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Standard & Poors European Investment Fund Primary Credit Analyst: Alexander Ekbom, Stockholm + 46 84 40 5911; [email protected] Secondary Contact: Regina Argenio, Milan + 39 0272111208; [email protected] Table Of Contents Ratings Score Snapshot Outlook Rationale Environmental, Social, And Governance (ESG) Enterprise Risk Profile: Strong Record of Fulfilling Its Mandate Financial Risk Profile: Robust Capitalization And Liquidity Profile Extraordinary Shareholder Support Group Support Ratings Score Snapshot Related Criteria WWW.STANDARDANDPOORS.COM/RATINGSDIRECT APRIL 21, 2021 1 European Investment Fund Ratings Score Snapshot Issuer Credit Rating Foreign Currency AAA/Stable/A-1+ Outlook The stable outlook on the European Investment Fund (EIF) mirrors that on the European Investment Bank (EIB) group, which we assume will remain the main policy bank for the EU. This is because we expect the EIB to support the EIF under any foreseeable circumstances. The outlook on the EIB reflects our expectation that the institution's preferred creditor treatment (PCT), alongside its comprehensive use of risk mitigation frameworks, will ensure its overall asset quality remains excellent amid the currently elevated uncertainty surrounding borrowers' repayment behaviors stemming from the COVID-19 pandemic. Our outlook assumes a very strong financial profile with the EIB's risk-adjusted capital (RAC) ratio comfortably above 15%, a healthy liquidity position, and uninterrupted access to low-cost capital market financing. Downside scenario We could lower the ratings on the EIF if we lowered our ratings on the EIB in the next 24 months. Although very unlikely, our ratings on the EIB could come under pressure if its mandate fulfilment was curtailed by constrained financial resources, with asset quality significantly deteriorating such that its PCT was in doubt. However, its robust financial profile is underpinned by available callable capital that could mitigate a very large drop in intrinsic capital levels. Therefore, an unlikely significant drop in liquidity or interrupted market access would be more likely to trigger downward rating pressure. We could also consider lowering the ratings on the EIF if its two main shareholders--the EIB and the EU--no longer WWW.STANDARDANDPOORS.COM/RATINGSDIRECT APRIL 21, 2021 2 European Investment Fund saw the EIF as integral to their strategy. We also see this scenario as remote. Rationale The EIF has a strong link to its main shareholder, the EIB (which owns 69.9% of the EIF), in implementing the EU's strategy with regard to small and midsize enterprises (SMEs). As such, the ratings reflect our view that the EIF will continue to receive extraordinary support from the EIB. The EIF has a unique role and mandate within the EU strategy, albeit with a niche focus. Indeed, the EIF represents the most important platform for SME projects from the EU budget, providing specialized expertise in SME financing while ensuring effective use of budget resources. Importantly, the EIF has played a crucial role in delivering the EIB's response to the COVID-19-related economic slump. The latter will lead the EIF disbursement agenda for 2021, with many initiatives engineered to provide financial support to the hard-hit SME sector. We expect the EIF's main shareholders, the EIB and the EU, to remain firmly committed to the fund's mandate and operations. Although the EIF has some private sector shareholding and usually distributes dividends, we believe this does not have a material effect on its governance effectiveness. We think the EIF's capitalization will remain a credit strength. We anticipate that the RAC ratio after diversification will remain above 23% once factoring in the recent capital increase of about €743 million, the future capital injection, and the robust credit risk mitigants provided by the European Commission (EC), the EIB, and the member states. The EIF's liquidity benefits from a strong treasury portfolio and low leverage, which result in very robust liquidity ratios. The EIF has no outstanding debt and we believe that equity balances the lack of proven access to the capital markets. Environmental, Social, And Governance (ESG) Because we regard the EIF as a core subsidiary of the EIB, we believe its exposure to environmental and social credit factors is similar to that of its parent. In many ways, the EIB sets the standards in environmental terms among multilateral institutions (MLIs) and, more broadly, among all debt issuers. The EIF, in turn, contributes actively to the achievement of group objectives, although we recognize that it might have lower control than the EIB on the final investment. The EIB group is well-prepared for energy transition. The group faces high expectations, however, especially because EU countries partially rely on the EIB group to meet their Nationally Determined Contributions (NDCs) under the Paris agreement. We believe the EIF has sound governance principles and a balanced shareholder structure. Its ownership model enables EU