1

Portuguese Mutual

Guarantee Scheme

key issues

Rural Credit Guarantee SchemesA Financial Instrument for Agriculture and

Rural Development

AVHGA – FAO - AECM

Budapest, 12 and 13 January 2006

José Fernando FigueiredoCEOVice-President of AECM – European Mutual

Guarantee AssociationFounder Member of REGAR – Latin-American

Guarantees and SME Financing Network

2

Corporate Mission

Support SME access to finance (filling a market gap):

Reducing size difficultiesReducing collateral needsReaching better interest rates

Improvement of SME’s financial structure

Increase of SME’s financial credibility

SME are the focus of the Guarantee Scheme

Portuguese Mutual Guarantee Schemekey issues

3

Main Players

SPGM (the “holding” of the Scheme)

Mutual Guarantee Societies (MGS) (the guarantees issuers)

Counter Guarantee Fund - FCGM (partially covers the MGS risks)

Portuguese Mutual Guarantee Schemekey issues

FCGMFundo de Contragarantia Mútuo

4

Legal Framework

MGS as private credit institutions: - benefit to banks within Basle rules, lowering required capital

weighting of guaranteed loan portfolio to 20%

Minimum MGS share capital: € 2 500 000(presently each MGS has € 6 million share capital the majority held by private SME, Chambers of Commerce and commercial banks)

Minimum mutual participation:- MGS with an initial mutual participation of 25% to be increased up to 50% after 3 years of activity

Public participation in the scheme : - counter guarantee mechanism (FCGM) defined by law

- supporting establishment and growing of new MGS (in both situations by using structural funds programmes for Portugal and, later, EIF support under MAP, to get 3rd level coverage)

Portuguese Mutual Guarantee Schemekey issues

5

SPGM

Established in 1994 to act as a pilot-MGS with the aim of creating a private Guarantee Scheme (mutual)

Legally is a credit institution (“sociedade de investimento”)

Main shareholders:

National SME Agencies (IAPMEI, ITP) Largest private banks (BPI, BES, MilleniumBCP, BTA)

Small and Medium Enterprises (around 500 SME´s as by 31 Dec. 2002, the end of the pilot-project, that have been transferred to the new MGS)

Portuguese Mutual Guarantee Schemekey issues

6

Scheme Development

From the end 2002, establishment of “regional”MGS:

NORGARANTE MGS in the north

LISGARANTE MGS in the south and Madeira Island

(these first two through a splitting process of the pilot activities of SPGM)

GARVAL MGS in the centre and Azores Islands (already as local private initiative supported by SPGM)

AGROGARANTE MGS national level, acting specifically for agro industries (again an initiative of public Agriculture authorities with the support of FEOGA programmes for Portugal but respecting the legislation on private management and minimum share capital from mutual SME. At the same time it will be under FCGM coverage using special capital endowment to the fund made for that purpose by public authorities)

Portuguese Mutual Guarantee Schemekey issues

7

Counter Guarantee Fund (FCGM)

Current capital amount: subscribed € 109 million, disbursed € 87 million (it will be reinforced with an additional € 15 million for the counter guarantee coverage of AGROGARANTE MGS guarantees)

- Second layer guarantee

- Usual counter guarantee between 50% and 75% of MGS guarantee amount (average around 60%)

- EIF gives the fund a third layer guarantee under specific circumstances (EIF coverage helps FCGM to raise its counter guarantee on MLT investment loans to SME under 100 workers)

Portuguese Mutual Guarantee Schemekey issues

8

Strategic View

COUNTER

GUARANTEE

FUND

(FCGM)

Mutual Guarantee Societies (MGS)

-NORGARANTE

- LISGARANTE

- GARVAL

- AGROGARANTE

Banks and other guarantee

beneficiaries

SME

Automatic Counter Guarantee

Counter Guarantee fees

Guarantees

MGS shares - mutualism

Guaranteed loans

Counter Guarantee Counter Guarantee --held by public entities held by public entities

Mutual Guarantee Societies Mutual Guarantee Societies --mainly privately heldmainly privately held

SPGMScheme “holding”

- Counter Guarantee Fund Management- Portuguese Mutual Guarantee Scheme development and

marketing (“umbrella”)- Several Back-Office services to Mutual Guarantee Societies- First level control of the Scheme- Minority Participations in the MGS share capital

Guarantee fees

Interest

and loan repayments

Portuguese Mutual Guarantee Schemekey issues

All MGS apply a homogeneous credit assessment, according to principles and rules discussed and approved by all entities of the scheme

EIF

9

Present Operational Situation of the Scheme

Mutual Guarantee Societies (MGS)- Local and Direct Marketing- Deal Flow Origination - Bank channelling- Risk Assessment- Guarantee decisions and Issuing- Monitoring- First steps on recovering procedures- Risk management of its portfolio- Development of small branches network on main district

Counter Guarantee Fund (FCGM)- Automatic counter guarantee - Agreements with EIF for third layer coverage

SPGM (the “holding”)- Manages the counter guarantee fund- Acts as Shared Services Centre to all MGS (back office)- Strategic unit for global product development and procedures- Global Marketing of the product “mutual guarantee”- Institutional relations and international representation- Minority participations in the MGS share capital

Portuguese Mutual Guarantee Schemekey issues

10

Accumulated Guarantee Commitments

Portuguese Mutual Guarantee Schemekey issues

3 13 2367

134167

206

260

391

556

856

1 6 13 24 4289

120156

201

254

374

574

43

050

100150200250300350400450500550600650700750800850900950

1.000

mill

ion

eu

ros

MGSSPGM

Issuedapproved

11

Leverage Effects (data of August 2005)

Portuguese Mutual Guarantee Schemekey issues

SME financing supported ; 800

SME investment induced; 1 100

issued guarantees; 309

issued counter guarantees; 193

total equity in the scheme (public +

private); 108

public investment; 94

nº mutual SME: almost 1500

jobs created or sustained: + de 55 thousand

12

MGS Other Main Characteristics

MUTUALISM:• share purchase = minimum 3% of guarantee value

INDUSTRY COVERAGE: • manufacturing, trade, tourism, services and construction & building• with AGROGARANTE MGS, also agriculture and related industries

COLLATERAL POLICY: • as a rule, no real collateral are requested;• often established some conditions such as:

- negative pledge- ownership commitment- cross-default - promissory notes

Portuguese Mutual Guarantee Schemekey issues

13

Typical Operations

Guarantees associated to:

Long Term bank loans (normally related to investment)

Short Term loans

Technical Duties (like good quality of supplies)

Good payment on long term contracts (like commodities or rentals)

Leasing financing

Bond issues

Public subvention anticipation

Tax duties

As a rule, guarantees associated to anySME contractual duty

Portuguese Mutual Guarantee Schemekey issues

14

As a conclusion, strong points

- Support SME access to finance at low cost levels

- For banks, lower banking own funds requirements (within solvency rules) and lower provisions on credit risks

- Strict risk assumption (as a consequence, low default rate)

- High flexibility to adapt to most SME´s needs

- Extensive industry coverage - Adequate Fee policy and public (national – FCGM and

european – EU/EIF) counter guarantee coverage assure long term sustainability of the scheme

Portuguese Mutual Guarantee Schemekey issues

15

Marketing activities

16

Thank You very much

FCGMMutual Counter Guarantee Fund

Vice-President of AECM – European Mutual Guarantee AssociationFounder Member of REGAR – Ibero-American Guarantees and SME Financing Network