Financial Instruments 2014-2020

Doing more with less

NFOŚiGWLuxembourg-Warsaw, 17 April 2012

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What are EU Financial Instruments?

Equity/risk capital: e.g. venture capital to SMEs with high growth potential or risk capital to infrastructure projects

Guarantees to financial intermediaries that provide lending to e.g. infrastructure projects, SMEs, persons at risk of social exclusion

Other risk-sharing arrangements with financial intermediaries in order to increase the leverage capacity of the EU funds

or a combination of the above with other forms of EU financial assistance (technical assistance, performance based rebates, …)

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EU Financial Instruments: Why?

An appropriate tool in times of budget constrains 3 types of benefits

Multiplier effect – multiplication of scarce budgetary resources by attracting additional finance

Policy impact – financial intermediaries pursue EU policies

Institutional know-how – EU can use the resources and expertise of financial intermediaries

A political priority (Europe 2020 strategy, Communication on a Budget for Europe 2020)

Effective and efficient way to support Europe 2020 objectives of smart, sustainable and inclusive growth

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EU Financial Instruments: When?

Guiding principles include:

1. Addressing sub-optimal investment situations Funding gaps e.g. due to general economic uncertainty, high business/innovation risk, high transaction costs, asymmetric information

2. Ensuring EU value added Effective targeting of policy goalsCatalytic effect on existing similar MS schemes or private

investment, no crowding out

3. Multiplier effect Attracting private investment greater than EU contribution

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Financial Instruments 2007-2013: SMEs & Innovation SME Guarantees (SMEG)

2007-2011: approx. EUR 300m of EU budget generated 9.4bn of lending 155.000 SMEs reached, volumes are increasing fast Target of 315.000 SMEs is attainable

Equity: High Growth and Innovation (GIF) 2007-2011: so far, EUR 344m of EU resources generated EUR 1.9bn of total

investment volume, amounts growing fast. 190 SMEs covered so far

Risk-Sharing Finance Facility (RSFF): EUR 2bn of EU and EIB resources expected to generate over EUR 10bn of

lending to RDI projects. By end 2011 approximately EUR 5bn of lending already disbursed to final beneficiaries. Dedicated RSI facility for SMEs.

European Progress Microfinance Facility (EPMF, est. 2010) by 2020, the EU contribution of EUR 100m is expected to have generated EUR

500m of micro-loans.

Financial Instruments 2007-2013: Transport & Energy Loan Guarantee Facility for TEN-Transport (LGTT, est. 2008)

Conceived to absorb traffic risk during the ramp-up phase EU and EIB share loan loss provisioning EUR 500m of EU budget has generated EUR 12bn of project financing

Marguerite (est. 2010) Equity fund for TEN-T, TEN-E and renewables EUR 710m, of which EU EUR 80m stake EU co-invests with BGK, Caisse des Depots, Cassa Depositi, ICO, EIB and KfW

European Energy Efficiency Fund (EEEF, est. 2011) Mixed fund for debt and equity to energy efficiency investments in municipalities EU invests EUR 125m in first loss piece Co-investors EIB, Cassa Depositi and Deutsche Bank Target size EUR 600-700m 6

Lessons learned

Need for simplified implementation modalities with streamlined rules.

Need for a clear and dedicated legal framework. Increased coherence and consistency between instruments is

necessary. Close coordination with Structural Funds. More can be done to raise visibility and transparency of

instruments. New risk-sharing arrangements could achieve higher finance

volumes. Audits and evaluations carried out of existing innovative

financial instruments are positive regarding their output.

