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JEREMIE Malta: Clarification of the Call for Expression of Interest to select Financial Intermediaries to implement the First Loss Portfolio Guarantee Financial Instrument

  •  
    Date: 26 October 2010 - 15 November 2010

Logos

Clarifications on the Call for Expression of Interest No. JER-001/1 (“the Call”) to select Financial Intermediaries (“FI”) that will receive resources from the European Investment Fund acting through the JEREMIE Holding Fund for Malta to implement the First Loss Portfolio Guarantee Instrument (the “Financial Instrument”)

Reference number of the Call: No.JER-011/1

Capitalised expressions utilised below shall have the meaning attributed to them in the Call, unless otherwise defined below or the context requires otherwise. 

ELIGIBLE SECTORS

 

QUESTION

ANSWER

1.

Can a definition of ‘Construction’ be provided so that it is clear what types of businesses are excluded?

 

Construction sector is eligible under the Guarantee except for the following sub-sectors (based on NACE Code – Rev.2 Division Level):  

F41 - Construction of buildings

  • 41.1 - Development of building projects
  • F41.1.0 - Development of building projects
  • F41.2 - Construction of residential and non-residential buildings
  • F41.2.0 - Construction of residential and non-residential buildings 

F42 - Civil engineering

  • F42.1 - Construction of roads and railways
  • F42.1.1 - Construction of roads and motorways
  • F42.1.2 - Construction of railways and underground railways
  • F42.1.3 - Construction of bridges and tunnels
  • F42.2 - Construction of utility projects
    F42.2.1 - Construction of utility projects for fluids
  • F42.2.2 - Construction of utility projects for electricity and telecommunications
  • F42.9 - Construction of other civil engineering projects
  • F42.9.1 - Construction of water projects
  • F42.9.9 - Construction of other civil engineering projects n.e.c.

F43 - Specialised construction activities

  •  
    • F43.1 - Demolition and site preparation
    • F43.1.1 - Demolition
    • F43.1.2 - Site preparation
    • F43.1.3 - Test drilling and boring

F43.9 - Other specialised construction activities

  •  
    • F43.9.1 - Roofing activities
    • F43.9.9 - Other specialised construction activities n.e.c. 

2.

Under industries that are excluded gambling is mentioned, is this inclusive of I-Gaming and small prize lotteries such as scratch cards?

 

All the activities linked to Casino and equivalent enterprises are considered as Restricted Sectors.

In other words, Internet gambling and online casinos are non eligible.

3.

Can it be confirmed that the exclusion of the Tobacco Industry is restricted to the primary and secondary industries and does not pertain to those tertiary outlets who may sell ‘Tobacco’ products such as newsagents, supermarkets etc? 

 

The restriction to tobacco is not limited to the production, but includes, as well, the trade in tobacco and the related products.

However, SMEs acting as an outlet selling, among other, tobacco do not fall under the restriction, unless their proportionate revenue, profit or client base related to tobacco constitutes a key feature of their overall business. 

4.

‘Arms’ is an excluded industry – is this limited to fire arms or are knives also considered arms? If they are would it therefore exclude shops selling kitchen equipment, camping stores, gift shops, general stores from the agreement?


Are ornamental/antique guns/weapons considered arms?

 

In general, the production, the trade of arms and related products is not eligible, including production or trading of hunting weapons. The reference to “arms” is not limited to firearms.

SMEs producing or trading household equipment does not fall under the restriction as this type of equipment is not included in the “arms” definition.

The trade of antique collector arms, which are not any more produced and traded on a limited basis and for the purposes other than utilisation, do not fall under the restriction. 


ELIGIBLE LOANS

 

QUESTION

ANSWER

5.

If a declaration of good faith is taken from the client vis-à-vis not breaching any of the eligibility criteria and it turns out that the Financial Intermediary is being deceived (unknowingly of course) would said loan become ineligible for cover by the guarantee?

The Financial Intermediary will have to assess in its discretion the eligibility criteria. It is important to note that EIF, at any time, shall have the right (but not the obligation) to verify whether a Financial Intermediary complies with its obligation to verify the Eligibility Criteria of the Eligible SMEs.

If an SME Loan included in the Portfolio was not eligible at the moment of its inclusion in the Portfolio such loan would need to be excluded from the Portfolio and would not be covered by the guarantee. The principal of the excluded loan will be deducted from the Actual Portfolio Volume.  

6.

What would happen if it is found that a loan is ineligible for the scheme post drawdown but said reasons were entirely out of the hands of the Financial Intermediary at the time of sanction? 

The loan would be generally excluded from the Portfolio except for specific instances as provided in the Operational Agreement. Any payment made by EIF under the guarantee with regards to such excluded loan would then have to be reimbursed to the EIF.

7.

Can it be confirmed that EIF retains the right to examine a facility and withdraw it from the guarantee after draw down has been affected?

On what criteria would such loans be assessed and under what circumstances would they be removed?

 

As the manager of the JEREMIE Holding Funds for Malta, EIF will have the right to check each loan included in the Portfolio.

In the Portfolio, if EIF considers a loan as non eligible, the selected Financial Intermediary will have to withdraw this loan from the Portfolio.

