Guarantee Instruments Paul Samsonoff Portfolio Guarantees, EIF
EIF at a Glance EU specialised institution for SMEs risk financing Debt - Structuring and Guaranteeing portfolios of SME loans/ leases and microcredit Equity - Venture Capital and Mezzanine (fund of funds) Geographic Focus: EU 28, EFTA, Candidate Countries Distribution through Banks and Funds (Full delegation) Founded in 1994 & started providing VC to businesses in 1997 Multilateral Development Bank (MDB) status Basel II 0% risk weighting Aaa/AAA/AAA ratings (Moody s/ S&P/Fitch) Shareholding Structure: EIB: 63.7%, EIB shareholders: 28 EU Member States European Commission: 24.3% 24 European Financial Institutions: 12 % 2
3 Guarantee Instruments Development Product Portfolio Tranche Form Leverage SME Guarantee Facility Risk Transfer First Loss Direct guarantee Counter - guarantee FLPG* First Loss + Second Loss Direct guarantee = 5 to 7 Credit Enhancement Second Loss (mezzanine) Direct guarantee = 6 to 8 InnovFin Blended (uncapped) Direct guarantee Counter-guarantee ABS wrap Funding Senior Direct guarantee = 2 to 3 = 20 =10 (on EC FLPG) * First Loss Portfolio Guarantee Expected Loss Expected Loss Expected Loss Expected Loss Expected Loss SME GF (First Loss) FLPG (First + 2 nd Loss) Credit Enhancement (Second Loss) InnovFin (uncapped/pari passu) ABS wrap (Senior)
1- InnovFin SME Guarantee Overview
InnovFin Product Overview 5
InnovFin SME Guarantee This guarantee instrument covers the risk related to losses of a portfolio Up to 50% loss coverage (Principal + Interest 90D) Full Delega<on to Financial Intermediaries Automa<c Coverage/Inclusion ABrac<ve Guarantee Terms Favourable Capital Treatment Guarantee and Counter- Guarantee 6
What Transactions can be supported? Purpose of Financing: Loans, Credit Lines, Leases and Bonds Tangible & Intangible Assets Working Capital Business Transfers n Loan amount: min EUR 25k max EUR 7.5m (only Senior Debt) n Loan maturity: min 1 year max 10 years n Currency: EUR and local currency n Max Portfolio: EUR 400m per intermediary EUR 1bn per intermediary group 7
Key Guarantee Terms Guarantee Fee: SME 0.50% p.a. Guarantee Fee: Small Mid- Cap 0.80% p.a. Financial Intermediary Financial Intermediary Guarantee from EIF 50% Guarantee Guarantee Fee Innova?ve SMEs / Small Mid- caps n Financial Intermediaries are required to transfer the Financial Benefit to SMEs & Small Mid-caps n Financial Intermediaries are selected on a first come, first processed basis 8
Transfer of Benefit (indicative example) Without InnovFin Financing at 4% With InnovFin Financing at 3.5% Total = 4% Total = 3% Indicative pricing model components Cost of Risk Margin Fixed Costs 1.5% 1.5% 0.5% Reduction of Cost of Risk with InnovFin 0.5% 1.5% 0.5% Cost of the guarantee : 0.5% (or 0.8% for small midcap) Funding Costs 0.5% 0.5% 50% of financing 50% of financing 9
Appendix I InnovFin Innovation Eligibility Criteria InnovFin Innovation Eligibility Criteria (at least one to be met) I will invest the money in producing or developing new or substantially improved products, processes or services that are innovative, where there is a risk of technological or industrial failure as evidenced by an external evaluation I am a fast-growing enterprise. That is: I ve been operating in a market for less than 12 years following the first commercial sale and turnover or staff has endogenously grown on average 20% a year over a three-year period (with at least 10 employees at the beginning of the reference period) I have been operating in a market for less than 7 years following the first commercial sale and R&I costs represent at least 5% of the total operating costs in at least one of past three years (or in the current one in case of a start-up enterprise) To be met at signing date of the loan/lease agreement with: Appropriate evidence of: (i) declaration of intent and (ii) business plan where such risks of failure are evidenced. Appropriate evidence of: (i) enterprise s business plan being significantly based on carrying out R&D and/or innovation activities, (ii) growth rate and (iii) employees at beginning of observation period. Appropriate evidence of