Financial Instruments
2014-2020
Doing more with less
NFOŚiGW
Luxembourg-Warsaw, 17 April 2012
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, …)
2
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
3
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 goals
 Catalytic effect on existing similar MS schemes or private
investment, no crowding out
3.
Multiplier effect
Attracting private investment greater than EU contribution
4
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.
7
Next MFF: Simplification and
Transparency
1. 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)
8
Financial Instruments included in
proposals for 2014-2020 MFF
Centrally managed by COM
Research,
Development
Innovation
Growth, Jobs
and Social
Cohesion
Shared Management
Horizon 2020
Equity and Risk Sharing Instruments
EUR 3.5bn
Competitiveness &
SME (COSME)
Equity & guarantees
EUR 1.4bn
Creative Europe
Guarantee Facility
EUR 210m
Social Change
& Innovation
Erasmus for all
Guarantee Facility
EUR 881m
Micro-finance EUR 192m
Instruments under
Structural and Cohesion
Funds
EU level
Off-the shelf instruments
Tailor made instruments
Infrastructure
Connecting Europe Facility (CEF)
Risk sharing (e.g. project bonds) and equity
instruments
Budget not yet decided
Significant higher amounts
than currently
9
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 operational
10
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.
11
MECHANISMS OF FINANCIAL
INSTRUMENTS
Risk Sharing Financial Facility
RSFF provides debt finance to
research and development
projects through
Own Resources
EUR 1bn
EIB (RSFF)
2007 - 2013
 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
EUR 1bn
Approx. EUR 10bn
Debt Financing
Banks
Investors
Final Beneficiaries
Low/Sub Investment Grade
13
Rating enhancement in RSFF
Moody's S&P and Fitch  RSFF finances sub-investment grade
projects moving them to investment grade
…
…
It makes the project therefore bankable
A1
A+
 RSFF loan is subordinated / junior to
A2
A
the bank's loans,
A3
Ameans in case of default it is served after
Baa1
BBB+
the senior bank loan
Baa2
BBB
Baa3
BBBBa1
BB+
Sub invstment
Ba2
BB
Senior loan
grade company
Ba3
BBB1
B+
Mezzanine finance
B2
B
B3
BCompany's equity
14
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
15
Europe 2020 Project Bond Initiative
Objectives
How?
Result
-Increase financing available for
large infrastructure projects
EU/EIB joint support to
project companies
issuing bonds to finance
infrastructure projects
More private sector
financing attracted from
the capital markets to
finance key infrastructure
projects
Form of support
Potential investors
Debt service guarantee
or subordinated loan by
EIB to ensure sufficient
rating of the bonds
Long-term institutional
investors – pension funds,
insurance companies
-Establish debt capital markets
as a complementary source of
financing
Target areas
•Transport
•Energy
•Broadband
16
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
17
Functioning of the Initiative
SPV
Project
Costs
Project
bond
Target
rating
> A-
Bond Issue and
underwriting
Project
Bond
Investor
up to 20% of total
Bond issue
Sub debt
10-20%
Equity
e.g. 15%
Sponsors or
investors
18
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
20
Leasing and Forfaiting in EE
Examples of off-balance sheet financing for public bodies
under constrains of borrowing
Leasing
 Leasing of resellable installations like CHP installations, PV
modules
 Organised 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
21
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.
Target
Size at first closing
€ 265m
EIB, CDP
Up to € 700m
Notes (debt)
Senior – A Shares
€ 117m
EIB, CDP,
Deutsche Bank
EU
Mezzanine - B Shares
€ 23m
Junior/FLP - C Shares €
€ 125m
Institutional
investors
Public banks &
institutional investors
Public financial
institutions
EU
22
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
23
Thank you
General information on innovative financial
instruments:
http://ec.europa.eu/economy_finance/financial_ope
rations/investment/innovative_financial_instrument
s/index_en.htm
ANNEX
EU financial instruments old and new
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
EQUITY INSTRUMENT FOR SMEs 2014-2020
EU Equity
Financial
Instrument 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-offunds that invest in venture capital
 indicatively EUR 690m
COSME
26
EU financial instruments old and new
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
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
27
EU financial instruments old and new
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
DEBT INSTRUMENT FOR LARGE R&I PROJECTS 2014-2020
Loan & Guarantee
Service for
Research and
Innovation
 Loans and guarantees to R&I (non-SMEs)
Horizon 2020
 No exact allocation yet (possibly approx.
2/3 of EUR 3.5bn)
28
EU financial instruments old and new
EQUITY 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
EQUITY AND DEBT INSTRUMENT FOR THE SOCIAL ECONOMY 2014-2020
Micro-finance and
social
entrepreneurship
instrument
 Guarantees, micro-credit, equity and quasiequity 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
29
EU financial instruments old and new
DEBT INSTRUMENT FOR STUDENTS
Student Loan
•
Guarantee Facility •
Guarantees for student loans
EUR 881m
Erasmus for
All
30
EU financial instruments old and new
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
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 risksharing 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
31
EU financial instruments old and new
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
Legal Architecture
Horizontal legal framework
Norm
FR Title VIII
(EP/Council Regulation)
Rules of Application
(delegated act)
Content
Definitions, management modes, principles and
conditions, limitation of liability, reflows, control,
reporting, etc.
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
Sector rules
Basic act
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
33