DBRS Assigns New Ratings to the European Investment Fund at AAA, Stable trend

DBRS Ratings Limited (DBRS) has assigned a long-term issuer rating of AAA and a short-term issuer rating of R-1 (high) to the European Investment Fund (the EIF or the Fund). The trend on both ratings is Stable.

DBRS rates the EIF at a level equivalent to AAA on both the Support and the Intrinsic Assessment. The ratings could face downward pressure as a result of a downgrade in the Support Assessment, while they are more resilient to a deterioration in the Intrinsic Assessment. The Stable trend signals that DBRS does not currently anticipate any changes in either of the Assessments.

Based in Luxembourg, the EIF is a financial body of the European Union with full legal personality and financial autonomy. It is a supranational institution, whose shareholders are the European Investment Bank (EIB or the Bank, with 67.2% of capital), the European Union (EU, 24.4%), and 24 EU and Turkish financial institutions (8.4%). Founded in 1994 pursuant to the Treaty instituting the European Community (now, the Treaty on European Union), the EIF is the main EU policy vehicle for the financing of small and medium-sized enterprises (SMEs) in Europe. The Fund is part of the European Investment Bank Group and is a leading investor in venture and growth capital as well as an important catalyst of equity, debt and hybrid finance for SMEs. Its main goal is to facilitate SME finance and to leverage public funds by attracting private capital. Active commitments totalled EUR13.6 billion at end-2013, mobilising nearly EUR80 billion of financing. The Fund aims at being profitable, targeting a long-term return on equity of 5%.

The ratings of the EIF are primarily based on the AAA Support Assessment. This is underpinned by the creditworthiness of its core shareholders (as defined under DBRS’s current Methodology for Rating Supranational Institutions) and by the credibility of their commitment. The EIF’s core shareholders are the EIB (AAA, Stable) and the EU (AAA, Stable). Cumulatively, they account for 91.6% of the Fund’s subscribed capital. Under EIB and EU mandates, the core shareholders provided 42% of the EIF’s aggregate commitments in 2013 and we expect both the EIB and the EU to support the Fund, if needed, to preserve its creditworthiness. The Support Assessment could be subject to downward pressure in the event of a downgrade of EIF’s core shareholders, on under evidence of a structural change in EU policy priorities in the field of SME financing, which in turn may lead to a somewhat weaker mandate for the EIF.

The EIB is the dominant shareholder of the Fund. Owning 67.2% of the EIF’s capital, the EIB is the only shareholder that enjoys a 50% majority at the General Meeting of Shareholders and at the Board of Directors. This majority allows the EIB to materially modify the EIF’s risk profile without the consent of other shareholders, as well as to oppose any major proposal from other shareholders. While DBRS views the EIF’s governance rules as detailed in its Statute as being based on consensus, our assessment takes into account that in case of disagreement between shareholders, the EIB could exert a dominant influence in the Fund.

The EIF’s Intrinsic Assessment of AAA is based on its very strong capital and liquidity position, a strong franchise, and a moderate risk and earnings profile. The EIF has no marketable or bilateral debt outstanding, and all Fund’s obligations arise out of (i) potential disbursements to private equity fund managers, and (ii) guarantee calls from beneficiaries. The Fund reported a total Exposure at Risk of EUR3.5 billion at end-2013, and DBRS considers the predictability of the cash outflows associated with this exposure as likely to prevent the occurrence of material liquidity problems. In addition, the Fund’s liquidity buffer is significant, at EUR181 million at end-2013. This is more than 16 times the net cash outflows expected in 2014, and is accompanied by a sizeable portfolio of debt securities (EUR929 million at end-2013). As the EIF’s sovereign debt holdings did not face any haircut during the 2012 Greek debt exchange, we assume the Fund will continue to benefit from preferred creditor status (PCS) on these investments. The Intrinsic Assessment of the EIF could face downward pressure if DBRS had evidence of a loss of PCS on EIF’s sovereign exposures, or if the Fund were to issue a significant amount of debt. Equally, evidence of limited or volatile profitability and capital generation may put downward pressure on the Intrinsic Assessment.

The Intrinsic Assessment of the EIF benefits from an increasingly important franchise. The Fund is the main EU policy vehicle to catalyse SME finance, and is part of the EU policy response to the consequences of the global financial crisis. With 20 million SMEs in the EU at end-2012, contributing to 86.8 million jobs or 66% of the total, the EIF’s business is concentrated in an important segment of the EU corporate market. The Fund supports SME growth by providing financing solutions such as guarantees on SME loans and by the acquisition, holding, managing and disposal of participations in funds, and funds-of-funds, which invest in SMEs.

The Fund operates an own-risk business and an asset management business. The Fund’s own-risk activities are split between its private equity (EUR270 million at risk) and guarantees (EUR3.3 billion outstanding) portfolio. The asset management business (EUR13.6 billion in 2013) consists of the management of resources provided by the EIB, the EU and other third parties to the Fund, allocated to supporting SME growth under several mandates. As the asset management carries no risks to the EIF, it benefits the Fund’s risk profile and the composition of its earnings. In 2013 mandate-related income accounted for 48% of pre-provision income, compared to 31% in 2009. Going forward, the mandate activity will contribute slightly less to the Fund’s underlying profitability.

The EIF’s capital is very strong. Total equity was EUR1.2 billion at end-2013, of which EUR600 million was paid-in capital. Equity amounted to 79% of assets and 33% of Exposures at Risk (95%, when callable capital from core shareholders is included). The Fund’s equity base was strengthened in May 2014 bringing the total authorised capital to EUR4.5 billion from EUR3.0 billion at end-2013. As of 15 July 2014, EUR4.1 billion have been subscribed with 438 million of additional equity already injected. Full subscription is expected by 2017, when the total additional paid-in equity will reach approximately EUR560 million.

The EIF also provides guarantees to smaller-scale transactions that are unable to tap the markets, and via its credit enhancement activity it allows the securitization market to remain appealing to private investors. It is therefore a valuable partner for many small issuers of securitised loans, and DBRS recognises the countercyclical role the Fund played during the crisis. This considerably improved its franchise strength, in DBRS’s view.

Notes:
All figures are in Euros (EUR) unless otherwise noted.

The principal applicable methodology is Rating Supranational Institutions, which can be found on the DBRS website under Methodologies. The principal applicable rating policies are Commercial Paper and Short-Term Debt, and Short-Term and Long-Term Rating Relationships, which can be found on our website under Rating Scales. These can be found on www.dbrs.com at: http://www.dbrs.com/about/methodologies.

The sources of information used for this rating include the European Investment Fund, the European Investment Bank, the European Commission, the European Central Bank, Haver Analytics, and DBRS. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

Information regarding DBRS ratings, including definitions, policies and methodologies are available on www.dbrs.com.

This is an unsolicited credit rating. This credit rating was not initiated at the request of the issuer.

Generally, the conditions that lead to the assignment of a Negative or Positive Trend are resolved within a twelve month period, while reviews are generally resolved within 90 days. DBRS’s outlooks and ratings are under regular surveillance.

For further information on DBRS historic default rates published by the European Securities and Markets Administration (“ESMA”) in a central repository, see:
http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Ratings assigned by DBRS Ratings Limited are subject to EU regulations only.

Lead Analyst: Claudio Columbano
Rating Committee Chair: Roger Lister
Initial Rating Date: 1 August 2014
Most Recent Rating Update: n.a.

DBRS Ratings Limited
1 Minster Court, 10th Floor
Mincing Lane
London
EC3R 7AA
United Kingdom

Registered in England and Wales: No. 7139960