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

DBRS Ratings GmbH (Morningstar DBRS) 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 trends on both ratings are Stable.

KEY CREDIT RATING CONSIDERATIONS
Morningstar DBRS rates the EIF on the basis of both the Support and the Intrinsic Assessments. The credit 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 with a Stable trend by Morningstar DBRS) with 59.7% of the subscribed shares, and the European Union (EU; AAA, Stable) with 29.7%. Cumulatively, they account for 89.4% of the Fund's subscribed capital. In Morningstar DBRS' 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, its enhanced strategic importance for its core shareholders as evidenced in the last years, as well as the continuous strengthening of its operational cooperation with the EIB along with convergence with the Bank in terms of public policy goals, especially on climate change.

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. 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 latest supportive measures are testament to the shareholders' strong commitment to the Fund. This capital increase also strengthened the EIF's capital metrics, allowing it to reach record volumes of activity in 2021 through the implementation of the Pan-European Guarantee Fund (EGF). It also offers the EIF the financial capacity to support the implementation of InvestEU since 2022 and various EU sovereignty initiatives since 2023, such as REPower and the European Tech Champions Initiative (ETCI).

CREDIT RATING DRIVERS
The credit 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.

CREDIT 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 59.7% 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 Morningstar 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 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 39 banks and financial institutions located in 21 countries of which 19 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 debt outstanding, and all of its obligations are from (i) potential disbursements to private equity fund managers, and (ii) potential guarantee calls from beneficiaries. As part of the InvestEU programme, a tripartite agreement has been signed between the EIF, the EIB, and the EU including a funding agreement of EUR 8.5 billion, consisting of an intra-group loan provided by the EIB to the EIF solely directed to fund InvestEU operations. The risk exposure of the EIF related to this loan is limited given that it will be reimbursed with the proceeds received by the EIF stemming from InvestEU investments and the amounts called by the EIF on the EU guarantee under InvestEU.

The EIF's capital position is very strong. Total equity was close to EUR 4.6 billion at year-end 2023, of which EUR 1,474 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.

The Fund reported a guarantees' Exposure at Risk (EAR) of EUR 9 billion at year-end 2023, compared with EUR 9.5 billion in 2022. As of December 31, 2023, of the EUR 9 billion guarantees' EAR and based on the EIF's internal rating approach, 99.8% 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 also mitigates this risk. There were no guarantee calls during 2020-2022 on own risk exposures under securitizations and risk sharing mandates and a very limited call in 2023, which was finally fully recovered. Morningstar 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 814 million at year-end 2023 and an additional EUR 2.35 billion in debt investments in its Treasury portfolio.

The EIF Benefited from an Increasing Strategic Importance During the COVID-19 Crisis and Continues to Play a Key Role With the Implementation of European Union Initiatives including InvestEU, REPowerEU and ETCI

The Intrinsic Assessment of the EIF benefits from an increasingly important franchise in recent years, deemed very strong and 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, InvestEU since 2022 and two new EU sovereignty initiatives since 2023 with REPowerEU and ETCI. Given its front-loading nature, the InvestEU program, successor to the European Fund for Strategic Investments (EFSI), is playing a key role in the EIF's activity since 2022 and is expected to account for more than 40% of the EIF's activity in 2024. The key role of the EIF in providing support to SMEs was already underscored by the European Commission through EFSI. 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.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS

Environmental (E) Factors
There were no Environmental factors that had a relevant or significant effect on the credit analysis.

Social (S) Factors
There were no Social factors that had a relevant or significant effect on the credit analysis.

Governance (G) Factors
There were no Governance factors that had a relevant or significant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (23 January 2024) https://dbrs.morningstar.com/research/427030/morningstar-dbrs-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 EIF's 2023 financial performance, the EIF's operational plan for 2024-2026 including the implementation of InvestEU, REPowerEU and ETCI, 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 methodology is the "Global Methodology for Rating Supranational Institutions" (16 February 2024) https://dbrs.morningstar.com/research/428245/global-methodology-for-rating-supranational-institutions. In addition Morningstar DBRS uses the "Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings" https://dbrs.morningstar.com/research/427030/morningstar-dbrs-criteria:-approach-to-environmental,-social,-and-governance-risk-factors-in-credit-ratings in its consideration of ESG factors.

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

The sources of information used for this credit rating include the presentation and other analytical information provided by the EIF, the EIF's annual reports from 2019 to 2023, the EIF's Operational Plan 2024-2026, the EIF's annual activity report of the audit board for the 2023 financial year, the EIF's Register of Members as of 4th March 2024 and the EIF's Environmental, Social and Corporate Governance Principles. Morningstar DBRS considers the information available to it for the purposes of providing this credit 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: YES
With Access to Management: NO

Morningstar DBRS does not audit the information it receives in connection with the credit 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. Morningstar DBRS' outlooks and credit ratings are under regular surveillance.

For further information on Morningstar DBRS historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://registers.esma.europa.eu/cerep-publication. For further information on Morningstar DBRS historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

The sensitivity analysis of the relevant key credit rating assumptions can be found at: https://www.dbrsmorningstar.com/research/434514.

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

Lead Analyst: Mehdi Fadli, Senior Vice President, Sector Lead, Global Sovereign Ratings
Rating Committee Chair: Thomas R. Torgerson, Managing Director, Global Sovereign Ratings
Initial Rating Date: August 1, 2014
Last Rating Date: June 16, 2023

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