DBRS Morningstar Confirms the European Investment Fund at AAA, Stable Trend

DBRS Ratings GmbH (DBRS Morningstar) 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 Morningstar 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 needed. The EIF’s core shareholders are the European Investment Bank (EIB or the Bank, rated AAA, Stable by DBRS Morningstar) with 58.5% of the issued shares at the end of 2019, and the European Union (EU; AAA, Stable) with 29.7%. Cumulatively, they account for 88.2% of the Fund’s subscribed capital. In DBRS Morningstar'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 a result of its strong fundamentals.

Following the United Kingdom (U.K.; AAA, Negative) decision to leave the EU, DBRS Morningstar points out that the EIF’s shareholding structure has remained unaffected. In addition, DBRS Morningstar views positively the replacement of the U.K's subscribed capital in the EIB's balance sheet by the remaining 27 member states, as it reinforced their commitment to the Bank, core shareholder of the Fund.

The recent Coronavirus Disease (COVID-19) outbreak, together with its large scale economic impact is likely to affect the Fund's risk profile in coming years. Nevertheless, DBRS Morningstar considers that the EIF's strong capital position, as well as its sound liquidity and risk management practices should help mitigate the adverse consequences of the pandemic on its overall financial performance. In addition, DBRS Morningstar continues to expect that the EIB and the EU, as core shareholders of the Fund, would provide timely support to the EIF, if ever necessary.

RATING DRIVERS
The rating could be downgraded if one or a combination of the following occur: (1) there is a downgrade of the EIF’s core shareholders; (2) the EIF’s core shareholders commitment to the institution weakens; or (3) there is 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.

RATING RATIONALE

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. 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 Morningstar 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 34 banks and financial institutions located in 18 countries of which 16 are EU members.

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

The EIF’s Intrinsic Assessment of AAA is based on its very strong franchise and liquidity, a strong capital position, 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 position is strong. Total equity was close to EUR 2.0 billion at year-end 2019, of which EUR 900 million was paid-in capital. The Fund’s equity base was strengthened in 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 2019.

The Fund reported a total Exposure at Risk of EUR 10.7 billion at year-end 2019, rapidly increasing from EUR 8.5 billion in 2018 and EUR 6.7 billion in 2017. Despite this marked increase, DBRS Morningstar continues to view positively the fact that 99% of these exposures remained investment grade at the end of 2019, although concentrated in the BBB-range. In addition, the track record of low impairments, manageable capital calls derived from private equity investments, as well as the reduced amount of guarantee calls also mitigates this risk. DBRS Morningstar 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 242 million at year-end 2019 and an additional EUR 1.24 billion in debt investments.

The EIF Benefits from an Increasingly Important Franchise, Recently Reinforced by its Role in Tackling the Coronavirus Crisis

The EIF benefits from a very strong franchise, in line with the rise in the size of the Fund's operations. The Fund is part of the EU policy response to the consequences of the global financial crisis and more recently to the Coronavirus Disease (COVID-19). The key role of the EIF in providing support to SMEs’ was repeatedly underscored by the European Commission’s (EC), being through its participation in the Investment Plan for Europe launched in 2015 or as a key institution to implement and deliver the EU response to the coronavirus pandemic. Under the Plan for Europe which aims at mobilising EUR 500 billion of new investments by the end of 2020 through the European Fund for Strategic Investments (EFSI), a specific SME Window of EUR 10.5 billion of guarantees is being implemented by the EIF. While the SME window was initially expected to bolster investments with a ratio of 1 to 15, this ratio has been markedly higher to-date, standing at close to 23 times. Therefore, at the end of 2019, EUR 8.2 billion had already been deployed, leveraging around EUR 186.3 billion of financing.

More recently, the EIF's role in the EU's COVID-19 response was based on EUR 1 billion unlocked from the EFSI under existing programmes to leverage up to EUR 8 billion in available financing for 100,000 European SMEs. DBRS Morningstar views positively the greater role played by the EIF in supporting European SMEs and still considers that most of the risks associated with the SME Window remain primarily borne by the EU through a guarantee as well as the EIB’s own resources. DBRS Morningstar will continue to closely monitor the credit risk profile of the Fund for any indication of a marked deterioration, either due to its higher risk activities or because of the economic impact of the COVID-19 pandemic.

ESG CONSIDERATIONS

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792

RATING COMMITTEE SUMMARY

The main points discussed during the Rating Committee include the role of the EIF in supporting SMEs during the COVID-19 outbreak, the potential impact of the pandemic on the Fund’s operations, the EIF’s risk profile and the EIF’s core shareholders commitment to the institution.

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

The principal methodology is the Global Methodology for Rating Supranational Institutions (3 March 2020) https://www.dbrsmorningstar.com/research/357589/global-methodology-for-rating-supranational-institutions.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883

The sources of information used for this rating include the European Investment Fund’s annual reports from 2015 to 2019, the 2019 annual report from the European Investment Bank and the latest EIB’s Investor Presentation (June 2020). DBRS Morningstar considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

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

With Rated Entity or Related Third Party Participation: YES
With Access to Internal Documents: NO
With Access to Management: NO

DBRS Morningstar 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 12-month period. DBRS Morningstar’s outlooks and ratings are under regular surveillance.

For further information on DBRS Morningstar 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.

The sensitivity analysis of the relevant key rating assumptions can be found at: https://www.dbrsmorningstar.com/research/362881

Ratings assigned by DBRS Ratings GmbH are subject to EU and U.S. regulations only.

Lead Analyst: Nicolas Fintzel, Vice President, Global Sovereign Ratings
Rating Committee Chair: Roger Lister, Managing Director, Chief Credit Officer, Global Financial Institutions and Sovereign Ratings Group
Initial Rating Date: August 1, 2014
Last Rating Date: June 21, 2019

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