The SME Initiative A joint Commission presentation SME Initiative workshop Brussels, 23 April 2015
SMEs are the backbone of EU economy SMEs employ 2/3 of private sector workforce and create 58% of gross value added 75% of SMEs dependent on external financing 'access to finance' the second most pressing problem for Eurozone SMEs, right after getting customers Supply of credit to SMEs is constrained as banks deleverage, accumulate capital and repair balance sheets SME lending volumes are low and declining Market gaps and deficiencies exist in debt and equity markets for financing of enterprises, and especially SMEs Therefore, the EU's approach is to Ensure banking and macroeconomic stability Adopt legislation supporting entrepreneurship Support SME lending 2
Financing SMEs: The EU expertise with Financial Instruments EU-level financial instruments for SMEs implemented since 1998 Guarantees increasing SME lending and leasing, almost 600,000 SMEs supported up to date Equity instruments supporting highly innovative and fastgrowing SMEs, more than EUR 4bn of investment volume supported so far Close and successful cooperation between the Commission and the EIB/EIF since then Lessons learnt: dedicated framework and optimised design of Financial Instruments, best practices for efficiency and effectiveness, audits Financial Instruments under Structural Funds 3
Historical background to the SMEI: a unique crisis-response instrument ECB President Draghi, May 2013: "The key obstacle to a growth recovery seems to be the blocked credit channel to the small and medium-sized enterprises (SMEs)" European Council (June and December 2013) Conclusions of the High Level Expert Group Ex-ante assessment (EU wide) Model Funding Agreement (Implementing Act to the CPR) Signature in Spain on 26 January 2015, Malta soon to follow 4
Objective of the SME Initiative: Increase rapidly the volume of lending to SMEs in the EU Achieve significant impact to stimulate SME financing, economic growth and job creation Contribute European Structural Investment Funds (ESIF) to EUlevel instrument(s). An innovative change in the use of ESI Funds: the first joint instrument. For the achievement of the same policy objectives as EU instruments, using the same delivery mechanism (i.e. involving the same counterparties) and applying the same requirements (e.g. terms, reporting, audit, etc.). Differences apply only to eligibility criteria related to the final beneficiaries, in particular the geographical criteria. Plug in to what we already have: COSME and Horizon 2020 In addition, use EIB/EIF and possibly NPBs' resources 5
Financial Instruments for 2014-2020 EU-level Instruments Regional / National Instruments Research, Development Innovation Growth, Jobs and Social Cohesion Infrastructure Horizon 2020 Equity and Risk Sharing Instruments (EUR 2.7 bn, including at least EUR 710m for InnovFin SME Guarantees) Competitiveness & SME (COSME) Creative Europe Equity & guarantees Guarantee Facility (EUR 1.4 bn, incl. EUR 700m for SME (EUR 121m) guarantees) Social Change Erasmus for all & Innovation Guarantee Facility (EASI) Connecting Europe Facility (CEF) Risk sharing (e.g. project bonds) and equity instruments Instruments under European Structural and Investment Funds Contribution to EU-level instrument(s) Off-the shelf instruments Tailor made instruments 6
Main features of the SME Initiative Legal basis: Article 39 CPR Voluntary contribution (ERDF/EAFRD, up to 7%) from MS Indirect management by Commission and EIF Ex-ante assessment carried out EU wide Single dedicated OP at MS level Two instruments available: uncapped guarantees and securitisation 7
Uncapped Guarantee Instrument (Option 1) Objective: improve SME access to finance for new loans; provides (counter-)guarantees Covers up to 80% of the losses from the portfolios; financial intermediary retains 20% Contributions from MA remain ring-fenced to support SMEs in that Member State ESIF covers the highest risk Horizon 2020 (or COSME) contributions EIF, EIB (and possibly NPBs) share the residual risk Benefit passed onto SMEs: lending to riskier SMEs (e.g. innovative SMEs, start-ups, etc. ) reduced pricing and reduced collateral Gradual capital relief to financial intermediaries to support new lending to SMEs 8
Securitisation instrument for new and existing loans (Option 2) Combines ERDF-EAFRD, COSME, Horizon 2020, EIF, EIB and possibly NPBs in one instrument Two steps: a) securitisation of an existing/new portfolio and b) construction by the bank of a new portfolio ERDF-EAFRD take 50% of the riskier tranche (Junior tranche) Bank would retain a material interest in the transaction (typically of the Junior tranche) to help ensuring alignment of interest and good origination standards EU resources together with EIF own resources guarantee the Mezzanine tranche EIB and other institutional investors invest in the Senior tranche 9
Advantages for SMEs Fast roll-out Increased amount of funding available, i.e. more liquidity for investments Reduced pricing Reduction of collateral requirements Access to credit also for "riskier" SMEs 10