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Next MFF: Simplification and Transparency1. Fewer financial instruments (from 13 to 6)

2. Larger financial instruments ensuring critical mass

3. Minimisation of overlap between instruments

4. Standardised contractual arrangements including management structures, reporting, fees…

5. More transparent to stakeholders

6. Budget: No contingent liabilities

7. Dedicated regulatory framework (Title VIII of the Financial Regulation)

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Financial Instruments included in proposals for 2014-2020 MFF

Research, Development Innovation

Growth, Jobs and Social Cohesion

Infrastructure

Horizon 2020Equity and Risk Sharing Instruments

EUR 3.5bn Instruments under Structural and Cohesion

Funds

EU level

Off-the shelf instruments

Tailor made instruments

Significant higher amounts than currently

Competitiveness & SME (COSME)

Equity & guaranteesEUR 1.4bn

Connecting Europe Facility (CEF)Risk sharing (e.g. project bonds) and equity

instruments

Budget not yet decided

Social Change & Innovation

Micro-finance EUR 192m

Creative EuropeGuarantee Facility

EUR 210m

Erasmus for allGuarantee Facility

EUR 881m

Shared ManagementCentrally managed by COM

Current status and next steps

2011: Commission proposals were adopted

2012: Discussions in Council and Parliament on the legal framework (Financial Regulation, delegated act) as well as on the basic acts for the specific instruments

2013: Expected adoption of legal bases by European Parliament and Council, negotiations with IFIs, preparations for the roll-out

2014: Roll-out, instruments are operational10

Conclusions

Financial instruments Well-tested, efficient and effective way of supporting

growth, jobs and innovation.

Can attract private funding for public policy objectives. Needed in times of limited public resources.

Will play an important role in achieving the Europe 2020 objectives.

Promote best practices.

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MECHANISMS OF FINANCIAL INSTRUMENTS

RSFF provides debt finance to research and development projects through

directly to companies

indirectly through banks

EIB/EU fund in average 20% of the projects, remaining 80% come from banks

This multiplication / leverage is reached through Risk sharing

Risk Sharing Financial Facility

Banks Investors

Final BeneficiariesLow/Sub Investment Grade

EUR 1bnEUR 1bn

Approx. EUR 10bnDebt Financing

Own Resources

EIB (RSFF)2007 - 2013

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Rating enhancement in RSFF RSFF finances sub-investment grade

projects moving them to investment gradeIt makes the project therefore bankable

RSFF loan is subordinated / junior to the bank's loans,means in case of default it is served after the senior bank loan

Moody's S&P and Fitch… …A1 A+A2 AA3 A-

Baa1 BBB+Baa2 BBBBaa3 BBB-Ba1 BB+Ba2 BBBa3 BB-B1 B+B2 BB3 B-

Company's equityCompany's equity

Senior loanSenior loan

Mezzanine finance

Sub invstment grade company

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What is a bond?

Bonds are debt securities paying a fixed interest (coupon)In comparison to other debt they are tradable rated large ticket size interesting for institutional investors

Bonds are issued by: public bodies (sovereign, municipal bonds) Companies Special purpose vehicles

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Objectives

- Increase financing available for large infrastructure

projects

- Establish debt capital markets as a complementary source

of financing

Target areas

• Transport• Energy• Broadband

How?

EU/EIB joint support to project companies

issuing bonds to finance infrastructure projects

Form of support

Debt service guarantee or subordinated loan by EIB to ensure sufficient

rating of the bonds

Result

More private sector financing attracted from the capital markets to

finance key infrastructure projects

Potential investors

Long-term institutional investors – pension funds,

insurance companies

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Europe 2020 Project Bond Initiative

Functioning of the Initiative

Designed to improve (or “enhance”) the rating of the senior debt of the project

Subordinated tranche of debt underwritten by EU and EIB share risk

Subordinated debt maximum 20% of total investment Provides cushion for senior debt service if project risks

materialises Raises rating of the debt to a quality where it will be

attractive to bond investors Longer maturities more appropriate for project lifetime

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Bond Issue and underwriting

SPVProjectCosts

Project Bond

Investor

up to 20% of total Bond issue

Project bond

Target rating > A-

Sub debt 10-20%

Equitye.g. 15%

Sponsors or investors

Functioning of the Initiative

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European Energy Efficiency Fund

