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 Short-Term Issuer Rating at R-1 (high). The trend on both ratings remains 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 as of 1 June 2021 are the European Investment Bank (EIB or the Bank, rated AAA, Stable by DBRS Morningstar) with 61.3% of the subscribed shares, and the European Union (EU; AAA, Stable) with 30.9%. Cumulatively, they account for 92.2% 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 institutional and financial fundamentals.

In February 2021, the EIF's shareholders decided a 64% capital increase to EUR 7.4 billion of total authorised capital (EUR 7.1 billion subscribed as of 1 June 2021) from EUR 4.5 billion. This capital increase puts an end to the temporary EIB's counter-guarantee provided to the EIF in 2020. Those two supportive measures testify for the strong shareholders' commitment to the Fund. This capital increase will allow the EIF to play a key role in the implementation of the InvestEU programme starting from 2021, successor of the European Fund for Strategic Investments (EFSI), which aims to mobilise more than EUR 370 billion of public and private investment through an EU budget guarantee of €26.2 billion over 2021-2027. This capital increase also strengthens the EIF's capital metrics which will allow it to deploy its increased activity and to fight the consequences of the Coronavirus Disease (COVID-19) under the Pan-European Guarantee Fund (EGF). The EIF is a pillar in the roll-out of the EGF which is part of the EU's COVID-19 response and is scaled at up to EUR 25 billion, of which half is expected to be dedicated to the EIF. The EGF, endorsed by the European Council and secured by member states' guarantees, is expected to support up to EUR 200 billion of financing with a focus on SMEs, MidCaps, corporates and public sector companies.

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 61.3% 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 over the Fund. In addition to its core shareholders –the EIB and the EU – the EIF’s 7.8% remaining capital is held by 38 banks and financial institutions located in 20 countries of which 18 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 2020, of which EUR 900 million was paid-in capital. The Fund’s equity base was strengthened in February 2021, bringing total authorised capital to EUR 7.4 billion, divided into 7,370 shares of EUR 1 million each. This capital increase translated into an increase of EUR 2.3 billion in callable capital, EUR 0.6 billion in paid-in capital and EUR 0.7 billion in share premium, resulting in a cash injection of EUR 1.25 billion. The core shareholders have already subscribed and paid for their pro-rata shares.

The Fund reported a guarantees' Exposure at Risk (EAR) of EUR 5.5 billion at year-end 2020, compared with EUR 10.7 billion in 2019. This significant but temporary decrease reflected the EIB's counter-guarantee provided to the EIF in 2020 --until the capital increase materialised-- and covered a portion of the credit risk and potential losses associated with the EIF's portfolio. As of December 31, 2020, the exposure transferred from the EIF to the EIB related to this counter-guarantee amounted to EUR 7 billion. On the EUR 5.5 billion remaining as guarantees' EAR, 98% of these exposures remained investment grade at the end of 2020. In addition, the track record of low impairments, manageable capital calls derived from private equity investments, as well as the limited amount of guarantee calls (no guarantee calls in 2020) 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 228 million at year-end 2020 and an additional EUR 1.24 billion in debt investments.

The EIF Benefits from an Increasingly Important Franchise, With a Key Role in Implementing European Union Initiatives and in Tackling the COVID-19 Crisis

The Intrinsic Assessment of the EIF benefits from an increasingly important franchise, deemed very strong, in line with the rise in the size of the Fund's operations and its key role in the implementation of InvestEU and the EGF. The key role of the EIF in providing support to SMEs was already underscored by the European Commission, for example through ESFI. Under the latter, the EIF was able deploy EUR 10.75 billion of guarantees leveraging up to EUR 232 billion investments for almost 1.5 million SMEs.

No Material Impact on the EIF’s Financials from the Brexit Confirmed

Following the United Kingdom (U.K.; (AA high), Stable) 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.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

For more information on the Rating Committee decision, please see the Scorecard Indicators and Building Block Assessments.

DBRS Morningstar notes that this Press Release was amended on July 6, 2021 to incorporate the disclosure for currency used.

Notes:
All figures are in EUR unless otherwise noted.

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 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. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings https://www.dbrsmorningstar.com/research/373262/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (February 3, 2021).

The sources of information used for this rating include the European Investment Fund’s annual reports from 2016 to 2020, the EIB’s Group Climate Bank Roadmap 2021-2025, the EIF’s Operational Plan 2021-2023, the EIF’s Register of Members as of 1 June 2021 and the EIF’s Environmental, Social and Corporate Governance Principles. DBRS Morningstar considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

With respect to FCA and ESMA regulations in the United Kingdom and European Union, respectively, this is an unsolicited credit 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. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.

The sensitivity analysis of the relevant key rating assumptions can be found at: https://www.dbrsmorningstar.com/research/380321.

This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Mehdi Fadli, Vice President, Global Sovereign Ratings
Rating Committee Chair: Thomas R. Torgerson, Managing Director, Co-Head Global Sovereign Ratings
Initial Rating Date: August 1, 2014
Last Rating Date: June 19, 2020

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