such information provided by the certified accountant(s) The enterprise shall have a significant innovation potential and/or be an R&D and/or innovation-driven enterprise, satisfying at least one of the following elements: Our latest certified accounts confirm that we are already spending at least 20% of the sum I want to borrow on R&I and our business plan indicates an increase of R&I expenses at least equal to that amount At least 80% of the sum I want to borrow will be spent on R&I activities as shown in my business plan and the remainder on costs necessary to enable such activities I have been awarded grants, loans or guarantees from European R&I support schemes or regional, national research or innovation support schemes over the last 36 months, and the amount I want to borrow now will not cover the same expense Appropriate evidence of such information provided by the certified accountant(s) Appropriate evidence of: (i) undertaking and (ii) business plan where such expenditures are evidenced. Appropriate evidence of award dated less than 36 months before I have been awarded over the last 24 months an R&D or Innovation prize by an EU institution or an EU body Appropriate evidence of an innovation prize delivered less than 24 months before In the past 24 months I have registered at least one technology right (e.g. patent, utility model, design right) and the money that I will borrow intend to enable the use of this technology right I am an SME and in the past 24 months I have received an investment from a venture capital investor or from a business angel being a member of a business angels network; or they are today a shareholder in the company As per my business plan I intend to enter a new product or geographical market, and the required investment is higher than 50% of the average annual turnover of the past 5 years; Our R&I costs represent at least 10% of the total operating costs in at least one of the past 3 years (or in the current one in the case of a start-up enterprise) Appropriate evidence of technology right registration dated less than 24 months before Appropriate evidence of the investment Appropriate evidence of enterprise s business plan Appropriate evidence of such information provided by the certified accountant(s) 10
Appendix II Beneficiary Eligibility Criteria Beneficiary Eligibility Criteria (all to be met) The Beneficiary shall be an unlisted SME or an unlisted Small Mid-cap without prejudice to the possibility for such companies to be quoted on an alternative trading platform, as defined in Article 4(1)(15) of Directive 2004/39/EC, where the majority of the financial instruments admitted to trading are issued by SMEs or Small Mid-caps; To be met at signing date of the loan/lease agreement with: Appropriate evidence of criteria being met and information source. SME relates to micro, small or medium-sized enterprises as defined in the Commission Recommendation 2003/361/EC, as amended, restated, supplemented and/or substituted from time to time or Small Mid-caps (defined as enterprises which has up to 499 employees, that is not an SME); The Beneficiary shall not be a firm in difficulty within the meaning of the General Block Exemption Regulation (Commission Regulation (EU) No C(2014) 3292/3 of 21 May 2014 declaring certain categories of aid compatible with the internal market); Shall not have a substantial focus on one or more EIF Restricted Sectors (which determination shall be made by the intermediary in its discretion based, without limitation, on the proportionate importance of such sector on revenues, turnover or client base of the relevant enterprise); Shall be established and operating in at least one Participating Country (an EU Member State and/or Associated Country to the Horizon 2020 Regulation); The Beneficiary shall not perform any R&I activities, which are related to: illegal activities according to the applicable legislation of the Beneficiary s country, including any applicable EU legislation. Any additional eligibility criteria as may be specified in the relevant guarantee agreement. Appropriate evidence of criteria being met and information source. Appropriate evidence of Restricted Sectors, criteria used to assess the focus and information source. Appropriate evidence of information source. Appropriate evidence of information source. Appropriate evidence of criteria being met and information source. 11
