European Investment Fund 2011

October 31, 2011 European Investment Fund Primary Credit Analyst: Leila Butt, London (44) 20-7176-2138; Leila_Butt@standardandpoors.com Secondary Contact: Benjamin Young, London (44) 20-7176-3574; benjamin_young@standardandpoors.com Table Of Contents Major Rating Factors Rationale Outlook Structure And Shareholders Capitalization Operations Own-Risk Guarantee Portfolio Own-Risk Private Equity Participations Financial Performance Related Criteria And Research www.standardandpoors.com/ratingsdirect 1 906713 | 301664923 European Investment Fund Major Rating Factors Strengths: • A solid financial profile, including a debt-free balance sheet. • Strong shareholder support. • In our opinion, prudent statutory and policy controls. • `AAA` rated callable capital equaling 223% of shareholders` equity. Counterparty Credit Rating Foreign Currency AAA/Stable/A-1+ Weaknesses: • High embedded risk in EIF`s portfolio of loan guarantees and venture capital investments. Rationale The European Investment Fund (EIF) is a Luxembourg-based financial institution of the European Union (EU). At Dec. 31, 2010, EIF`s shareholders were: the EIB with a 61.2% shareholding; the EU, represented by the European Commission with a 30.0% shareholding; and 28 financial institutions from the enlarged EU with a combined 8.8% shareholding. The EIF`s mandate is to promote the creation, growth, and development of micro and SMEs in the enlarged EU and candidate countries. The mandate is pursued in two ways: • EIF guarantees financial institutions` SME loan portfolios in exchange for a fee; and • EIF participates in private equity (PE) funds, including venture capital (VC) funds. The EIF, in effect, operates in two different capacities: it has an own-risk portfolio, but also acts as an agent for other supranationals (primarily the EIB and EU) and national and provincial governments (for instance, Germany, Spain, and Bavaria). The risk that the EIF incurs in this capacity is borne by these entities. At year-end 2010, 93% of the EIF`s €5.4 billion private equity (PE) investments were of this type and the remainder was at the risk of the EIF`s own account. Similarly, nearly 83% of the EIF`s €14.7 billion in outstanding guarantees at year-end 2010 was mandated by the EU, with the remainder at the EIF`s own risk. During 2009–2010, the EIF increased its participation in PE funds and its issuance of guarantees to SMEs to meet the challenges of reduced availability of market-based funding. The new PE commitments have increased by 50% since 2008--this includes a 22% increase in commitments at the EIF`s own risk. Overall, new-guarantee commitments have increased by nearly 20% since 2008, but the proportion at the EIF`s own risk decreased to 17.5% in 2010, from just over 31.0% of total guarantees in 2008. The growth in overall guarantees stemmed from an increase in guarantee trust activity that the EIF manages on behalf of the EC, its member states, and the EIB. The EIF`s key shareholders remain firmly committed to its mandate and operations, and we believe that the EIF is an integral part of the EIB group and its future strategy. As evidence of shareholder support, in 2007 shareholders agreed to increase subscribed capital to €3 billion from €2 billion by end-2010, with €200 million of the increase to be paid in, most of which was to come from the EIB. As a result of the capital increase, retained earnings, and statutory reserves, The EIF`s shareholders` equity stood at €1,016 million at year-end 2010, from €693 million at Standard & Poors | RatingsDirect on the Global Credit Portal | October 31, 2011 2 906713 | 301664923 European Investment Fund year-end 2006. Funding for the EIF`s activities for its own account comes entirely from shareholders` equity; under its agreement, EIF cannot borrow for these purposes, although it maintains a €25 million treasury facility for bridging purposes, and we believe funding from EIB would be available if necessary. The EIF`s operations require lower liquidity relative to total assets than other multilateral lending institutions (MLIs), since it does not lend or borrow, and outflows of funds result from the undisbursed PE commitments and payments under guarantees. Liquid assets, including securities, benefit from implicit liquidity support from the EIB. Liquid assets decreased to 6.2% of total balance-sheet assets in 2010, compared with 35.6% at year-end 2008, as cash assets have been progressively invested in debt securities and other fixed income securities. We believe the EIF`s statutory and policy controls are