Fund (EEE F)• Objective: financing of projects in a local & public context• Scope: Energy efficiency, renewable energy and clean

transport• Commercially managed fund, operating under market

conditions• Debt and equity products, normally not offered by banks

senior loans with long duration ( 15 years) and grace periods

Junior/subordinated loans Leasing Forfeiting of receivables (quasi-)equity participation in special purpose vehicles

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Leasing and Forfaiting in EE

Examples of off-balance sheet financing for public bodies under constrains of borrowingLeasing Leasing of resellable installations like CHP installations, PV

modulesOrganised similar 'to sale and lease back' Forfaiting for ESCOs ESCO face high up-front capital demand and long pay-back

period ESCO can sell major share of future receivables at

discounted rate after agreed milestones of investment Energy performance contract as colateral for forfaiting loan

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Structured Fund

The eeef is a dedicated investment vehicle founded as an Investment Fund with variable capital (SICAV)In the eeef the EU takes the first loss piece to attract other public and private investors.

Public banks & institutional investors

Public financial institutions

Junior/FLP - C Shares €Junior/FLP - C Shares €

Mezzanine - B SharesMezzanine - B Shares

Senior – A SharesSenior – A Shares

Notes (debt)Notes (debt)

EU

EIB, CDP, Deutsche Bank

Size at first closing€ 265m

TargetUp to € 700m

EU

Institutional investors

EIB, CDP

€ 125m

€ 23m

€ 117m

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European Energy Efficiency Fund

Technical Assistance Volume € 20m provided by EU grants for project development cost – exclusively for

projects financed by the Fund Managed by fund manager Deutsche Bank at 'arm's length'

to eeef

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Thank you

General information on innovative financial instruments:

http://ec.europa.eu/economy_finance/financial_operations/investment/innovative_financial_instruments/index_en.htm

ANNEX

EU financial instruments old and new

EQUITY INSTRUMENT FOR SMEs 2014-2020

EU Equity FinancialInstrument for EU enterprises’ growth and RDI

Equity Instruments for Research and Innovation - Investments in early stage funds or funds-of-funds that invest in intellectual property, technology transfer or venture capital - No exact allocation yet, up to 1/3 of EUR 3.5bn to be allocated to this facility and the RSI II facility for SMEs

Horizon 2020

Equity Facility for Growth Investments in expansion stage funds or funds-of-

funds that invest in venture capital indicatively EUR 690m

COSME

EQUITY INSTRUMENT FOR SMEs 2007-2013

High Growth and Innovative SME Facility (GIF) under the Competitiveness and Innovation Framework Programme (CIP) – approx. EUR 600m

GIF 1 – invests in seed, start-up and early-stage SMEs GIF 2 – invests in expansion-stage SMEs

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DEBT INSTRUMENT FOR SMEs 2014-2020

Debt Instrument for EU Enterprises’ Growth and RDI

Loan Guarantee Facility Guarantees and securitisation on loans up to EUR 150,000 Indicatively EUR 746m

COSME

RSI-II Facility Guarantees for R&I SMEs on loans above EUR 150,000 No exact allocation yet, up to 1/3 of EUR 3.5bn to be

allocated to this facility and equity instrument for R&I

Horizon 2020

Cultural and Creative Sectors Facility (new) Guarantees for loans to creative and cultural entities EUR 210m

Creative Europe

DEBT INSTRUMENT FOR SMEs 2007-2013

SME Guarantee Facility (SMEG) under the Competitiveness and Innovation Framework Programme (CIP) – approx. EUR 500m

Risk Sharing Instrument (RSI): A dedicated compartment for SMEs under the Risk Sharing Finance Facility, created in 2011 – EUR 120m

EU financial instruments old and new

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DEBT INSTRUMENT FOR LARGE R&I PROJECTS 2014-2020

Loan & Guarantee Service for Research and Innovation

Loans and guarantees to R&I (non-SMEs)

No exact allocation yet (possibly approx. 2/3 of EUR 3.5bn)

