Financial Engineering Instruments in the new perspective

1. Financial Engineering Instruments in the new perspective Sofia, 24 June 2014 Hristo Stoyanov, Mandate Manager, European Investment Fund

2. Agenda • EIF approach to SME finance • JEREMIE experience in Bulgaria • 2014-2020 Central EU instruments • SME Initiative

3. EIF approach to SME finance Section One

4. EIF objectives “ To support smart, sustainable andinclusive growth ” Working with a broad rangeof financial intermediariesto provide credit enhancementand invest in venture andgrowth capital Being Europe’s cornerstone venture and growth capitalinvestor, leading catalystto promote SME lendingand microfinance Promoting cohesionand regional and social development Bringing together nationalpublic and private partners tosupport innovation and entrepreneurship Filling the financing gapsin Europe’s economy

5. Our counterparts “ We work with a wide range ofcounterparts to support SMEs ” Fund providers and Mandators Intermediaries and counterparts micro-enterprises, SMEsand small mid-caps • European Investment Bank • European Commission • Member States • Managing Authorities • Funds of Funds • Corporates/private • Public institutes • Commercial Banks • Development &Promotional Banks • Guarantee Institutions • Leasing Companies • Fund Managers • Microfinance Institutions

6. Helping businessesat every stage Public Stock Markets Portfolio Guarantees & Credit Enhancement Formal VC Funds & Mezzanine Funds Microcredit VC Seed & Early Stage Business Angels,Technology Transfer PRE-SEED PHASE SEED PHASE START-UP PHASE EMERGING GROWTH DEVELOPMENT SME Development Stages HIGHER RISK LOWER RISK

7. JEREMIE experience in Bulgaria Section Two

8. A portfolio approach EUR 392m Guarantees EUR 350m Holding Fund EUR 60m Mezzanine EUR 300m Funded Products 5 different financial products are being deployed Co-investment Equity Funds EUR 21m Venture Fund Via 14 different financial intermediaries EUR 22.6m Accelerator/Seed Fund Producing a leveraging effect of x 2.5 PRE-SEED PHASE SEED PHASE START-UP PHASE EMERGING GROWTH DEVELOPMENT SME Development Stages Allowing for a revolving nature to the funds Product under development Equity products Debt products HIGHER RISK LOWER RISK

9. Two lending products for EUR 700m First Loss Portfolio Guarantee (FLPG) Portfolio Risk Sharing Loan (PRSL)

10. MFF 2014 – 2020Central EU Instruments Section Three

11. Overview of future EU-EIF financial instruments Central EU instruments European Structural Investment Funds -ESIF EUR 325bn Research, Development, Innovation Horizon 2020 Pilot Equity Facility for Tech Transfer (GIF successor) SME and Small Mid Caps Guarantee Facility for RI (RSI successor) (700m) EUR 3bn Min. 1/3 (EUR 1bn) for SME/smallmid caps EU level instruments (contribution of Member State (MS) funds from Operational Programmes to centrally managed EU Creative Europe Cultural and Creative Sector Guarantee Facility 121m Competitiveness & SME (COSME) EUR 1.4bn Equity Facility for GrowthEUR 690mLoan Guarantee Facility EUR 700m Off-the shelf instruments Jobs, Growth and Social Cohesion Erasmus for all Student Loan Guarantee Facility 517m Tailor-made instruments Social Change & Innovation Progress Microfinance II Social enterprise investingEUR 192m Source: EC, adapted

12. SME Initiative: improving SME lending in times of crisis Section Four

13. The SME initiativeEU structural funds + EU budget + EIF & EIB • Key objectives • Better access to finance for SMEs through capital relief, loss protection and liquidity • Increased multiplier on public budget through participation of EIF/EIB and private sector • Reduction of financial markets fragmentation • Optional programme, at the discretion of each Member State • Eligibility criteria: • Most sectors eligible for support – including agriculture business • Special attention to innovative small business and finance of R&D in • EIF and EIB participate • Own funds (for guarantees and direct investments) • Expertise in deal structuring, execution, implementation and monitoring throughout EU • Participation of private investors: important medium-term objective (Option 2)

14. Two risk-sharing instruments • Two risk-sharing instruments endorsed by the European Council: • Guarantee facility for portfolios of new SME loans; • Securitisation instrument for portfolios of both new and existing SME loans; • Eligible assets: SME Loans, leasing and guarantees • Timing: SME initiative to be operational in beginning of 2015

15. Option 1: SME Guarantee Facility • Provides uncapped portfolio guarantees and partial capital relief to banks building up new portfolios of loans, guarantees for loans [and leasing] to SMEs • Both direct guarantees and counter-guarantees • Description: • Originator (gradually) builds-up a portfolio of new SME loans • EIF issues uncapped portfolio guarantees and shares (hedges) the risk with various risk-takers: • ESIF: first-loss piece • ESIF and EU funds (COSME/Horizon 2020): second-loss tranches • EIF own funds: (upper) mezzanine tranche • EIB and national/regional development banks and private investors : senior tranche • Instrument can cover up to 80% of each loan included in the portfolio. Originator must retain at least 20% of each loan included in the guaranteed portfolio • Originator will have to demonstrate the transfer of benefit of the instrument to the SMEs in the form of acceptance of higher risk clients, reduction of collateral requirements and/or reduced pricing

