Guarantee Schemes in Europe: the cooperation with

the banking sector

BGK International SeminarGuarantee Schemes in European Union Countries

– searching for the best model Warsaw, 9 February 2011

José Fernando FigueiredoPresident AECM

Why guarantees ?

– SME are key actors in the EU economy (also worldwide): – They represent an important part of employment and GDP and

are generally important for maintaining the economic and social fabric throughout the territory.

– Credit finance is important to SME in the EU, as they: – have no or little access to venture capital, mezzanine capital,

bond issues, etc.

– Have weak own funds positions => limited capability to auto-finance investment or working capital needs

– Rely predominantly on loan finance

– Usually have a relative lack of bankable collateral

– Due to the relative lack of collateral, loan finance is more difficult to obtain than for larger companies

WHY GUARANTEES? ...STRENGTHEN MARKET MECHANISMS...

SavingsSavings

Why guarantees ?

– Guarantee schemes facilitate access to finance by

providing credit default guarantees for SME that : – Are economically healthy

– Have an economically meaningful project but at the same time do not dispose of sufficient collateral to access bank credit

– Guarantee schemes’ philosophy:

– “Help for self help” principle and “risk sharing” with other financial partners, specially banks, in order to support SME development

What Guarantee products are offered in Europe?

– Generally: Credit default guarantees for SME:

– Guarantee issued on behalf of SME to banks to substitute missing collateral

– Offered for all stages of SME life cycle (from the financing of start-ups to business transfers)

– But also other types of guarantee products offered by some Guarantee schemes:

Guarantees for:

Micro loans, leasing, factoring, mezzanine finance, risk capital, internationalization, projects, EU funding, fiscal authorities, public procurement, etc.

6

... PRESENCE OVER THE LIFE CYCLE OF THE COMPANY

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Venture Capital

M & AVenture Capital

Maturity

Private EquityLoans

guarantees

guarantees

guarantees

Added value of Guarantee schemes

Advantages to SME:

– The first and most relevant is obviously the providing of an alternative way to access the financing need to develop

their projects (naturally for economically sound projects)

– At appropriate prices and for adequate term

– Recognition of qualitative factors in MGS risk analysis

– Support services and third party analysis by sectoranalysis of business plan and model

– Non-profit orientation of Guarantee scheme

– Intermediary function of Scheme towards lender

– In mutual schemes, participation in management of scheme

Added value of Guarantee schemesAdvantages to Public authorities :

– Helpful tool while designing public policies• the specialized knowledge can help the authorities in the SME financing area

– Financial intermediary for public policies: • Directly or through the Counter-guarantee element (regional, national, euroepan level EIF-CIP)

- It is an highly cost/effective leverage mechanism:

Example:

Leverage effect of € 1 public investment in counter-guarantee scheme that has 10 times multiplier, with e.g. a 50% coverage both at counter-guarantee and guarantee level:

– € 10 of counter-guarantees– € 20 of guarantees– € 40 of bank loans– even higher amount of final investment

– Individual risk assessment and follow-up

Added value of Guarantee schemes

Advantages to banks:

– Reduction of bank’s risk exposure, improvement of credit quality

• The loss given default ration is reduced in the presence of a guarantee

• Guarantee issuers are private or public financial institutions (that normally are covered by a public counter-guarantee mechanism, national or european like EIF), thus increasing the banks willingness to lend

– The can build up an SME portfolio• The bank can focus on this specific sector as the guarantee turns these loans more interesting and profitable

• Risk analysis can be individual or shared between banks and guarantee entities

Added value of Guarantee schemes

Advantages to banks:

– Financial supervision of the Guarantee Entity• The guarantee entity will also carry out the follow up of the SME evolution so giving additional trust and sustainability vis-a-vis lending partners

– Mutual Guarantee Schemes provides specific sector knowledge of SME customer in addition

to traditional Banking Sector analysis• In the particular case of the Mutual Guarantee Societies there is a special knowledge of the borrowers so an even higher level of information to the banks regarding risk analysis

– The Guarantee Entities are specialized • Special knowledge and no competition with the banks (partners on behalf of the SME)

Added value of Guarantee schemes

Advantages to banks:

– Mitigation effect on risk-asset ratio• thus reduction on capital consumption by the banks (depending of the qualification of the guarantee scheme)

– High level of liquidity of guarantee in contrast to other types of collateral

• most of the times guarantees are first demand and paid to banks in short time

after claiming

Typologies of Guarantee SchemesIn general, we can observe a great variety of different legal and operational frameworks for guarantee schemes, reflecting local needs.

