DBRS Confirms the European Investment Fund at AAA, Stable Trend

DBRS Ratings Limited (DBRS) 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.

KEY RATING CONSIDERATIONS

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 58.5% of the issued shares at the end of 2017, and the European Union (EU; AAA, Stable) with 29.7%. Cumulatively, they account for 88.2% 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.

RATING DRIVERS

The ratings could face downward pressure as a result of a downgrade in the Support Assessment. This could materialise 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.

While the ratings are more resilient to a deterioration in the Intrinsic Assessment, DBRS could lower this assessment if there is evidence of a loss of the Fund’s preferred creditor status on its 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 Fund’s Intrinsic Assessment.

RATING RATIONALE

The UK’s Departure of the EU is Unlikely to Disrupt the EIF’s Capital Structure

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. On 19 March 2018, the draft agreement on the withdrawal of the UK from the EU was published. The document foresees that the EU will be liable to the UK for its share of the EU’s investment in the paid-in capital of the EIF in 5 equal annual instalments to be paid from 30 June 2021. DBRS highlights that these repayments will not disrupt the EIF’s capital structure. DBRS also views positively that the UK will remain liable for its share of EIF’s operations over an extended period of time, in line with its liabilities with the EIB.

Support Assessment Ultimately Reflects the EIB’s Influence in the Fund

The Fund is the main EU policy vehicle for the financing of small and medium-sized enterprises (SMEs) in Europe. Its governance is intrinsically linked to its parent, the EIB, and by extension to the core EU member states. Indeed, the Bank, with 58.5% 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 and its core shareholders would exert a dominant influence in the Fund. In addition to its core shareholders –the EIB and the EU– the EIF’s 11.8% remaining capital is held by 32 banks and financial institutions located in 17 EU countries and Turkey.

Sound Capital and Liquidity Position Support the Fund’s Intrinsic Assessment

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 EIF’s capital is very strong. Total equity was close to EUR 2.0 billion at year-end 2017, of which EUR 900 million was paid-in capital. 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, all of them having been issued at the end of 2017.

The Fund reported a total Exposure at Risk of EUR 6.7 billion at year-end 2017 (EUR 5.2 billion in 2016). Despite this 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 284 million at year-end 2017 and an additional EUR 1.25 billion in debt holdings and other fixed income securities; 30% of which from EU sovereigns. As the EIF’s sovereign debt holdings did not face a haircut during the 2012 Greek debt exchange, DBRS assumes 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. 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 initially aimed to mobilise EUR 315 billion of new investments by mid-2018 through the European Fund for Strategic Investments (EFSI).

The EFSI was extended into an EFSI 2.0 in January 2018, aiming to mobilise a total of EUR 500 billion by 2020. Under the EFSI 2.0, a specific SME Window (EUR 10.5 billion of guarantees which could be increased up to EUR 13 billion) has to be implemented via the EIF. The SME window is expected to leverage private investments with a ratio of 1 to 15. At the end of 2017, around EUR 90 billion (57% of the EUR 157.5 billion overall investments expected to be mobilised via the EIF) had already been leveraged. 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.

Despite These Strengths, the EIF Faces Several Challenges

Following the UK vote to leave the EU, the draft withdrawal agreement, although it does not foresee disruption for the EIF’s capital base, still needs to be formally approved by all parties. 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 efficiently the rapid expansion of the balance sheet while maintaining a sound risk profile could prove challenging for the EIF going forward.

RATING COMMITTEE SUMMARY

The main points discussed during the Rating Committee include: impact of the UK’s departure on the EIF’s capital, the EIF’s risk profile and the EIF’s core shareholders’ commitment to the institution.

Notes:
All figures are in Euros unless otherwise noted.

The principal applicable methodology is Rating Supranational Institutions, which can be found on the DBRS website www.dbrs.com at http://www.dbrs.com/about/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 at http://www.dbrs.com/ratingPolicies/list/name/rating+scales.
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 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 and US regulations only.

Lead Analyst: Nicolas Fintzel, Vice President, Global Sovereign Ratings
Rating Committee Chair: Thomas Torgerson, Co-Head of Sovereign Ratings, Global Sovereign Ratings
Initial Rating Date: 1 August 2014
Last Rating Date: 28 June 2017

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