Advantages for financial intermediaries Gradual capital relief (incentive for new lending/enabling new debt finance to SMEs) Extend volume of loans with limited impact on risk exposure Additional funding in case of true securitisation Expertise of EIF Alignment of interests 11
Advantages for Managing Authorities: A unique crisis-response instrument with unique advantages Voluntarily opt-in until end 2016 Contributions from Managing Authorities remain ring-fenced to support to SMEs in their respective region or country Zero co-financing State Aid clearance upfront No need for a further ex-ante assessment Leverage of ESIF resources More SMEs supported and more beneficial terms for SMEs thanks to risk-sharing with the EU and EIB Group Possible way out 12
Outlook to the future More MS to join the SME Initiative? How to better use ESI Funds for more efficiency in SMEs financing: Juncker Plan 13
The role of ESIF Juncker Plan Investment Plan for Europe ("Juncker Plan") is driven by two central questions: How to use scarce public resources in the most effective and efficient way to promote investment and economic growth? How to use them as a catalyst, as a multiplier - how can we leverage scarce public resources and generate additional, private funding on top? The Juncker Plan aims at an overall doubling of the use of financial instruments precisely because of their capacity to leverage additional funds and generate higher impact The SME Initiative is a key tool to accelerate the use of financial instruments and to increase their impact via leveraging additional funds for the benefit European SMEs 14
The role of ESIF in the SME Initiative Given their role to cover the most risky parts of a loan portfolio, the ESIF act as an invaluable catalyst Also, most of the EU funding in the SME Initiative will come from the ESIF (e.g. EUR 800 million in the case of Spain) Why do the ESIF participate and play this important role? For many years, SME support has been a top priority of Cohesion Policy In 2014-20, EUR 57 billion or around 20% of funding from the European Regional Development Fund (ERDF) will be dedicated explicitly to SMEs Cohesion Policy is under shared management and largely decentralised it is closely connected to national, regional and local stakeholders and focuses on impact on the ground 15
The main advantages of the ESIF contribution No national co-financing required for the contributions from ERDF-EAFRD Leverage effect on the ERDF-EAFRD contribution by a combination of resources (leverage definition in Art. 39(5) of the CPR) Higher number of SMEs supported and more beneficial terms for SMEs thanks to risk-sharing with the EU and EIB Group Complement the existing financial instruments to address market failure (often "mainstream OP" guarantees are capped and there is no securitisation) 16
cont'd Through Investors Board, Managing Authorities retain control and define the investment policy Early deployment and frontloading of ESIF support Ex-ante assessment carried out already Model Funding Agreement available Clear and tight deadlines for signature of various documents and for payments Intense preparatory work done (plus concrete experiences already made by Spain and Malta) Very light OP (Single Dedicated National Programme) 17
Key steps Single Dedicated National Programme (SDNP) Each participating Member shall provide the COM with a single dedicated national programme (SDNP) per financial contribution by ERDF and EAFRD supporting thematic objective 3 If contributions at regional level (covering several regions), then the SDNP shall highlight the appropriate amounts by regions Contributing regions shall agree to designate "single authorities" as: managing authority, certifying authority (where applicable), audit authority Approval of the Single dedicated national programme by the COM 18
The SDNP some more detail CPR (Article 97) foresees specific provisions regarding the SDNP programming it is a much lighter and shorter OP than the mainstream OPs: only some of the programming requirements of Art. 96 CPR have to be met Only one thematic objective (3), one investment priority (3d), one specific objective Article 96.2 (b) i: Investment priority "Supporting the capacity of SMEs to grow in regional, national international market and engage in innovation process". Specific objective "Facilitate SMEs access to finance through the implementation of Financial Instrument[s] i.e. uncapped guarantee / securitization Article 96.2 (b) ii: Expected results for the specific objectives 19
cont'd Article 96.2 (b) iv: Output indicators Number of SMEs receiving support ERDF amount committed to cover the New Debt Finance portfolio (option 1) ERDF amount used to cover the existing portfolios of debt finance to SMEs and other enterprises with less than 500 employees (option 2) Article 96.2 (d): performance reserve - not applicable under SME Initiative Commitment period: recital 40 CPR, SME Initiative phased over 2014-2015-2016 Article 96.5 (a), (b), (c): MS needs to identify MA, Certifying authority, Audit authority, Body to whom payment are to be made by the COM Article 96.6 (b): Assessment of the ex-ante conditionality at the date the PA / SDNP is submitted for approval at the COM (fulfilled? If not, description of the envisaged actions) 20
