
to promote SME lending
and microfinance
Bringing together national
Filling the financing gaps in
public and private partners to
support innovation and
entrepreneurship
Europe’s economy
Working with a broad range
Promoting cohesion and
regional and social development
4
Our counterparts
“
We work with a wide range of
counterparts to support SMEs
”
Fund providers
and Mandators
Intermediaries
and counterparts
 European Investment
Bank
 Commercial Banks
 European Commission
 Development &
Promotional Banks
 Member States
 Guarantee Institutions
 Managing Authorities
 Leasing Companies
 Funds of Funds
 Fund Managers
 Corporates/private
 Microfinance Institutions
microenterprises,
SMEs
and small
mid-caps
 Public institutes
5
Helping businesses
at every stage
Public Stock Markets
Portfolio Guarantees & Credit Enhancement
Formal VC Funds & Mezzanine Funds
VC Seed & Early Stage
Microcredit
Business Angels,
Technology Transfer
PRE-SEED PHASE
SEED PHASE
START-UP PHASE
EMERGING GROWTH
DEVELOPMENT
SME Development Stages
HIGHER RISK
LOWER RISK
6
JEREMIE experience in Bulgaria
Section Two
A portfolio approach
EUR 392m Guarantees
EUR 350m
Holding Fund
EUR 60m Mezzanine
EUR 300m Funded Products
5 different financial
products are being
deployed
Co-investment Equity Funds
Via 14 different
financial
intermediaries
Producing a
leveraging effect of
x 2.5
EUR 21m Venture Fund
EUR 22.6m
Accelerator/Seed Fund
PRE-SEED PHASE
Allowing for a
revolving nature to
HIGHER RISK
the funds
SEED PHASE
START-UP PHASE
EMERGING GROWTH
DEVELOPMENT
SME Development Stages
Debt products
Equity products
Product
under development
LOWER
RISK
8
Two lending products for
EUR 700m
First Loss Portfolio Guarantee (FLPG)
Portfolio Risk Sharing Loan (PRSL)
9
MFF 2014 – 2020
Central EU Instruments
Section Three
10
Overview of future EU-EIF
financial instruments
Central EU instruments
Research,
Development,
Innovation
Horizon 2020
Pilot 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
Jobs, Growth and
Social Cohesion
European Structural Investment
Funds -ESIF
Competitiveness &
SME (COSME)
EUR 325bn
EU level instruments
Creative Europe
Cultural and Creative
Sector Guarantee Facility
121m
EUR 1.4bn
Equity Facility for Growth
EUR 690m
Loan Guarantee Facility
EUR 700m
Social Change
& Innovation
(contribution of Member State (MS) funds
from Operational Programmes to centrally
managed EU
Off-the shelf instruments
Erasmus for all
Student Loan Guarantee
Facility
517m
Tailor-made instruments
Progress Microfinance II
Social enterprise investing
EUR 192m
Source: EC, adapted
11
SME Initiative: improving SME
lending in times of crisis
Section Four
12
The SME initiative
EU 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)
13
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
14
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
15
SME Guarantee Facility (2)
Risk Covered by the Financial
Intermediary
Risk guaranteed by EIF (up to 80%)
EIB risk
(plus
promotional
banks)
Financial Intermediary
Loan 1 Loan 2
Loan n
Guarantee
Risk allocation
EIF
guarantee
Risk
tranching
Mezzanine
(ESIF,
COSME/H2020
, EIF)
Junior
(ESIF)
SME n
SME 2
SME 1
Beneficiaries
 Partial guarantee (up to 80%) on new loans
 Uncapped, AAA, zero weighting
16
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
17
Option 2: Securitisation

Securitisation can be backed by portfolio of new and existing SME loans

Can take the form of :



Description :




“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)
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
18
Securitisation (2)
Securitisation
Financial Intermediary
SME Loans
SME n
SME 2
SME 1
Beneficiaries
FLP
MEZZ
Risk
tranching
EIB risk
(plus
National
Promotional
banks)
New SME
loans
(Additional
Portfolio)
Third-party
risk
EIF (Target Rating: Baa3)
ESIF + EU Funds
(Target Rating: B3)
ESIF risk
Retained risk
 Securitisation transactions
 Either “true sale” (funded structure);
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
 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
19
Securitisation (3)

Objective: improve access to finance for SMEs by
 Addressing challenges that banks face and which impede their credit appetite through





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



Diversification of banks’ funding sources through access to debt capital markets
Capital relief to the banks, through risk transfer to third parties
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
20
The SME initiative
How 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).
Option 1
guarantee risk
tranching
EIB
risk
Member State EIF own
risk
COSME,
contribution
Max 7% of
ERDF + EARDF
Uncapped
guarantee
on portfolio
level
Senior tranche
European
Investment
Fund
Mezzanine
H2020 risk
tranche
ESIF
risk
First loss piece
Newly originated
loan portfolios
Guaranto
r
SME1
Financial Institution 1
SME2
EIF
guarantee
Up to 80%
guarantees on
a loan-by-loan
basis.
SME3
At least 20%
risk retained
by originator
SME1
Financial Institution N
EIF
guarantee
SME2
21

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