EIB Financing for SMEs in Europe

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1 EIB Financing for SMEs in Europe Mark Pevsner Head of SME Policy, Directorate for Lending in Europe Annual Convention of the European Leasing & Automotive Rental Industry 11th October 2012 Cannes 19/10/2012 1

2 EIB GROUP IN CONTEXT One of Institutions of European Union, owned by Member States Finances itself on public markets, with a AAA credit rating SME lending is one of 6 core objectives of the Bank. In 2011:- EUR 10.5 billion intermediated lending signed Allocations of EUR 14.5 billion to more than SMEs Approximately 18% of EIB signatures in the E. Statute requires it to obtain adequate guarantees or to rely on the financial strength of the counterpart Loan portfolio remains strong, despite downgrades of counterparts Includes the European Investment Fund (EIF), EIB Group s specialist developer of risk financing for SMEs and innovation EIF SME lending/leasing guarantees and microfinance signatures of EUR 1.5 billion in 2011 Venture capital funds commitments of EUR 1.1 billion in employees at end-june 2012, of which 214 at EIF 2

3 Main EIB Group facilities: FINANCING FACILITIES Direct Loans Large-scale projects (more than EUR 25m) with due diligence undertaken by EIB Intermediated Loans Loans for small and medium-scale investments (particularly for on-lending to SMEs) via financial intermediaries Due diligence on financial intermediary undertaken by EIB, lending decision on SME taken by the financial intermediary Guarantees and counter-guarantees (via financial intermediaries) Coverage of portfolios of SME loans, leases and microcredits; credit enhancement for SME loan/lease securitisations Initiatives with the European Commission include: Risk-Sharing Finance Facility and RSFF for SMEs (RSI) - for higher-risk innovative enterprises including SMEs. PROGRESS EUR 200 million initiative to support Micro-Finance Institutions in Europe. Managed by EIF JEREMIE Deploys Structural Funds to support SMEs, especially start-ups and new ventures. Managed by EIF CIP capped guarantees to financial intermediaries partially covering portfolios of loans and leases to SMEs. Managed by EIF. 3

4 SME FINANCING : A KEY PRIORITY FOR EIB SME financing - one of 6 priority objectives of the EIB Group Major anti-crisis effort ; continuing high levels in 2011 and 2012 to meet market demand EIB funding reached more than SMEs and MidCaps in 2011, including more than microloans of less than EUR (28% of allocations) EIB s shareholders recommended EUR 10 billion capital increase to facilitate policy-led lending growth in the EU in June 2012 SME Access to Finance Initiative will increase SME financing support by EUR billion per year up to EUR 40 billion additional SME investment expected EIB will extend range of financial intermediaries where possible to include smaller entities and specialist finance providers e.g. lessors 4

5 LOAN FOR SMEs MAIN FEATURES Introduction of Loan for SMEs from October 2008 Key parameters: Simple SME definition: any autonomous enterprise employing < 250 people Most investments costing up to EUR 25 million can be financed (limited list of excluded sectors) Financing up to 100% of sub-loan to SME or EUR 12.5 million - whichever is smaller Subloan term can be up to economic life of investment (2 year minimum) Must permit free choice of equipment financed Partner financial intermediaries identify SME final beneficiaries, manage lease/loan process and retain SME risk Similar approach for smaller MidCap companies (250 to < employees) Partner intermediaries and SMEs benefit from long term funding at attractive rates Periodic reporting on implementation Structure already deployed by several leasing entities 5

6 EIB LOAN FOR SMEs - STRUCTURE Basic principle: cooperation with financial intermediaries EIB Loan for SMEs Financial Intermediary Medium-long term financing for SMEs SME SME SME SME SME 6