Key steps Funding Agreement There is a model Funding Agreement available (COM Implementing Decision 2014/660/EU of 11 September 2014) for interested parties to use Negotiation of the funding agreement between the participating MS and the EIB Positive: Signature of the Funding Agreement (the signature shall occur within 6 months following the approval of the single dedicated national programme by the COM). If SME Initiative set up at regional level, this should be clearly specified in the SDNP and in the FA Negative: Member State shall submit a request for amendment of the single dedicated national programme and reallocate the contribution to other programmes and priorities in accordance with requirements for thematic concentration Request for payment from the EIB to the participating MS Transaction approved with the selected financial intermediary 21
Horizon 2020 contribution to the SME Initiative - rationale and added value Additional guarantee option for more loan and lease finance to innovative SMEs and small midcaps in Horizon 2020 participating countries SMEI uncapped guarantees and guarantees for securitization transactions complementary to guarantees available under InnovFin SME Guarantee facility Target group (SMEs, small midcaps) and eligibility criteria (innovative company or innovative investments) remain unchanged (InnovFin innovation criteria apply) 22
Eligibility criteria for final recipients Eligible transactions: Loans or leases between EUR 25,000 and 7.5 million Loan duration between 1 and 10 years in case of a fixed repayment schedule; up to 3 years for revolving transactions Final recipients must be an innovative company or make investments into innovative products, processes or services 23
Innovation criteria for final recipients SME intending to invest in producing or developing new or substantially improved products, processes or services that carry a risk of technological or industrial failure or SME or small midcap that is a 'fast-growing enterprise' or SME or small midcap operating in a market for less than 7 years and R&I costs represent at least 5% of its total operating costs or SME or small midcap having innovation potential or being 'R&I-intensive' (9 different criteria of which one must be met) 24
Consequences of opting for COSME Additional guarantee option for financial intermediaries in participating countries: COSME Loan Guarantee Facility (LGF): capped portfolio guarantees, guarantees for securitization transactions SME Initiative: additional option of uncapped guarantees Sub portfolio (20x COSME contribution) to be made up of COSME-compliant transactions Focus on higher risk SME transactions (COSME subportfolio) in Option 1, no additional criteria applicable for Option 2 25
Eligible transactions (1/3) Sub-portfolio must target higher risk profile clients/products: Starting point credit risk policy of each Financial Intermediary Financial Intermediary must commit to provide new lending which significantly increases expected losses when compared to existing SME loan book 26
Eligible transactions (2/3) Must cover higher risk products/clients: New product set up for start-ups; or Transactions which are provided to with existing features but cover previously excluded final recipients; or Transactions which are provided with new features which result in higher expected losses (e.g. increased maturities, reduced collateral requirements) New products previously not offered due to higher risk (e.g. subordinated and participating loans) 27
Eligible transactions (3/3) Transaction size: Lending up to and including EUR 150,000 Lending above EUR 150,000 may be included provided InnovFin SME Guarantee Facility criteria are not fulfilled Maximum lending amounts: Transactions with duration < 5 years max. EUR 1,500,000 (EUR 750,000 for SMEs performing road freight transport) Transactions with duration > 5 up to 10 years max. EUR 750,000 (EUR 375,000 for SMEs performing road freight transport) 28
Conclusions and outlook: SME Initiative workshop This slideshow presented the background to the SME Initiative, its overall architecture and its many advantages, and the role of the different funds and DGs Now we will move on to the essential role played by the EIB Group in the process to the experiences made by Spain and Malta After this, we will have two in-depth Q&A sessions where you can ask your questions regarding the SME Initiative, with all the presenters (Commission, EIB Group, Spain, Malta) at your disposal The main objective of this workshop is to set in motion a true interactive discussion, learning and exchange of experiences let's make good use of it! 29