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

DBRS Ratings Limited (DBRS) has confirmed the European Investment Fund’s (EIF or the Fund) long-term issuer rating at AAA and its short-term issuer rating at R-1 (high). The trend on both ratings is Stable.

DBRS rates the EIF on the basis of both the Support and the Intrinsic Assessments. The ratings of the EIF primarily reflect the Support Assessment at AAA. This is underpinned by the creditworthiness of its core shareholders and by the credibility of their commitment to support the Fund, if ever needed. The EIF’s core shareholders are the European Investment Bank (EIB or the Bank, rated AAA, Stable by DBRS) with 59.9% of the issued shares at the end of 2016, and the European Union (EU; AAA, Stable) with 28.1%. Cumulatively, they account for 88% of the Fund’s subscribed capital. In DBRS’s view, the EIF’s AAA rating also benefits from a preferred creditor status, in line with its parent the EIB. The Stable trend reflects the resilience of the Fund to downside risks as result of its strong fundamentals.

Following the United Kingdom (UK) vote to leave the EU and the country’s decision to formally start the withdrawal process from the EU on 29 March 2017, DBRS points out that the EIF’s shareholding structure has remained unaffected. Going forward, DBRS expects the Fund’s operations within the UK to be largely determined as part of the broader withdrawal agreement between the UK and the European bodies.

In addition to its core shareholders –the EIB and the EU– the EIF’s 12% remaining capital is held by 30 banks and financial institutions located in 15 EU countries and Turkey. The Fund is the main EU policy vehicle for the financing of small and medium-sized enterprises (SMEs) in 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. The total active commitments increased significantly to an aggregated EUR 26.2 billion at year-end 2016 from EUR 13.9 billion at year-end 2014, mobilising a total of EUR 148.9 billion of financing at the end of 2016. The increase over the last two years reflects the substantial growth in signatures activity, from less than EUR 3.3 billion in 2014 to EUR 9.4 billion in 2016. This followed the capital increase in 2014, meant to support the launch of the Investment Plan for Europe (IPE) in 2015, which reinforced the EIF’s mandate.

The EIF’s governance is intrinsically linked to its parent, the EIB. Indeed the Bank, with 59.9% of the Fund’s capital, is the sole shareholder to enjoy a majority at the General Meeting of Shareholders and at the Board of Directors. 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 would 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) potential guarantee calls from beneficiaries.

The Fund reported a total Exposure at Risk of EUR 6.3 billion at year-end 2016 (EUR 3.9 billion in 2015). Despite this substantial increase, DBRS views positively the track record of low impairments and manageable capital calls derived from private equity investments as well as the reduced amount of guarantee calls. DBRS also considers the predictability of the cash outflows associated with these exposures as likely to prevent the occurrence of material liquidity problems. In addition, the Fund’s liquidity buffer is significant, with cash and cash equivalents of EUR 218 million at year-end 2016 and an additional EUR 1.29 billion in debt and other fixed income securities; 40% of which from EU sovereigns. 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 on these investments.

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 23 million SMEs in the non-financial business sector in the EU, representing around 90 million jobs, the EIF’s business is concentrated in one of the key contributors of job creation and economic growth in the EU. The role of the EIF in providing support to SMEs’ market development was underscored by the European Commission’s (EC) Investment Plan for Europe launched in mid-2015. The plan aims to mobilise EUR 315 billion of new investments by mid-2018 through the European Fund for Strategic Investments (EFSI). In particular, a specific SME Window (EUR 5 billion) of the EFSI has to be implemented via the EIF, largely through guarantees and equity investments. Within the first year of the EFSI’s deployment, agreements signed had already mobilised two-thirds of the EUR 75 billion targeted. Given this rapid progress, the EC increased the SME Window resources by EUR 500 million to EUR 5.5 billion, through a fund reallocation within the EFSI. This led to a revision of the investment objective for the SME window to EUR 82.5 billion (1:15 ratio between guarantees and overall investments). At the end of 2016, close to 84% of this amount had already been mobilised through investments. DBRS does not expect the EIF’s risk profile to change materially as a result of the Fund’s mandate within the EFSI, as the risk associated to the SME Window will be partly borne by the EU through a guarantee as well as the EIB’s own resources.

The EIF’s capital is very strong. Total equity was EUR 1.9 billion at year-end 2016, of which EUR 876 million was paid-in capital. At the end of 2016, equity including reserves and share premium amounted to 81.6% of assets. The Fund’s equity base was strengthened in May 2014, bringing total authorised capital to EUR 4.5 billion, divided into 4,500 shares of EUR 1 million each, of which 4,382 have been issued to-date and 118 have been allocated to the EC for subscription in 2017.

Despite these strengths, the EIF faces several challenges. Following the UK vote to leave the EU, there are high uncertainties concerning the withdrawal agreement that will be reached between the UK and the EU, and its potential impact on the EIB and subsequently the EIF. Also, as the main policy vehicle for SMEs’ financing at European level, the EIF is inherently exposed to a higher risk category compared to mature companies with an established track record of profitability. Finally, managing an expanding balance sheet could prove 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.

RATING DRIVERS

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 Support Assessment could be subject to downward pressure in the event of a downgrade of the 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.

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

The principal applicable methodologies are Rating Supranational Institutions and Rating Sovereign Governments, 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 and the European Investment Bank. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

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

This rating included participation by the rated entity or any related third party. DBRS had no access to relevant internal documents for the rated entity or a related third party.

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.

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

For further information on DBRS historical default rates published by the European Securities and Markets Authority (“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: Nicolas Fintzel, Vice President, Global Sovereign Ratings
Rating Committee Chair: Thomas Torgerson, Senior Vice President, Global Sovereign Ratings
Initial Rating Date: 1 August 2014
Last Rating Date: 29 June 2016

DBRS Ratings Limited
20 Fenchurch Street
31st Floor
London
EC3M 3BY
United Kingdom
Registered in England and Wales: No. 7139960

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