Horizon 2020

DEBT INSTRUMENT FOR LARGE R&D PROJECTS 2007-2013

Risk Sharing Finance Facility (RSFF) under FP7 provides loans and guarantees to R&D projects EU budgetary allocation to large projects and research infrastructures (excluding

the SME compartment) approx. EUR 900m

EU financial instruments old and new

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EQUITY AND DEBT INSTRUMENT FOR THE SOCIAL ECONOMY 2014-2020

Micro-finance and social entrepreneurship instrument

Guarantees, micro-credit, equity and quasi-equity to financial institutions that invest or lend to entrepreneurs, especially those furthest from the labour market, and social enterprises.

Proposed EU budgetary contribution Access to microfinance EUR 87m Social enterprise development EUR 96m Capacity building EUR 9m

Social Change and Innovation

EU financial instruments old and newEQUITY AND DEBT INSTRUMENT FOR THE SOCIAL ECONOMY 2007-2013

European Progress Microfinance Facility (EPMF, est. 2010) Guarantees and counter-guarantees for microcredit lending Loans or Equity to microcredit institutions EU Budgetary contribution EUR 100m

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DEBT INSTRUMENT FOR STUDENTS

Student Loan Guarantee Facility

• Guarantees for student loans• EUR 881m

Erasmus for All

EU financial instruments old and new

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EQUITY AND DEBT INSTRUMENT FOR INFRASTRUCTURE

Infrastructure financial instruments (incl. Project Bonds initiative)

Equity instruments, such as investment funds with a focus on providing risk capital for actions contributing to projects of common interest;

Loans and/or guarantees facilitated by risk-sharing instruments, including enhancement mechanism to project bonds, issued by a financial institution on its own resources;

Thematic coverage: TEN-T, TEN-E and broadband

Any other financial instruments. Exact budget not yet specified

Connecting Europe Facility

INSTRUMENTS FOR INFRASTRUCTURE 2007-2013

Loan Guarantee Facility for TEN-Transport (LGTT, est. 2008) EUR 500m of EU budget has generated EUR 12bn of project financing

Pilot phase for project bonds EUR 230m budget for 2012-13, currently being examined by Financial

Counsellors and EP Budget Committee

EU financial instruments old and new

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COHESION POLICY 2007-2013

Currently approx. 5% of ERDF delivered through financial instruments

COHESION POLICY 2014-2020 In 20014-2020 use of financial instruments in cohesion policy will expand to all thematic

objectives and priorities foreseen by operational programmes, provided that economic viability of final recipients / repayment capacity of projects is demonstrated

Combination of financial instruments and support, e.g. grants, will be strengthened.

CSF funds may contribute to support financial instruments set up at Union level managed directly/indirectly by COM in line with FR. OP contribution to be ring-fenced for investments in regions and actions covered by OP

Cohesion Fund will for the first time be open to financial instruments

Volume of ERDF resources that could potentially be delivered through financial instruments could increase up to three times

EU financial instruments old and new

Legal ArchitectureHorizontal legal framework Sector rules

Norm Content Basic act

FR Title VIII

(EP/Council Regulation)

Definitions, management modes, principles and conditions, limitation of liability, reflows, control, reporting, etc.

Contains a general authorisation the use of a financial instrument. May define type, duration, specific features or targets of the instrument envisaged.

 

The basic act may identify a specific entity entrusted with the implementation of the instrument

Rules of Application

(delegated act)

The delegated act is expected to supplement the FR in the following areas: combination of support, rules for direct/ indirect management, rules for fiduciary accounts, ex ante evaluation, management fees, etc.

Operational requirements (equity and debt platforms):

A standard set of rules, provisions and templates, including homogeneous detailed provisions on governance, monitoring, , financial parameters, delivery modes, rules for dedicated investment vehicles (DIV), etc.

Agreements with entrusted entities

Contractual conditions under which the Commission entrusts the implementation of a financial instrument to a financial institution in line with the above rules

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