EIF involved in German PROMISE Securitisation Programme, with Baden-Württembergische Bank and KfW

The European Investment Fund (EIF), acting as a credit default swap counterparty, has taken part in a synthetic securitisation transaction of SME loans originated by Baden-Württembergische Bank, whereby EIF guarantees EUR 41,2 million of a mix between a junior credit default swap (rated Aaa) and a mezzanine credit default swap (rated Ba2). This credit enhancement transaction takes place under KfW's PROMISE (Programme for Mittelstand-loan Securitisation) synthetic securitisation programme launched in 2000 to further promote SME financing. The programme enables KfW to support German banks in their granting of loans to the Mittelstand by providing regulatory capital relief and transferring credit risk to capital markets and swap counterparties.

SME financing securitisation became a priority for the EIF in 2000 in view of the market development and the EIF mission of contributing to enhance access to finance for European SMEs. The EIF provides an unconditional, irrevocable guarantee of timely payment of principal and interest on mainly BB to A rated bonds. These bonds are wrapped up to an implicit AAA rating level (based on the fact that 95% of the EIF's shares are held by AAA rated institutions). In 2001, the EIF has already participated in three such transactions, originated by Banco Bilbao Vizcaya Argentaria in Spain; Dresdner Bank in Germany; and Banca Lombarda Group in Italy.

The EIF was created in 1994; it is the specialized financial institution of the European Union for the support of the creation, growth and development of Small and Medium-sized Enterprises (SMEs). The EIF shareholding has a tripartite structure that comprises the European Investment Bank (EIB, 60%), the European Commission (30%) and several banks and financial institutions (10%).

The EIF does not finance directly SMEs, but always acts through financial intermediaries. It intervenes through venture capital and guarantee instruments.

The EIF guarantee instruments facilitate access to debt finance for Small and Medium-sized Enterprises through the intermediation of a wide range of banks and financial institutions. The latter are allowed to allocate capital to those operations at a rate of 20% in accordance with EIF's status as a multilateral Development Bank under the European Solvency Ratio Directive.