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