EVALUATION CRITERIA FOR MID-CAPS AND LARGE CORPORATIONS

1. EVALUATION CRITERIA FOR MID-CAPS AND LARGE CORPORATIONS Dr. Harald Jahn h.jahn@eib.org Head of Division for Industry and Commercial Services EUROPEAN INVESTMENT BANK

2. FINANCING FOR RESEARCH AND DEVELOPMENT FOCUSING IN THE PRIVATE SECTOR ON APPLIED R&D PLUS INNOVATION (RDI) EIB Categories: • “Large” corporations = above 3000 employees, usually rated companies • MID-CAP = max 3000 employees, often non-rated companies • SME = max 250 employees, rarely rated

3. Support LISBON objectives (Knowledge Based Economy) • Support Barcelona objectives (3% of GDP for RDI) • Themes for RDI projects - similar to FP7 - Platforms - support of EU policies (e.g. environment/energy) • Private sector RDI - priority will be given to the above themes, but not limited to them

4. TOPICS DEFINITION & ELIGIBILITY ISSUES CONFIDENTIALITY ISSUES CONTEXT & LOCATION OF R&D ACTIVITIES PROJECT COMPLIANCE WITH EU STANDARDS CREDIT FINANCE CULTURE FOR R&D PROJECTS

5. DEFINITION & ELIGIBILITY ISSUES • Large corporations define RDI projects for budgeting purposes. • Such RDI projects have to meet company specific selection criteria (e.g. hurdles; strategic importance; ROE). • A project definition is the basis for EIB financing. • The definition of RDI projects increasingly requires up-stream contact and involvement of company controllers in addition to traditional finance, technical and legal departments. • RDI financing widens eligible project costs to include not only tangible but increasing intangible and RDI related personal costs.

6. DEFINITION & ELIGIBILITY ISSUES • The RDI projects are evaluated by the EIB’s services similarly to standard investments based on a cash-out flow (implementation) and cash-in flow (operation) concept in order to define sector and project specific loan duration and grace periods. • Usually 3 years but up to 4 years of research costs (implementation period) are considered for the definition of one project. • However, several RDI programme components can be selected, identified and grouped into one project – mainly for easing the financial contract and monitoring requirements. It is similarly possible to finance one RDI programme comprising of several smaller RDI projects.

7. WHAT INVESTMENTS EIB CAN FINANCE: Eligible project costs include: • Facilities: project capital expenditures for tangible assets; • Activities : project capital expenditures for intangible assets, research staff cost, incremental working capital needs and otherrelated operating expenses. RDI budgets typically cumulated over 3 years (investment programme)

8. CONFIDENTIALITY • Confidentiality can be of crucial importance for private sector RDI investments. • The EIB is a BANK, and is prepared to sign confidentiality agreements with private sector promoters.

9. CONTEXT & LOCATION OF RDI ACTIVITIES • The context for RDI projects to be financed by the EIB has to comply with overall EIB standards, irrespective of size of promoters. Excluded are sub-projects that: Focus on weapons and ammunition, arms, military or police equipment or infrastructures, and equipment or infrastructure limiting people’s individual rights and freedom; Focus on gambling and related equipment; Focus on tobacco manufacturing, processing, or distribution; Involve live animals insofar as compliance with the "Council of Europe’s Convention for the Protection of Vertebrate Animals used for Experimental and other Scientific Purposes" cannot be guaranteed; May potentially cause lasting environmental damage; May potentially restrain or reduce human rights; Are considered ethically or morally controversial (e.g. such as e.g. research on human cloning); Focus on processing or disposal of solid waste, Involve hazardous waste, incineration and composting, and interim storage of refuse; Merely involve the transfer of environmental problems from one location to another; Real estate development activities on its own.

10. CONTEXT & LOCATION OF RDI ACTIVITIES cont …. • The EIB as a promotional bank is bound to finance RDI projects according to mandates given. • The majority of RDI financing has and will be, within the EU Member States to support the Lisbon objectives for RDI investments.

11. PROJECT COMPLIANCE WITH EU STANDARDS • EIB requires from all RDI promoters (independent of size) to comply with EU and national standards, both for tangible and intangible investments. The includes environmental, building and operational requirements.