prudent, and the sum of own-risk PE commitments (valued at cost) may not exceed 50% of shareholders` equity (excluding the fair value reserve), while guarantee exposure cannot exceed three times the amount of subscribed capital. We would expect `AAA` rated callable capital to comfortably cover this in a stressed scenario. The EIF is exempt from income taxes, like other MLIs. Unlike most other MLIs, it normally pays a cash dividend to its shareholders. However, the dividend was suspended for the 2009 fiscal year in light of EIF`s €7.4 million loss, the first since the EIF began operations. The loss primarily reflected higher provisions for losses on guarantees and some impairments on PE investments. The fund recorded a profit of €7.2 million in 2010, and a minimum amount of €1.4 million in dividend payments is expected to be made in 2011. Outlook Standard & Poor`s Ratings Services expects the EIF`s capacity to meet its financial obligations to remain extremely strong in the medium term despite suffering from the effects of the global market downturn. The fund`s conservative business approach, together with prudent statutory and policy controls, effectively limits its exposure to risks from its operations. Shareholder support remains robust, due to the important role the fund continues to play for both of its main shareholders. Table 1 European Investment Fund Financial Indicators Mil. € Total assets Liquid assets Debt securities and other fixed income securities PE investments (valued at lower of cost or attributable NAV) PE investments (valued at cost) Subscribed capital AAA` callable capital Paid-in capital Shareholders` equity Off balance sheet: SME guarantees at EIF risk (exposure at risk) 2010 2009 2008 2007 2006 2005 1,196 1,158 1,076 1,024 771 739 74 106 384 292 53 73 864 832 496 522 517 504 194 165 159 168 134 105 228 206 191 168 139 120 3,000 2,940 2,865 2,770 2,000 2,000 2,266 2,228 2,239 2,095 1,515 1,522 600 588 573 554 400 400 1,016 1,029 1,014 985 693 668 2,580 2,893 3,838 3,607 3,050 2,978 www.standardandpoors.com/ratingsdirect 3 906713 | 301664923 European Investment Fund Table 1 European Investment Fund Financial Indicators (cont.) Profit and loss Income from investments in shares and other variable income securities Commission income Administrative expenses Net interest and similar income Profit Value adjustments in respect of investments in venture capital enterprises Key Financial Ratios Shareholder Equity/Assets (%) Liquid Assets/Total Assets (%) Liquid Assets/Shareholder Equity (%) Liquid assets plus fixed income securities/Total assets (%) Gearing¶ (%) Drawn SME guarantees (exposure at risk)/equity (%) Return on shareholders` equity (%) Return on assets (including guarantees) (%) Commission Income/profit (%) Income from VC investments/profits (%) Commission Income/Administrative Expenses (%) 10.9 0.9 4.6 6.7 6.9 1.9 37.1 26.8 23.4 29.1 26.3 17.9 43.6 36.4 30.0 26.1 21.6 16.0 31.5 28.6 38.5 30.2 23.6 22.8 7.2 (7.4) 35.1 50.4 48.6 36.7 N/A N/A N/A N/A N/A N/A 85.0 88.8 94.3 96.2 89.8 90.3 6.2 9.2 35.6 28.5 6.9 9.9 7.2 10.3 37.8 29.6 7.6 11.0 78.3 81.1 81.7 79.5 73.9 78.1 107.1 118.0 151.1 151.8 167.2 127.0 253.8 281.2 378.5 366.1 440.4 445.9 0.7 (0.7) 3.6 7.5 7.5 5.8 0.1 (0.1) 0.3 0.4 0.4 0.4 513.7 (364.1) 66.7 57.7 54.1 48.8 150.4 (12.6) 13.1 13.2 14.2 5.2 85.2 73.8 78.0 111.3 121.7 112.1 Structure And Shareholders The EIF, established in 1994 and based in Luxembourg, is a financial institution of the EC. It has a tripartite shareholder structure, comprising the EIB (61.2% at Dec. 31, 2010), the EU represented by the European Commission (30%), and 28 financial institutions (8.8% in total). EIF`s shareholding structure and operations were reformed in 2000, following an initiative by the EIB to make the EIF an integral part of the EIB Group. The EIB became the majority shareholder of EIF by purchasing the remaining unallocated shares in the fund, buying shares from other financial institutions, and reducing the number of smaller shareholders. The EIF`s mandate is to promote the creation, growth, and development of SMEs, in accordance with a strategy to turn the EU into a dynamic, knowledge-based economy, as set out by the 2000 Lisbon European Council. This is outlined in Article 2 of the Fund`s statutes, which determines the EIF`s tasks in contributing to the pursuit of European Community objectives. The EIF`s statutes also require it to act independently and commercially, seeking a return for shareholders. To pursue its objectives, the EIF is authorized to provide loan portfolio guarantees (guarantees of