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 are currently the European Investment Bank (EIB or the Bank, rated AAA, Stable by DBRS Morningstar) with 59.4% of the subscribed shares, and the European Union (EU; AAA, Stable) with 30%. Cumulatively, they account for 89.4% 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, and its enhanced strategic importance for its core shareholders as evidenced in the last years.

In February 2021, the EIF's shareholders agreed a 64% capital increase from EUR 4.5 billion to EUR 7.4 billion of total authorised capital (of which 97.5% is currently subscribed). This capital increase put an end to the EIB's temporary counter-guarantee provided to the EIF as a capital bridge in 2020. These two supportive measures are testament to the strong shareholders' commitment to the Fund. This capital increase also strengthens the EIF's capital metrics, allowing it to reach record volumes of activity in 2021 and to mitigate the adverse consequences of the Coronavirus Disease (COVID-19) especially through the implementation of the Pan-European Guarantee Fund (EGF). The EIF was a pillar in the roll-out of the EGF in 2021 which was part of the EU's COVID-19 response and was scaled up to EUR 24.4 billion. The EGF, endorsed by the European Council and secured by member states' guarantees, is supporting up to EUR 200 billion of financing with a focus on small and medium-sized enterprises (SMEs), MidCaps, corporates and public sector companies. Using EUR 11.9 billion of EGF resources, the EIF committed EUR 26.2 billion of financing in 2021, or 86% of its total 2021 signatures which reached a record EUR 30.5 billion in 2021 versus EUR 10.4 billion per year on average during 2016-2020.

RATING DRIVERS

The ratings 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 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 59.4% 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 the EU would exert a dominant influence over the Fund. In addition to its core shareholders – the EIB and the EU – the EIF’s 10.6% 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 very 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 very strong. Total equity was close to EUR 4.0 billion at year-end 2021, of which EUR 1,460 million was paid-in share 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 at this stage in a cash injection of EUR 1.2 billion. The core shareholders have already subscribed and paid for their pro-rata shares. 70 unallocated shares are currently offered to the EIB with the final EIB's decision still pending.

The Fund reported a guarantees' Exposure at Risk (EAR) of EUR 10.9 billion at year-end 2021, compared with EUR 5.5. billion in 2020 and EUR 10.7 billion in 2019. The significant but temporary decrease in 2020 reflected the EIB's counter-guarantee provided to the EIF --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, 2021, of the EUR 10.9 billion guarantees' EAR, 99.5% were investment grade. 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 and 2021 on own risk exposures under securitizations and risk sharing mandates) 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 285 million at year-end 2021 and an additional EUR 2.45 billion in debt investments.

The EIF Benefited from an Increasing Strategic Importance During the COVID-19 Crisis and Will Continue to Play a Key Role in the Implementation of European Union Initiatives

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 the EGF in 2021 and InvestEU from 2022. The key role of the EIF in providing support to SMEs was already underscored by the European Commission, for example through ESFI, the European Fund for Strategic Investments. Under the latter, the EIF was able to 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.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

There were no Environmental/ Social/ Governance factor(s) that had a significant or relevant effect on the credit analysis.

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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

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 EIF’s 2021 financial performance, the EIF’s operational plan for 2022-2024 including the implementation of InvestEU, 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 (17 February 2022)
https://www.dbrsmorningstar.com/research/392578/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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (May 17, 2022).

The sources of information used for this rating include the European Investment Fund’s annual reports from 2017 to 2021, the EIF’s Operational Plan 2022-2024, the EIF’s Register of Members as of 29 December 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.

The conditions that lead to the assignment of a Negative or Positive trend are generally 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: https://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/398547.

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 18, 2021

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