12. Promoter Finance Model Project Finance Model • Financing partners provide funding to the promoter on the basis of its financial strength. • A promoter can be a company, a consortium of companies or an institution • The financing partners are thereby exposed to the credit risk of the promoter, not of the project. • In the Project Finance Model, the project is realised and financed via a legally and financially standalone project company. • The promoter(s) usually has the role of a strategic partner (e.g shareholder). • The financing partners are thereby exposed to the credit risk project only . CREDIT FINANCE CULTURE FOR R&D

13. CREDIT FINANCE CULTURE FOR R&D cont… • For accountancy and tax purposes RDI expenditure is treated in a heterogeneous manner within the EU. • Activating and depreciating such investments according to technical and economic life are often not possible, therefore RDI costs can strongly effect company’s annual cash-flows. • By providing long term credit-financing the EIB and its banking partners have and are developing products to allow for better cash-flow management concerning RDI spending and resulting gains. a) Large corporations (rated companies) balancing cash-flow throughout RDI lifetime. b) MID-CAPS (often non-rated companies) access to funding, culture of defining RDI via controlling tools, and balancing cash-flow throughout RDI life time.

14. CREDIT FINANCE CULTURE FOR R&D cont… • In the context additional internal & external (consultancy) know-how is needed to define and justify RDI projects (feasibility studies) in order to: • allow long-term credit financing and • develop RDI project risk ratings that might differ from the company’s current (historically based) rating. • For MID-CAPS – often non-rated companies – these efforts might be higher. • Research intensive companies will be evaluated within the respective sector and value chain context and their given RDI track record.

15. CREDIT FINANCE CULTURE FOR R&D cont … • Liberalisation increasingly requires from private sector companies investing in applied RDI to remain competitive (cost efficiency & innovation) both as individual niche suppliers or within global supply chains. • The EIB, in co-operation with its the banking partners, is launching financing mechanisms: • to provide access for projects up to EUR 50M via simplified procedure for MID-CAPS and • to develop together with the MID-CAP’s traditional banking partners ways of rating RDI project and company risks, that might be shared. • These recent EIB initiatives are considered of importance to support RDI efforts in existing companies with historic balance sheet data, which, for one reason or another, are somehow reducing the company’s RDI capacities to re-orientate business focus or to expand activities.

16. EVALUATION CRITERIA FOR MID-CAPS AND LARGE CORPORATIONS EIB PRODUCTS FOR DIFFERENT TYPES OF COUNTERPARTS Corporate /Project Finance Risk Sharing with Banks • Targeted beneficiaries: Mid-sized and large corporations (low/sub-investment grade), • Product Ideas: Structured individual corporate loans for RDI projects (senior/junior debt, mezzanine) • EIB value added: Lower Financing Cost, increase of debt capacity (in case of subordination), project risk sharing • Targeted beneficiaries: SMEs & MIDCAPS(low/sub-investment grade) • Product Ideas: RSFF Facilities; Interest Contingent Supplier Facility, Co-financing, Global Authorisations • EIB value added: Banks: risk sharing, capital relief, new customers/cross selling, Beneficiaries: risk sharing, higher debt capacity, lower financing cost NEW PRODUCT DEVELOPMENTS • Targeted beneficiaries: JTIs, Technology Platforms, EUREKA Joint Ventures,… • Product Ideas: SPV based structures for individual RDI consortia • EIB value added: Provide structuring know-how (Project Financing) and facilitate private sector funding • Targeted beneficiaries: Universities • Product Idea: Royalty fund for scientific research projects • EIB value added: Facilitate financing for universities, utilize royalty streams of research results (e.g. patents, lower financing cost Financing Technology Platforms Risk Sharing with Universities

17. Financial Value Added Know-How Attractive financing costs due to AAA rating and non-profit status Project Due Diligence: Strong technical competencies Flexible terms and conditions (e.g. long repayment periods) Know-how and track record in financial structuring Risk Sharing Product Innovations The EIB can share risks with banks/promoters as appropriate Dialoque with banks and industry to develop suitable products WHY EIB INVOLVEMENT ADDS VALUE? Project/Promoter