other institutions` loans to SMEs) and to acquire PE fund participations in private equity funds targeting SMEs. The fund`s investments aim to leverage both its own funds and those that are available through mandates (resources that the EIF manages on behalf of the EIB and EU). Mandates from the EIB include the Risk Capital Mandate (RCM) and the Mezzanine Facility for Growth (MFG), while those from the EU include the Competitiveness and Innovation Framework Programme (CIP) and the Joint European Resources for Micro to Medium Enterprises (JEREMIE). For example, the JEREMIE initiative started in 2005 to facilitate SMEs` use of EU structural funds over the period 2007-2013. The Standard & Poors | RatingsDirect on the Global Credit Portal | October 31, 2011 4 906713 | 301664923 European Investment Fund EIF also began to scale up its microfinance activity in 2010 and launched the European Progress Microfinance Facility (EPMF) in that year, which serves as an umbrella initiative for the fund`s microfinance activities. This focuses on micro-borrowers, micro-entrepreneurs, and groups with limited access to the conventional banking system. The fund`s key shareholders are firmly committed to the EIF`s objectives and operations. The EIF plays an integral role in the operation of its majority shareholder, the EIB, acting as the EIB`s specialist arm for PE and SME guarantee operations under the umbrella of the EIB group. Following the reform of the fund in 2000, overlaps in the operations of EIB and EIF were removed by transferring the EIF`s portfolio of guarantees under the trans-European transport, telecommunications, and energy networks to the EIB. In return, the EIB transferred management of its SME PE portfolio to the EIF and gave the fund a mandate for future operations on behalf of the EIB. In addition, certain tasks previously carried out within the EIF, such as treasury management and internal auditing, were outsourced to the EIB. The EU, represented by the European Commission, is the EIF`s second-largest shareholder and plays a specific role. Not only was the EU the initial driver behind the EIF`s creation , it also sets the EU objectives to which the EIF is committed through its statutes. The EIF represents the most important platform for SME projects from the EU budget, providing specialized expertise in SME financing while at the same time ensuring effective use of EU budget resources. At Dec. 31, 2010, the EIF`s third group of shareholders was made up of 28 financial institutions that generally have expertise and a commercial interest in SME finance, comprising national development and commercial banks. Many of these institutions are not only shareholders, but cooperate with the EIF at the operational level, as demonstrated by guarantee operations carried out with KfW (AAA/Stable/A-1+), Caisse Des Depots Et Consignations (AAA/Stable/A-1+), and a number of commercial banks. Capitalization The EIF`s subscribed capital was €3 billion at end-2010, of which 20% has been paid in, amounting to €600 million. Callable capital from `AAA` rated shareholders was 223% of shareholders` equity. Given that the sum of own-risk PE commitments (valued at cost) may not exceed 50% of shareholders` equity (excluding fair value reserve), while guarantee exposure must not exceed three times the amount of subscribed capital, `AAA` rated callable capital of €2.3 billion at end-2010 should suffice to cover all potential payment obligations even under the most severe stress scenarios. At end-2010, EIF own-risk guarantees amounted to €2.6 billion, less than a third of the statutory limit of €9 billion, while net PE commitments totaled €389 million, below the €523 million statutory limit. Shareholders` equity therefore covered one-third of the EIF`s own-risk guarantees and PE operations in 2010 (shareholders` equity was more than twice own-risk PE operations). Callable capital may be called by a general meeting, on a proposal of the board of directors, to meet the fund`s liabilities to creditors. Payments are required be made within 90 days. This explicit deadline for the capital pay-in is unusual among supranationals. Considering also that almost all of the EIF`s `AAA` rated callable capital comes from its two main shareholders, capital calls should be implemented fairly swiftly. If the EIF required liquidity at shorter notice than provided for by callable capital procedures, however, we would expect the EIB to act as a lender of last resort and to provide interim credit. www.standardandpoors.com/ratingsdirect 5 906713 | 301664923 ... - tailieumienphi.vn