DBRS Confirms European Investment Fund’s Rating at AAA, Stable Trend

DBRS Ratings Limited (DBRS) has confirmed the long-term issuer rating of AAA and the 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 Assessments. The ratings could face downward pressure as a result of a downgrade in the Support Assessment. The ratings are more resilient to a deterioration in the Intrinsic Assessment. The Stable trend reflects the resiliency of the Fund to downside risk as result of its strong fundamentals.

The EIF’s shareholders are the European Investment Bank (EIB or the Bank, with 63.7% of capital), the European Union (EU, 24.3%), and 26 EU and Turkish financial institutions (12%). The Fund is the main EU policy vehicle for the financing of small and medium-sized enterprises (SMEs) in the Europe. The EIF is a leading investor in venture and growth capital, as well as an important catalyst of equity, debt and hybrid finance for SMEs. Active commitments totalled EUR14.5 billion at end-2014, mobilising nearly EUR77.8 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 by DBRS’s methodology, 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 88% of the Fund’s subscribed capital. Under EIB and EU mandates, the core shareholders provided 48% of the EIF’s aggregate commitments in 2014 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, or under evidence of a structural change in EU policy priorities in the field of SME financing, which in turn may lead to a weaker mandate for the EIF.

The EIB is the dominant shareholder of the Fund. Owning 63.7% 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, and to oppose major proposals from other shareholders. While DBRS views the EIF’s governance rules as detailed in its Statute as being based on consensus, 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 of its obligations are from (i) potential disbursements to private equity fund managers, and (ii) guarantee calls from beneficiaries. The Fund reported a total Exposure at Risk of EUR3.4 billion at end-2014, 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 EUR155 million at end-2014. This is more than 28 times the net cash outflows expected in 2015, and is accompanied by a sizeable portfolio of debt securities (EUR1,465 million at end-2014). As the EIF’s sovereign debt holdings did not face a 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 the 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 could put downward pressure on the Intrinsic Assessment.

The Intrinsic Assessment of the EIF benefits from an increasingly important franchise. The Fund is part of the EU policy response to the consequences of the global financial crisis. With 21.6 million SMEs in the EU in 2013, contributing to 88.8 million jobs or 67% 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 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. Moreover, the role of the EIF in providing support to SMEs’ market development was underscored by the European Commission’s Investment Plan for Europe. The plan aims to mobilise EUR 315 billion of new investments from 2015 to 2017 through the European Fund for Strategic Investments (EFSI). In particular, a specific SME Window (EUR 5 billion) of the EFSI will be implemented via the EIF, through agreements between the EIF and financial intermediaries signed in 2015-2019. DBRS does not expect the EIF’s risk profile to change significantly as a result of this mandate, as the risk will be borne by the EU (EUR2.5 billion guarantee) and EIB (EUR 2.5 billion of own resources).

The EIF’s capital is very strong. Total equity was EUR1.7 billion at end-2014, of which EUR832 million was paid-in capital. Equity amounted to 82% of assets and 49% of Exposures at Risk (134%, when callable capital from core shareholders is included). The Fund’s equity base was strengthened in May 2014, bringing total authorised capital to EUR4.5 billion, divided into 4,500 shares of EUR 1 million each, of which 4,161 have been issued and 339 were allocated to the EC for subscription in the following three annual subscription periods from 2015 to 2017.

Despite these significant strengths, the EIF faces several challenges. As the main policy vehicle for SMEs’ financing at the European level, the EIF is inherently exposed to a higher risk category compared to mature companies with an established track record of profitability. Also, the EIF’s profitability will remain dependent on the evolution of the macroeconomic environment in Europe, being exposed to a potential return of negative market sentiment that could exert downward pressure on the creditworthiness of own-risk exposures. Finally, managing an expanding balance sheet could prove to be challenging. The pool of business or transactions available for the EIF to deploy its own resources could pose risk to the balance sheet expansion of the Fund.

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. Other applicable methodologies include the following: Rating Sovereign Governments. These 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.

The sources of information used for this rating include the European Investment Fund, European Investment Bank, the European Commission, the European Central Bank, Bloomberg and Haver Analytics. 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.

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http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

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Lead Analyst: Javier Rouillet, Assistant Vice President, Global Sovereign Ratings
Initial Rating Date: 1 August 2014
Rating Committee Chair: Alan G. Reid
Last Rating Date: 1 August 2014

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