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Financial Engineering Instruments in the new perspective

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Presentation on theme: "Financial Engineering Instruments in the new perspective"— Presentation transcript:

1 Financial Engineering Instruments in the new perspective
Sofia, 24 June 2014 Hristo Stoyanov, Mandate Manager, European Investment Fund

2 Agenda EIF approach to SME finance JEREMIE experience in Bulgaria
Central EU instruments SME Initiative

3 EIF approach to SME finance
Section One

4 “ ” EIF objectives To support smart, sustainable and inclusive growth
Working with a broad range 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 Promoting cohesion and regional and social development Bringing together national public and private partners to support innovation and entrepreneurship Filling the financing gaps in Europe’s economy

5 SMEs and small mid-caps
Our counterparts We work with a wide range of counterparts to support SMEs 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 micro-enterprises, SMEs and small mid-caps

6 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

7 JEREMIE experience in Bulgaria
Section Two

8 A portfolio approach SME Development Stages 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 EUR 21m Venture Fund EUR 22.6m Accelerator/Seed Fund Producing a leveraging effect of x 2.5 PRE-SEED PHASE SEED PHASE START-UP PHASE EMERGING GROWTH DEVELOPMENT SME Development Stages Allowing for a revolving nature to the funds HIGHER RISK Debt products Equity products Product under development LOWER RISK

9 Two lending products for EUR 700m
First Loss Portfolio Guarantee (FLPG) Portfolio Risk Sharing Loan (PRSL)

10 MFF 2014 – 2020 Central EU Instruments
Section Three

11 Overview of future EU-EIF financial instruments
Central EU instruments European Structural Investment Funds -ESIF EUR 325bn 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 EU level instruments (contribution of Member State (MS) funds from Operational Programmes to centrally managed EU Creative Europe Cultural and Creative Sector Guarantee Facility 121m Competitiveness & SME (COSME) EUR 1.4bn Equity Facility for Growth EUR 690m Loan Guarantee Facility EUR 700m Jobs, Growth and Social Cohesion Off-the shelf instruments Erasmus for all Student Loan Guarantee Facility 517m Tailor-made instruments Social Change & Innovation Progress Microfinance II Social enterprise investing EUR 192m Source: EC, adapted

12 SME Initiative: improving SME lending in times of crisis
Section Four

13 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)

14 Two risk-sharing instruments
Two risk-sharing instruments endorsed by the European Council: Guarantee facility for portfolios of new SME loans; 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

15 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

16 SME Guarantee Facility (2)
Risk guaranteed by EIF (up to 80%) EIF guarantee Loan 1 Loan 2 Loan n Guarantee Risk Covered by the Financial Intermediary Financial Intermediary Beneficiaries SME 1 SME n Risk allocation EIB risk (plus promotional banks) Mezzanine (ESIF, COSME/H2020, EIF) Junior (ESIF) Risk tranching Partial guarantee (up to 80%) on new loans Uncapped, AAA, zero weighting SME 2

17 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

18 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

19 Securitisation (2) Securitisation New SME loans (Additional Portfolio)
Financial Intermediary EIB risk (plus National Promotional banks) Third-party risk SME Loans Risk tranching EIF (Target Rating: Baa3) ESIF + EU Funds (Target Rating: B3) Beneficiaries MEZZ ESIF risk Retained risk 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 1 SME 2 SME n FLP 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

20 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

21 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 Newly originated loan portfolios Guarantor SME1 Senior tranche Mezzanine tranche First loss piece European Investment Fund Financial Institution 1 Uncapped guarantee on portfolio level SME2 EIB risk EIF guarantee SME3 Up to 80% guarantees on a loan-by-loan basis. At least 20% risk retained by originator Member State contribution EIF own risk COSME, H2020 risk SME1 Max 7% of ERDF + EARDF ESIF risk Financial Institution N EIF guarantee SME2

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