2- COSME Loan Guarantee Overview
COSME LGF Loan Guarantee Facility Successor of the CIP SME Guarantee Facility as part of the Europe 2020 strategy EC facility enhancing access to finance for European SMEs Call launched in August 2014 with an estimated budget of EUR 690m (2014-2020) COSME LGF provides: Free of charge capped portfolio guarantees and counter-guarantees for additional SME risktaking A securitisation option on mezzanine tranches of SME debt portfolios subject to additional lending to SMEs COSME LGF is implemented through Financial Intermediaries like guarantee schemes, banks and leasing companies Thanks to COSME LGF, Financial Intermediaries go beyond their current lending or guarantee practice or increase lending volumes 13
COSME LGF Capped (Counter-) Guarantee Structure Financial Intermediary s Portfolio of Higher Risk Transactions to SMEs COSME LGF s capped (counter-) guarantee proposed features Guarantee Rate on a loan by loan basis 50% maximum Structured in the form of guarantees or counter-guarantees Risk retained by the Financial Intermediary 20% minimum* of the original portfolio Expected Loss Guarantee Cap Rate (Counter-) Guarantee rate typically set at maximum 50% Pari-Passu ranking (Counter-) Guarantee cap rate fixed at the level of Expected Losses (max 20%) COSME guarantee has 10 year maturity Eligible loans min 12 months maturity * The minimum 20% level is based on the consideration that financial intermediaries could combine additional credit risk protection financial instruments alongside with the proposed COSME (counter-)guarantees Retained exposure of the Financial Intermediary to the SME transactions needs to be min 20%* 14
Conditionality under COSME Mechanics Option 1 Unconditional Guarantee Option 2 Conditional Guarantee Guarantee rate (GR) 45 50% Guarantee cap rate (GCR) 20 % Expected Loss Cap amount Guarantee rate (GR) 50% Guarantee cap rate (GCR) 45 20 % Expected Loss Cap amount 40 40 35 35 30 30 25 25 20 15 10 5 MaxPV trigger MinPV trigger RPV trigger 20 15 10 5 GUARA N-TEE COVER GUARA N-TEE COVER 0 0 15 Portfolio Volume Indicator Pre-set Value Trigger calculation formula MaxPV* 200 MaxPV*GR*GC R MinPV** 130 MinPV*GR*GC R Trigger Value * MaxPV ( maximum Portfolio Volume); MinPV (Minimum Portfolio Volume); RPV (Reference Portfolio Volume) RPV*** 100 RPV*GR*GCR 10 20 13
COSME LGF What are Higher Credit Risk Transactions? COSME LGF covers Higher Credit Risk Transactions to SMEs of two types: Option 1 Target Higher Risk Profile clients/products through: - New product set up for Start-ups; OR - Extension in maturities and/or reduction in collateral; OR - New products or existing products offered to previously excluded client sectors Ground up COSME cover Unconditional guarantee Option 2 Increase in volumes of (guarantees of) loans to SMEs related to - most risky 25% of current portfolio by internal rating; OR - full portfolio in case of guarantee institutions and promotional banks COSME cover is conditional on the Intermediary realising certain volumes of activities as defined within the Guarantee Agreement Conditional guarantee 16
COSME LGF Eligibility Criteria Final Recipient Transactions: Amount: up to a maximum of EUR 150,000 larger transactions can be included provided that the Final Recipient does not fulfil any of the 12 InnovFin Innovation Eligibility Criteria Maturity: minimum 12 months Purpose: - Working capital (including revolving credit lines maximum maturity of 5 years and overdrafts; excluding factoring and credits or loans resulting from utilisation of credit card limits) - Investments Final Recipients: SMEs as defined in Commission Recommendation 2003/361/EC (OJ L124, 20.05.2003, p. 36) Established in one of the COSME programme countries They should not be undertakings in difficulty as defined in General block exemption regulation (Commission regulation (EU) No C(2014) 651/2014, 17.06.2014) 17