7 HOW DO SMEs BENEFIT? Enhances market capacity partners undertake to lend at least twice EIB Loan for SMEs within Allocation Period( 2 x EIB approach) Transfer of value added by EIB to SME - partners commit to pass on an agreed financial advantage to SME final beneficiaries (up to EUR 200m committed in 2011) Amount and method of transfer negotiated on a case by case basis e.g. through interest rate reduction, cashback at signature Reporting of method and amount of benefit transferred Transparency partners must inform SMEs of EIB s presence and impact on their financing conditions Can be done through product labeling or direct communication Information on website Accountability - speed of allocation to SMEs and amount of benefit transferred seen as key performance indicators by EIB Significant reduction in time to allocate seen since

8 ASSET-BACKED SECURITY STRUCTURE (SPAIN) Group of Financial Intermediaries set up closed end fund with assets comprising secured rights to payments of loans Different bond classes: EIB subscribes for AAA rated tranches; other tranches can be sold or retained Proceeds from purchase by EIB funds SME lending by FIs Reserve Account provides liquidity to SPV Fund is overcollateralised through loan to value ratio of underlying loans and other security Excess spread between income from assets and bond coupon Fund manager protects credit rights of bondholders Originators: Financial intermediaries No direct obligation Principle interest Payment depends on the quality of the assets Reserve Account No Liquidity Line True sale of payment rights to secured loans Loan for SMEs (cash) Paying agent SPV Bonds Fund Manager Coupon payments to the EIB AAA Bonds Loan for SMEs (cash) Put Option Subscriber EIB 8

9 ASSET-BACKED TRANSACTIONS (ITALY) 2011 EUR 1.5 billion of SME lending to leasing entities in Italy, of which 50% through tailor-made AAA-rated ABS structures Main characteristics Leasing Companies transfer lease receivables to SPV, which issues Senior Notes - backed by receivables - subscribed by EIB Notes to be rated by two rating agencies and listed. EIB is only purchaser with junior tranche retained by originator Typical term up to 10yrs amortising with 2 year initial replenishment period Senior Notes receive all principal and interest payment, and amortise sequentially. No reliance on residual value of assets. Put option to parent Bank in the event of certain breaches of conditions or loss of rating Leasing assets transferred Highly granular portfolio with limits including sector and region Proceeds of sale of Notes to EIB to fund new portfolio of SME loans Transfer of financial advantage through reduction in underlying interest rate 10/19/ European Investment Bank

10 ASSET-BACKED TRANSACTION SUMMARY STRUCTURE Bank 1 Bank 2 Leasing Subsidiary Swap Agreements Lease Receivable Securitization proceeds EIB Senior Notes SPV Lease Payment Leasing Agreement Purchase Consideration SMEs 10/19/ European Investment Bank

11 PUBLICY ISSUED ASSET BACKED TRANSACTION (UK) Portfolio comprises SME loans, but could equally comprise lease receivables Main characteristics Leasing Companies assigns loan receivables to SPV, which tranches Notes Notes are rated and listed; no recourse to Originator EIB purchases part of senior (AAA) tranche, remainder and B and C tranches sold to other investors. 5% of junior tranche retained by originator Term of senior tranche approx. 8 years with 2 year replenishment EIB funding advantage transferred through retrocession Sequential repayment of principal after replenishment period. Enhanced protection through cash reserve and excess spread. Loans assigned Highly granular loan portfolio with limits including sector and region Proceeds of sale of Notes to EIB used to fund new portfolio of SME loans Financial advantage provided to new SME loan portfolio as lower interest rate 10/19/ European Investment Bank

12 10/19/ European Investment Bank

13 CONCLUSIONS EIB Loans for SMEs offer an attractive source of long-term funding for intermediated SME lending, including leases Already used by some leasing entities to finance SME investment On single signature or parent-guaranteed basis; and Through provision of appropriate security Various EIF guarantee products support SME leasing EIB strategy will use proposed capital increase to facilitate policy-led intermediated lending to increase SME investment in Europe Enhanced role with leasing entities offers one route to enhance EIB support for SMEs investing in new capacity Experience in developing asset-backed structures to deploy Loans for SMEs EIB developing a range of targeted initiatives to meet these objectives, ready for rollout from /19/ European Investment Bank

14 For more information (+352) More information about EIF s SME leasing related products can be found in a working paper available at this conference and on EIF s website ( 14