Withdrawals of SME loans would generally occur if not satisfying the Eligibility Criteria or if comprising Irregularities. 

8.

Are seasonal repayment loans permitted under the scheme?

 

Loans to Eligible SMEs will have to comply with a fixed repayment scheduled like amortising or bullet loans. Credit lines are not eligible.

ELIGIBLE SMEs

 

QUESTION

ANSWER

9.

In the case of Groups of Companies does that Maximum Obligor Concentration of 1% relate to each individual company or to the holding company?  What happens in cases where the individual companies and the holding company fit into the definition of an SME?

A corporate entity is not an SME as per the EU definition[1] if it belongs to a group that would exceed the definition criteria (max. 250 employees, and max. EUR 43m total assets or max. EUR 50m turnover).

In the case of an SME group, where the group satisfies the SME definition criteria, the 1% concentration limit will apply at the SME group level. 

10.

Maltese SMEs are not rated in terms of risk. How do you propose to handle this issue?

In the case where Maltese SMEs would not be rated in terms of risk, the internal bank scoring or estimate of default probability, recovery rate and/or expected loss would be taken into account. In addition, EIF would analyse the historical performance of comparable SME loans (in terms of default, loss and recoveries). 

11.

Is the maximum obligor rate as a percentage of the whole fund or of the portion allocated to the Bank?  Is the maximum amount of any one loan we can give 1% of our portfolio or of the entire portfolio under the JEREMIE initiative?

The maximum obligor rate will be set at a percentage (1%) of the Agreed Portfolio Volume (e.g. EUR 51.04m).

In case the Agreed Portfolio Volume is set at EUR 51.04m, the selected Financial Intermediary will therefore be allowed to provide to any Eligible SME one or several loans, the aggregate of which not exceeding EUR 510 400.  

CONTRACTUAL MATTERS

 

QUESTION

ANSWER

12.

If the Financial Intermediary needs to call on the guarantee, the 75% applies on the original loan amount or on the amount owed at that point in time? 

The loss cover under the Guarantee applies to the amount of principal and interest due, payable and outstanding at the time when the default has occurred under each eligible loan included in the Portfolio.

13.

Can EIF confirm that by covering “principal & interest” the Guarantee covers any interest charged at a higher rate resulting from missed/late payments? 

The guarantee does not cover default interest nor interest amounts accruing after 90 days following en eligible loan default.

14.

The guarantee covers losses relating to Principal and Interest; would such a guarantee also cover any fees associated with late payments which would have been charged to the loan?

 

In case of eligible loan default or acceleration the Guarantee will only cover losses relating to unpaid principal and interest (interest being limited to 90 days).

Associated fees, other costs and expenses are not covered under the Guarantee.

15.

Can EIF confirm that the calculation of the cap amount is equal to:

Cap Amount = Actual Volume * 75% * 23% * Disbursement Ratio.

Can EIF provide the calculation of the Cap Amount?

The Cap Amount (at which the obligation to pay under the Guarantee is capped) is calculated as the product of the:

Lower of the Actual Volume and the Agreed Portfolio Volume * the Guarantee Rate (75%) * the Guarantee Cap Rate (up to 23%) * the Disbursement Ratio.

16.

Can you explain when and how will EIF apply the 23% cap rate?

The Guarantee Cap Rate is fixed ex-ante and is set by EIF based on the track record at a level covering can the expected and unexpected loss. The Guarantee Cap Rate can reach maximum 23%. The Guarantee Cap Rate applies on day 1 on the Actual Volume. Every time there are claims under the Guarantee, the EIF will check that the amount of claims do not exceed the Cap Amount (as calculated at that point in time, based on the Actual Volume). Once the Agreed Volume is reached, the claims under the Guarantee will be limited up to the Cap Amount of EUR 8.8m. 

17.

Can EIF confirm that when a portion of a loan is repaid the amount repaid can be, if desired, given to another applicant as a loan under the scheme and that such provision is not based on the loan from which the repayments were originally made being repaid in full? 

The Financial Instrument is not revolving, i.e. if any eligible SME loan is prepaid and/or repaid, then this shall not reduce the Actual Volume. 

18.

Payments under the Guarantee are made only once a valid Guarantee Call is made. Can EIF clarify what conditions constitute such a call and if applicable provide the criteria on which the validity of such a call is assessed? 

The Guarantee Call shall comprise the proper notice of claim (to be sent within the period as agreed in the Guarantee contract), as well as the list of Defaulted SME loans, which satisfy the Eligibility Criteria.

19.

Are there penalties applied to the EIF if valid payments are received after the 90 day period? 

In an unlikely event when the Guarantee payment to the Financial Intermediary is delayed, no penalties will be born by EIF. 

20.

Could EIF confirm that the Financial Intermediary awarded this 'Call for Expression of Interest' will have to commit to build a portfolio of loans of EUR 51.04m, and that JHF (JEREMIE Holding Fund) will only be guaranteeing a total of EUR 8.8m.

75% of EUR 51.04m equates to EUR 38.28m, so in actual fact the unsecured lending which the FI will have at risk will be c. EUR 30m? 