Nevertheless it is possible to identify three main models:

1. Mixed model of with Private Guarantee entities and Public

counter-guarantee (a sort of PPP) – very frequent in older EU

member states and the more significant in volumes and number

of SME supported;

2. Public Guarantee Scheme or Guarantee Fund – also very

frequent, mainly in new EU member states;

3. Fully Private (Mutual) Guarantee Scheme, without any kind of

support from public authorities – not very frequent - the remaining

existing situations try to find counterguarantee at national or EU

level, for example through the EIF.

Typologies of Guarantee schemes

Main differences between public and private schemes:

PUBLIC GUARANTEE SOCIETIES

• Initiative taken by Public Authorities (State, Region..)

• Mainly public shareholding

• Directory Board elected or nominated by state authorities

• Mission: SME support

• Solvency: responsibility through own funds + public umbrella

• Ltd company with majority from state or endowment from public budget

• Other goal: sometimes the management of public subsidies

PRIVATE GUARANTEE SOCIETIES

• Initiative from SMEs and representative organizations, also banks

• Mainly private shareholding

• Directory Board composed of SMEs, bankers, private managers …

• Mutuality principles

• Mission: support member SME

• Self protected solvency through own funds and provisions + public support (normally) through counterguarantee

• Cooperative or Ltd Company normally under financial regulation

• Other goal: no

About AECM

35 active schemes in 19 countries

AECM Key figures (provisional 31.12.2009, in €1.000.000)

– Own Funds € 7.000

– Guarantees issued in 2009 €

33.601

– Outstanding commitments €

70.000 Leverage Cap / commitments > 10 x

– SMEs beneficiaries ~ 2,2

Million

AECM Membership

SME Finance Days for SMEs – Vilnius - Lithuania – 16 June 2010

Evolution of portfolio of AECM members

Progression of guarantee activity 2002 - 2009

Own funds

Value of guarantees granted during year

Total value of guarantees in portfolio

Years

2002 2003 2004 2005 2006 2007 2008 2009

in '00

0 €

0

10,000,000

20,000,000

30,000,000

40,000,000

50,000,000

60,000,000

70,000,000

80,000,000

The particular case of the portuguese mutual guarantee scheme

Protocols with banks Special Credit Lines negotiated between government, banks and MGS

Purpose: financing investment and working capital

Amounts: Max 1,5 million € per SME (positive discrimination for the best SME)

Maturity : Up to 5 years with 18 month grace period

Guarantee: 50% to 75%

Decision time: 3 to 7 working days

Interest rate: according to rating, from 0,9% to 4% spread

Guarantee fee: also according to rating, from 0,75% to 2%

State gives counter-guarantee through the national counter-guarantee fund up to 80% (90% in certain cases under Special measures for crisis)

Guarantee fees subsiized under “minimis”

19

Evolution of activity

Million Euro

Counterguarantees

issued€ 3 796

Public Investment

Private Investment

Mutual SME: > 47 000Employment: > 605 000Nº Students: > 11 300

€ 708

€ 132

Multiplying effects of public + private allocations to the scheme

Guaranteesissued€ 4 984

Bank financing to

SME€ 9 779

Investment made by the SME that got guarantees

€ 10 226

Contacts

AECM

Rue Washington 40

1050 BrusselsBelgium

Tel/Fax: 00 32 / 2 640 51 77E-mail: info@aecm.beWebsite: www.aecm.be

Thank you for your attention!