Madrid, 27 May 2010 Securitisation as tool to support SME financing Helmut Kraemer-Eis Head of Research & Market Analysis WPFS – Workshop on Securitisation

1 /19 Content Introduction/SME financing/the EIF Overview EIFs role Origination Focus Underwriting Criteria Pool Criteria Portfolio Summary Concluding Remarks Contacts

2 /19 Introduction: The challenge Financing Innovation amongst SMEs in Europe Importance of SMEs as the Foundation Stone for Tomorrows Prosperity Source: Eurostat, Commission Communication on Modern SME policy for Growth and Employment SMEs account for a large proportion of Europes economic activity Micro-businesses dominate employment in countries such as Italy (48%) and Greece (57%) Successive EU summits put issues of growth, employment, innovation and competitiveness high on agenda EIF is the SME arm of the EIB Group

3 /19 Introduction: EIF at a glance Dual Objective of Meeting EU Policy Goals & Generating a Satisfactory Return on Equity EU specialised institution for SMEs, risk financing Venture Capital and Mezzanine (fund of funds) Structuring and Guaranteeing portfolios of SME and microfinance loans/leases Authorised Capital 3bn Geographic Focus / Intermediaries EU 27, EFTA, Candidate Countries Distributing through Banks and Funds AAA rated Staffing, Culture and Values Leading-edge modern institution Adapting to changing market conditions Attracting talented staff High standards of compliance and integrity

4 /19 Introduction: EIFs Shareholders EIB: Main Shareholder (61%) European Investment Banks shareholders: 27 EU Member States European Community represented by the European Commission (29%) 30 public and private financial institutions from 17 countries (9%)

5 /19 Introduction: Operating Model of EIF Transformational Role of EIF VALUE ADDED Own resources Mandates by EIB, EC, MAs, … Product development Mandate management Transaction execution Risk management Follow-up and relationship focus Commercial banks Development & Promotional banks Guarantee Institutions Fund Managers SMEs Suppliers / Mandators Transformational Key Success Factors Intermediaries

6 /19 Introduction: EIF Tool Kit for SMEs Public Stock Markets SME Cash Flows SME Development Stages HIGHER RISK Seed PhaseStart-up Phase LOWER RISK Emerging Growth Development Portfolio Guarantees & Credit Enhancement Formal VC Funds & Mezzanine Funds VC Seed & Early Stage Business Angels, TT Microcredit

7 /19 Overview – Securitisation Status European Investment Fund (EIF) is part of the EIB Group and serves as: Europe's leading developer of risk financing for entrepreneurship and innovation Multilateral Development Bank (MDB) status Basel II 0% risk weighting Aaa/AAA/AAA ratings (Moodys/S&P/Fitch)

8 /19 Overview – Why SME Loan Securitisation? Transforming illiquid SME loans into liquid asset class. Alternative source of funding for the originating banks. Economic and regulatory capital relief. Smaller banks are able to tap the capital markets. Portfolio management, risk diversification. Overall: increase of lending capacity. Advantages for investors. Securitisation of an individual loan does not improve the access to finance for the individual SME, but on a portfolio level banks are able to expand their SME lending. Positive impact on the overall availability and conditions of loans to SMEs.

9 /19 Overview – Market Environment European SME securitisation market has dropped since 2007 with reduced investor demand. Still negative perception of securitisation in Europe; contagion effects. Restart depends on macroeconomic developments, investors demand, and regulatory environment. Public sector support to complement private sector activities. Replicable tool for SME support that provides efficient multiplication of public money. EIF expects to play a key role in rebuilding the market.

10 /19 EIF as deal facilitator (for any SME-backed transaction) Credit enhancer of typically mezzanine tranches, either with ABS wrap or as bilateral protection seller. Unconditional, irrevocable guarantee of timely payment of interest and ultimate payment of principal. Transaction Manager for the EIB Group, with potential involvement of EIB as cash investor at senior (AAA) level. Deal maker with active structuring role Small, bilateral and work-intensive deals unattractive for investment banks, but which contribute to the development of the SME securitisation market. EIFs Role

11 /19 External guarantor Investors AAA AA A BBB BB unrated AAA AA A BBB BB unrated Investors Sale of Portfolio or Aaa/AAA Credit Default Swap Reference SME Portfolio Originator SPV EIFs Role (example) Typical EIF intervention in a securitisation transaction

12 /19 WHO SME Finance Providers (mainstream + 2nd tier originators) WHAT HOW Through Investment Banks for public deals / private placements Direct origination with established FIs Direct origination for bilateral transactions Origination Focus We doWe dont Financial GuaranteesCash investments Granular PortfoliosNon granular portfolios (<500) SME-loans / - leases, - trade receivables Mezzanine loans; healthcare receivables; direct loans to originators

13 /19 Underwriting Criteria Minimum tranche rating Typically: BB (exceptionally: BB- / B+) External rating is not required but preferred EIF always assigns its internal rating to the tranches guaranteed and performs own due diligence. Max. amounts BB up to EUR 10-15m BBB-AA up to EUR m AAA up to EUR 150m (larger tickets possible for senior positions) Max. term Typically: 3-5 years WAL Up to 10 years WAL; exceptionally up to 15 years Competitive/Commercial pricing

14 /19 Pool Criteria Eligible countries and currencies All EU Member States Candidate and potential candidate countries (Turkey, Croatia, Western Balkans, etc.) All European currencies Obligor Entities SMEs* (EU definition) Middle-market companies eligible, but to a limited extent * ie < 250 employees and < EUR 50m turnover or < EUR 43m assets The portfolio should be SME focused!

15 /19 Pool Criteria Originator must be committed to new SME lending! Typical underlying pool Credit quality supported by PD, LGD, or historical data Granularity of >500 names Max. obligor exposure of 50bps Industry diversification

16 /19 Portfolio Summary EIFs securitisation portfolio Outstanding commitmentEUR 2.7 bn Number of outstanding tranches124 Average transaction commitmentEUR 24.2 m Countries covered18

17 /19 Concluding Remarks SME financing/Securitisation The revitalisation of SME securitisation is a systemic approach to strengthen banks capacities and capacities to supply long-term financing to SMEs. The support of this market is very important for the future of SME financing. Securitisation as efficient way of deploying public support. The EIF… is a stable specialist, long term investor and guarantor. plays a catalytic role in enhancing access to finance for SMEs. intends to play a key role in rebuilding the SME securitisation market in Europe. supports the introduction of quality signals, e.g. Prime Collateral Securities (PCS).

18 /19 Contacts – EIFs Securitisation European Investment Fund 96, Blvd. Konrad Adenauer L-2968 Luxembourg Alessandro Tappi Markus Schaber

19 /19 Thank you for your attention! Helmut Kraemer-Eis European Investment Fund Head of Research & Market Analysis