16. Risk Covered by the Financial Intermediary Risk guaranteed by EIF (up to 80%) Financial Intermediary EIF guarantee Loan 2 Loan n Loan 1 Guarantee Beneficiaries SME n SME 1 SME Guarantee Facility (2) Risk allocation Risk tranching • Partial guarantee (up to 80%) on new loans • Uncapped, AAA, zero weighting SME 2

17. SME Guarantee Facility (3) • Objective: improve SME access to finance by addressing challenges that banks face and which impede their credit appetite • More specifically, by: • Covering 80% of losses for defaulted loans (with no cap at portfolio level), addresses credit risk concerns and/or lack of collateral at the SME level • Providing capital relief to the banks due to the involvement of EIF (0% risk weighting on the guaranteed part of each loan under CRD IV), addresses regulatory capital scarcity at the banks’ level • Improvement in the access to finance for SMEs is materialised through: • Attractive guarantee pricing due to zero pricing on the ESIF first-loss contribution, attractive pricing for the ESIF second-loss contribution and EIB Group’s competitive pricing • Higher-risk SMEs gaining access to credit, reduced collateral requirements and/or improved pricing (strict conditionality for the deployment of EU funds) • More flexible eligibility criteria: no geographical restrictions will apply, working capital may be financed, credit line facilities will be permitted • Constraints: • Does not provide liquidity to the banks (but could be combined with e.g. EIB funding) • Covers only new loans • Provides gradual capital relief to banks as portfolios of new SME loans are being built up

18. Option 2: Securitisation • Securitisation can be backed by portfolio of new and existing SME loans • Can take the form of : • “True sale” (funded): transfer of a portfolio of SME assets to a dedicated securitisation vehicle; or • Synthetic risk transfer (unfunded) – providing credit risk protection in the form of guarantee (unfunded structure) • Description : • 50% of the first-loss piece of the securitised portfolio is retained by the originator and 50% is covered by ESIF • The second-loss risk is covered by ESIF, EU funds (COSME/Horizon 2020) and EIF. Originator possibly retains 5% of the risk • EIB and national/regional development banks and/or third-party investors purchase or guarantee the senior tranche • Undertaking by the Originator: “Additional Portfolio”. The Originator undertakes to provide new financing (corresponding to a multiple of the ESIF contribution) to SMEs in the relevant region in line with the eligibility criteria of the EU funds. • For funded structures, amount of new financing will be equal to the funding raised through the securitisation. • For cap relief transactions, amount of new financing will be equal to the volume that could be financed with the capital relief achieved via the securitisation

19. Securitisation (2) New SME loans (Additional Portfolio) Securitisation Third-party risk EIB risk (plus National Promotional banks) Financial Intermediary SME Loans Risk tranching EIF (Target Rating: Baa3) ESIF + EU Funds (Target Rating: B3) MEZZ Beneficiaries • Pricing • ESIF cover for the Junior tranche will be granted for free • ESIF Mezzanine tranches will be priced in a way to sustain the risk • EIF and other risk takers will charge according to their respective pricing policies and objectives ESIF risk Retained risk SME 1 SME n SME 2 FLP • Securitisation transactions • Either “true sale” (funded structure); • Or “synthetic” risk transfer (unfunded structure, providing credit risk protection; • Securitised portfolio: existing SME debt finance • Commitment to originate new SME loans (Additional Portfolio) • “Option 3” Similar to Option 2 but with pooling of ESIF resources and risks

20. Securitisation (3) • Objective: improve access to finance for SMEs by • Addressing challenges that banks face and which impede their credit appetitethrough • Diversification of banks’ funding sources through access to debt capital markets • Capital relief to the banks, through risk transfer to third parties • Revitalisation of the SME securitisation market in Europe • Freeing up lending capacity, creating headroom in the balance-sheet for new lending • Attractive pricing • ESIF participation the Junior tranche at zero cost and Mezzanine tranche at *sustainable cost” • EIB Group’s competitive terms on mezzanine/senior tranches • New financing to SMEs stimulated by more flexible eligibility criteria and Originator’s undertaking • to use the mobilised resources for new lending • To transfer the financial benefit to the SMEs • “Penalties” in case of non-achievement of targets • Obligation to repay non utilised ESIF (multiplier 1:1) • Commitment fees on the shortfall

21. The SME initiativeHow is the risk tranching set? • The First Loss Piece (FLP) is partially covered by ESIF, up to 80% for Option 1 and indicatively 50% for Option 2; • The full mezzanine tranche will be around 10%-15%. Lower mezzanine tranches will be covered by ESIF, COSME and H2020. ESIF, COSME and H2020 will be junior to EIF. Upper Mezzanine tranche will be covered by EIF own risk and will be around 4%-8%; • The size of FLP and mezzanine tranches will be set in order to achieve certain target ratings: for EIF mezzanine at least Baa3 and for senior tranches at least Aa3. For a portfolio quality equivalent of B1/B2 portfolio rating, the FLP is envisaged to be around 15-20% on average in order to allow investment grade attachment point for EIF. The senior tranche (EIB) is envisaged to be around 60-70% (AA). Option 1 guarantee risk tranching Newly originated loan portfolios Guarantor SME1 European Investment Fund Financial Institution 1 Uncapped guarantee on portfolio level SME2 Senior tranche EIB risk EIF guarantee SME3 Up to 80% guarantees on a loan-by-loan basis. At least 20% risk retained by originator Member State contribution EIFown risk Mezzanine tranche COSME, H2020 risk SME1 Max 7% of ERDF + EARDF First loss piece ESIF risk Financial Institution N EIF guarantee SME2