The financial intermediary awarded for this Call for Expression of Interest will have to build up a portfolio of EUR 51.04 m during an availability period of 36 months. The Guarantee provides a first loss protection on each Eligible Loan included in the portfolio. In other words, all loans inserted in the portfolio will be covered at a guarantee rate of 75% and guarantee payments will be made up to the Cap Amount. No additional claim can be made under the Financial Instrument above the Cap Amount.  

21.

If the Financial Intermediary does not manage to raise the total amount of loans allocated, are there any issues with the guarantee?

Could you confirm that the guarantee is on a pro-rata basis?

There will be no penalties if the Financial Intermediary selected is not able to build up the Portfolio. However, in the Operational Agreement signed with the selected Financial Intermediary, it will be specified that the Availability Period will be deemed to be terminated if halfway through the Availability Period the Actual Volume does not exceed 30% of the Agreed Volume.

In other words, if after 18 months, the Financial Intermediary selected does not build up a loan portfolio of at least EUR 15.312 m, EIF might cancel the remaining committed amounts (i.e. the EIF will have the right to freeze the amount available under the guarantee).

If Actual Portfolio Volume is lower than Agreed Portfolio Volume, the Guarantee Cap Amount is reduced automatically as the guarantee cap amount is a function, inter alia, of the Actual Portfolio Volume (see answer 15). 

22.

The Financial Institution will have to build a portfolio of EUR 51.04m. Could you let us know if there will be charges in case that threshold is not reached within the 3 years? (Indeed market conditions could not be favourable for example). 

See 21 above

23.

Can the Final Guarantee Termination Date be confirmed?

The Guarantee Final Termination Date will be the earlier of:

  • 6 months following the latest Loan Maturity Date;
  • The date on which an Early Termination (if any) has occurred and
  • The date (if any) on which the EIF is no longer liable to effect further payments to the Financial Intermediary and has no further claims under the Guarantee.

24.

Can EIF confirm, under which country’s law is the Guarantee is made? 

The Guarantee Agreement will be governed by the laws of England.

GUARANTEE STRUCTURE 

 

QUESTION

ANSWER

25.

Is the Financial Intermediary able to give the guarantee an extendable value of less than 75% and request additional security cover from the client?

The Guarantee Rate shall be fixed at 75% for each eligible SME loan covered by the Guarantee.

Any realised recoveries from collateral provided by the client, net of recovery costs, shall be shared pro-rata with the EIF. 

26.

Can the Financial Intermediary requests additional security post-drawdown in the event of issues with the Guarantee/ Guarantee Cap Amount?

The Financial Intermediary selected shall maintain economic exposure of at least 20% of the outstanding amount of each Eligible Loan included in the Portfolio and shall not enter into any credit support contract, guarantee or other credit risk transfer arrangements with respect to this retained portion; for the avoidance of doubt, any collateral provided by the Eligible SMEs shall not constitute such guarantee). Any additional security cover from the client shall be shared prorata with the EIF if exercised upon loan default (after a guarantee call has been made). 

27.

Indeed, defaults are really low currently but about 80% of loans are secured.

If the Financial Intermediary reverses the tendency and have only 23% security for the portfolio.It becomes risky so the FI might not be able to apply very low interest rates for the loans which will not be 75% secured due to the cap.

The Guarantee will provide significant risk coverage as it will cover 75% of each loan included in the Portfolio up to the Cap Amount (up to EUR 8.8m).

As the Guarantee is free of charge, the selected Financial Intermediary will be requested to transpose the benefit of the Guarantee to the Eligible SMEs by a reduction of the interest rate and/or by a reduction of collateral. 

The Financial Intermediary is free to request collateral from the client; the proposed collateral level for the loans will be binding (and is a selection criterion). Any collateral requested for the Eligible Loan will be shared pro-rata with EIF. 

28.

Could EIF explain in details how a guarantee of EUR 8.8m should spur a EUR 51.04m portfolio? (Explain the 5.8 leverage effect model).

The Guarantee Cap Amount of EUR 8.8m is the value of the EIF guarantee and is computed as the product of the 23% maximum cap rate offered available for cover expected and unexpected losses and the guaranteed portfolio of EUR 38.28 m (51.04m *75%).

The leverage shall be calculated as the ratio between the total SME loan portfolio and the Cap Amount (51.04m/8.8 m). Equally it can be computed as: (1/Cap Rate) * (1/Guarantee Rate)=(1/23%) * (1/75%) = 4.3 * 1.33 = 5.8 

29.

Does the EIF have any recommendations as to how loans should be assessed so as to ensure that the FI is not expecting something from us which if he does not do could exclude the loan from the guarantee?

Origination, client assessment, documentation and servicing of the Eligible Loans etc. shall be performed by the Financial Intermediary in accordance with its standard origination and servicing procedures. The Financial Intermediary shall have the sole direct client credit relationship with each SME. 

The Deadline for the submission of the Expressions of Interest is 15 November 2010.

[1] Micro, small or medium-sized enterprises as defined in the Commission Recommendation 2003/361/EC


 
 

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