1 Financing Innovation in Europe Brussels / December 16, 2005 Kim Kreilgaard

2 Table of Content 2. Case Studies 1. Financing Innovation in Europe

3 EIB Profile The EIB is the EU long-term financing institution The EIB has been created by the Rome Treaty 1958 The EIB is owned by the 25 EU member states The EIB is a policy driven institution (EU Commission, Council and EP) The EIB has a subscribed capital EUR 150bn  EUR 164bn The EIB collects its funds on the capital markets (2004: EUR 50bn) The EIB signed loans amounting to EUR 43.2bn in 2004

4 Financing Innovation in Europe EIB Strategic Objectives Five priorities Economic and social cohesion in an enlarged EU Implementing of the Innovation 2010 Initiative (i2i) Development of Trans-European and Access networks (TENs) Support of EU Development and Cooperation Policies in Partner Countries Environmental Protection and Improvement, including Climate Change and Renewable Energy. EIB financing always depends on the creditworthiness of the borrower and/or the guarantor(s). Direct and indirect Loans for private and public entities Global Loans (small projects/SMEs) MidCap Facility EIB Product Portfolio:

5 Financing Innovation in Europe What the EIB can do? Funding Supply: Increase market supply for loans/guarantees for innovation projects from EIB own resources; from EIB SFF resources; through joint financial products with Commission (RSFF) and through co-financing with financial markets. Funding Costs: Pass-on funding advantage of EIB after “risk pricing” to private/public sector innovators in order to reduce the cost of innovation Risk Sharing: Share financial risks with promoters in innovation projects and consequently reduce their risk adjusted cost of capital Signaling Effects: Due the Bank’s reputation for its prudent lending policy and its strong market/technology know-how, the EIB provides learning/signaling effects for other Banks EIB Policy Support in i2i Risk Sharing Signalling Effects Funding Supply Funding Costs

6 Maximum loan amount: up to 50% of project cost. Loan tenors: depending on the “economic life” of the investment (generally between 10 and 20 years; exceptions). Interest Rate: Fixed or Variable Minimum size per loan: > EUR 25 m (Up to EUR 12.5m: Global Loan; For loans larger than EUR 12.5m, but smaller than EUR 25m: Mid Cap Facility; Exceptions possible) Business plan and project definition Minimum Requirements / Terms General Lending Policy EIB follows a policy of close co-operation with the banking sector. EIB almost always finances projects together with other banks. Close co-operation with all national and regional promotional banks. Financing Innovation in Europe EIB Lending Policy

7 Financing Innovation in Europe The Innovation 2010 initiative (i2i) has been founded in 2000 as a part of the Lisbon Agenda! The EIB’s objective is to lend EUR 50bn to foster innovation over the current decade of which EUR 32.8bn (65.6%) already achieved. Private and Public Sector Investment in R&D (inlcuding downstream investments) Human Capital Formation Development of Information and Communication Technology (ICT) SME/VC Financing (EIF) The 4 strategic areas of i2i lending activities

8 Financing Innovation in Europe Higher Risk Financing – SFF and RSFF The EIB implemented SFF as a facility – funded from own resources – aiming to provide financing for companies and projects in higher risk categories than the standard EIB requirement. RSFF (implemented in 2007) will be based on the same objective / procedures but focused on RDI investments. Moreover, RSFF is a joint initiative of the European Union and the EIB. Objectives Overcome market inefficiencies (information failures and spillover effects) Signalling: Catalyse the mobilization of further resources from EIB and capital markets through co-financing and EIB guarantees Improve access throughout the EU to financing for corporates, SPVs, public bodies, & SMEs to invest in priority technology themes

