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Financial Instruments 2014-2020

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

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Financial Instruments 2014-2020

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  1. Financial Instruments 2014-2020 Doing morewith less NFOŚiGW Luxembourg-Warsaw, 17 April 2012

  2. 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 2

  3. 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

  4. EU Financial Instruments: When? Guiding principles include: • Addressing sub-optimal investment situations Funding gaps e.g. due to general economic uncertainty, high business/innovation risk, high transaction costs, asymmetric information • Ensuring EU value added • Effective targeting of policy goals • Catalytic effect on existing similar MS schemes or private investment, no crowding out • Multiplier effect Attracting private investment greater than EU contribution 4

  5. 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.

  6. 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, CassaDepositi, 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, CassaDepositi and Deutsche Bank • Target size EUR 600-700m 6

  7. 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

  8. Next MFF: Simplification and Transparency • Fewer financial instruments (from 13 to 6) • Larger financial instruments ensuring critical mass • Minimisation of overlap between instruments • Standardised contractual arrangements including management structures, reporting, fees… • More transparent to stakeholders • Budget: No contingent liabilities • Dedicated regulatory framework (Title VIII of the Financial Regulation) 8

  9. Financial Instruments included in proposals for 2014-2020 MFF Centrally managed by COM Shared Management Research, Development Innovation Horizon 2020 Equity and Risk Sharing Instruments EUR 3.5bn Instruments under Structural and Cohesion Funds EU level Off-the shelf instruments Tailor made instruments Significant higher amounts than currently Growth, Jobs and Social Cohesion Creative Europe Guarantee Facility EUR 210m Competitiveness & SME (COSME) Equity & guarantees EUR 1.4bn Erasmus for all Guarantee Facility EUR 881m Social Change & Innovation Micro-finance EUR 192m Infrastructure Connecting Europe Facility (CEF) Risk sharing (e.g. project bonds) and equity instruments Budget not yet decided 9

  10. 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

  11. 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

  12. Mechanisms of financial Instruments

  13. Risk Sharing Financial Facility RSFF provides debt finance to research and development projects through • 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 Own Resources EUR 1bn EUR 1bn EIB (RSFF) 2007 - 2013 Approx. EUR 10bn Debt Financing Banks Investors Final Beneficiaries Low/Sub Investment Grade 13

  14. Rating enhancement in RSFF • RSFF finances sub-investment grade projects moving them to investment grade It makes the project therefore bankable • RSFF loan is subordinated / junior to the bank's loans, means in case of default it is served after the senior bank loan Senior loan Sub invstment grade company Company's equity Mezzanine finance 14

  15. 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

  16. Europe 2020 Project Bond Initiative • Objectives • Increase financing available for large infrastructure projects • Establish debt capital markets as a complementary source of financing • Target areas • Transport • Energy • Broadband How? EU/EIB joint support to project companies issuing bonds to finance infrastructure projects Form of support Debt service guarantee or subordinated loan by EIB to ensure sufficient rating of the bonds Result More private sector financing attracted from the capital markets to finance key infrastructure projects Potential investors Long-term institutional investors – pension funds, insurance companies 16

  17. 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

  18. Functioning of the Initiative Bond Issue and underwriting SPV Project Costs Project bondTarget rating > A- Project Bond Investor up to 20% of total Bond issue Sub debt 10-20% Equitye.g. 15% Sponsors or investors 18

  19. 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-)equityparticipation in specialpurposevehicles 20

  20. Leasing and Forfaiting in EE Examplesof off-balance sheetfinancingforpublicbodiesunderconstrainsofborrowing Leasing • Leasing ofresellableinstallationslike CHP installations, PV modules • Organisedsimilar 'tosaleand lease back' Forfaitingfor 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 • Energyperformancecontractascolateralforforfaitingloan 21

  21. Structured Fund The eeefis a dedicatedinvestmentvehiclefoundedasan Investment Fund with variable capital (SICAV) In the eeef the EU takes the first loss pieceto attract other public and private investors. Target Up to € 700m Size at first closing € 265m Senior – A Shares Notes (debt) Institutional investors Public banks & institutional investors EIB, CDP € 117m Mezzanine - B Shares Public financial institutions EIB, CDP, Deutsche Bank Junior/FLP - C Shares € € 23m EU EU € 125m 22

  22. European Energy Efficiency Fund Technical Assistance • Volume € 20m provided by EU • grants for project development cost – exclusively for projects financed by the Fund • Managedbyfundmanager Deutsche Bank at 'arm'slength' toeeef 23

  23. Thank you General information on innovative financial instruments: http://ec.europa.eu/economy_finance/financial_operations/investment/innovative_financial_instruments/index_en.htm

  24. Annex

  25. EU financial instruments old and new 26

  26. EU financial instruments old and new 27

  27. EU financial instruments old and new 28

  28. EU financial instruments old and new 29

  29. EU financial instruments old and new 30

  30. EU financial instruments old and new 31

  31. EU financial instruments old and new

  32. Legal Architecture 33

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