member states to have a role, through the EIB and the EC, in the fund's decision-making and close control over its activities. Member states are represented on the EIB's board of governors and the EU is represented by the EC's shareholding. The EIB and the EU hold about 92% of the EIF's share capital between them. The EIB is heavily WWW.STANDARDANDPOORS.COM/RATINGSDIRECT APRIL 21, 2021 3 European Investment Fund involved in risk management and the EIF draws on its best banking principles and resources. We view private shareholders' influence over the EIF as very limited. Enterprise Risk Profile: Strong Record of Fulfilling Its Mandate • Very important mandate although with a niche focus. • Track record of strong support from its shareholders. • Sound governance and advanced risk management principles. Policy importance Established in 1994, the EIF is a supranational financial institution focusing on SMEs in the EU and candidate countries. It fulfills its mandate by taking credit exposures or providing management for three business lines: private-equity investments, guarantees and securitization credit enhancement, and microfinance. However, compared with its peers, the EIF's mandate has been and remains rather niche. The EIF's balance sheet remains small and most operations are external mandates and risk-sharing structures. Total purpose-related exposure was about €11.7 billion at year-end 2019, more than double that seen in 2014. We expect the EIF's focus for 2021 will be providing support to contain the economic effects of COVID-19 in Europe, where SMEs are being particularly hit. Last year, EIB group announced it expects to mobilize up to €40 billion of financing to alleviate COVID-19-related liquidity and working capital constraints for European companies. Of this, about €20 billion will be dedicated to SMEs, for which we expect the EIF to play a significant role. Additionally, the EIB Group established a Pan-European Guarantee Fund (EGF) which includes €25 billion of guarantees, unlocking up to €200 billion of external financing to the EU's real economy. The deployment of the EGF will represent a significant boost to activity planned for 2021, which is expected to reach about €31.4 billion--70% of which as part of the EGF. More structurally, the EIF will be instrumental to fulfilling the EU's policy agenda heading into the 2021-2027 Multiannual Budget period. For example, EIF activities will aim to achieve the targets set out by InvestEU regarding the equity and SMEs sections of the initiative. InvestEU will be operational from 2021 and aims at mobilizing public and private investment in the EU through a budget guarantee of €26.2 billion that will back investment projects of financial partners. Thanks to a multiplier effect, InvestEU is expected to mobilize more than €370 billion of additional investment over the next seven years, contributing to the economic recovery and the EU's medium- and long-term policy priorities, including the green and digital transitions. Apart from the roll-out of the new InvestEU and EGF, the priorities of the fund in the next two years will be to actively support the implementation of the new EIB strategy, particularly on climate financing. We expect climate financing and sustainable projects to become a more relevant portion of EIF activity. As of March 31, 2021, the EIB and EU together accounted for 91.4% of the EIF's subscribed capital. The remaining 8.6% is divided among more than 34 financial institutions from European countries, two from the U.K., and two from Turkey. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT APRIL 21, 2021 4 European Investment Fund Chart 1 The EIF has historically benefited from robust shareholder support, demonstrated by the timely capital payments during the two capital increase plans in 2007 and 2014. Recently, the shareholders of the EIF approved a 64% increase in share capital to €7.4 billion from €4.5 billion. The fund already received a first contribution of €743 million in February 2021. The EIF is a specialized private-sector financier, as such it does not benefit from PCT--which we only apply to sovereign exposures. Consequently, we do not incorporate PCT in our assessment of the EIF's enterprise risk profile. However, the EIF does generally benefit from preferential treatment granted by the governments of countries in which it operates. We expect this will continue and we incorporate this preferential treatment into our assessment of the EIF's financial risk profile. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT APRIL 21, 2021 5 European Investment Fund Chart 2 Governance and management expertise In our opinion, the EIF benefits from sound governance and risk management principles and systems, a conservative risk appetite, balanced shareholding structure, and high governance rankings for most EIB member countries. The EIF benefits from its close ties to the EIB and the group shares best practices and resources to ensure an effective risk-management structure in both institutions.
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