9 Financing Innovation in Europe Higher Risk Financing – SFF and RSFF The EIB will continue its approach of EIB own resources/SFF AND enhance its activities by a continous product innovation process. SFF Risk sharing with banks/other specialists (e.g. Automotive RDI (GER), Coficiné (FR), Cofiloisirs (FR)) SFF Low/sub-investmentgrade companies (e.g. Bombardier (UK), Andasol (ES), Atmel (FR)) Strategic Approaches for RDI Financing The EIB and the European Comission are developing under FP7 a new dedicated facility for RTD financing. Risk Sharing Finance Facility (RSFF) 12 3

10 Projects eligible under FP7 Large European RTD projects (joint technology initiatives and large collaborative projects) Participants in multi-partner consortia (Midcaps, large corporates, SMEs, PPPs, etc.) Eligibility Financing Innovation in Europe Higher Risk Financing - RSFF Improve access to finance by sharing risks between EIB and the EU Budget (i) to leverage larger volume of high risk lending and (ii) to finance riskier projects Demonstrate the feasibility and bankability of numerous research projects Added Value

11 Table of Content 2. Case Studies 1. Financing Innovation in Europe

12 Case Study I: Automotive RDI (I) The Supplier Dilemma Reduction of R&D investment for OEMs % of total R&D Expenditure OEMs Supplier CapEx Years Suppliers are forced to take more R&D risk and to finance an increasing number of larger R&D projects. Years PresentFuture Shorter R&D Cycles with higher Capex Illustrative Source: Roland Berger, VDA, HVB Equity Research Driven by OEM* pressure to reduce their share in the overall value chain (esp. upstream), automotive suppliers find it increasingly difficult and expensive to fund R&D projects As a consequence, financing has become the crucial element for Suppliers to succeed in tenders of new R&D projects with leading OEMs * OEM: Original Equipment Manufacturer

13 Case Study I: Automotive RDI (II) Tailor-made EIB Solution OEM Automotive Suppliers Lesees/Final Beneficiary Development and production of a car component Technology Leasing Hard Assets + IPR Deutsche Leasing Leading German Leasing Financial Structuring Saar LB Re-Financing + Partial Credit Risk of Lesee Global Loan Risk Sharing Credit Risk Distribution: Deutsche Leasing: 10% - 49% Saar LB: > 26% EIB: Max. 25% The combination of a classical Global Loan with a tailor-made risk sharing guarantee scheme generates a capital relief for SaarLB. Hence, risk capacity for SaarLB and Deutsche Leasing for R&D financing of automotive suppliers is improved and will lead to more lending activity EIB will delegate due diligence to Deutsche Leasing and SaarLB (two independent and experienced players in that field) Support innovative models for IPR based financing

14 Case Study II: Chip Development Tailor-made EIB Solution OEM Semiconductor R&D Supplier (Rating: BB) Development of a new memory chip Debt Finance (Senior/Junior Debt) Commercial Bank Financial Structuring Direct Loan (max. 50% of CAPEX) OR Refinancing (max. 50% of CAPEX) Guarantee i2i projects promoted by low-investmentgrade / sub-investmentgrade corporations can (in principle) be financed either direct through RSFF/SFF operations OR indirect using the promoters bank as a intermediary. Indirect financing could be complemented by a guarantee with the intermediary, which would lead to a capital relief for the commercial bank and hence a higher level of lending activty. In both cases, the EIB would conduct a comprehensive project and credit due diligence.

15 Kim Kreilgaard Head of Structured Finance in i2i Phone: (+352) Fax: (+352) European Investment Bank 100, boulevard Konrad Adenauer L-2950 Luxembourg Thomas C. Barrett Director AGI Phone: (+352) Fax: (+352) European Investment Bank 100, boulevard Konrad Adenauer L-2950 Luxembourg Guy Clausse Associate Director Operational Lending Policies Phone: (+352) Fax: (+352) European Investment Bank 100, boulevard Konrad Adenauer L-2950 Luxembourg Jean-Jaques Mertens Associate Director Project Directorate Phone: (+352) European Investment Bank 100, boulevard Konrad Adenauer L-2950 Luxembourg Thank You !