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Fitch Affirms European Investment Fund at 'AAA'; Outlook Stable
June 22, 2017 / 3:17 PM / 6 months ago

Fitch Affirms European Investment Fund at 'AAA'; Outlook Stable

(The following statement was released by the rating agency) LONDON, June 22 (Fitch) Fitch Ratings has affirmed European Investment Fund (EIF)'s Long-Term Issuer Default Ratings (IDR) at 'AAA' with a Stable Outlook and Short-Term IDR at 'F1+'. KEY RATING DRIVERS EIF's 'AAA' IDR reflects the following key rating drivers: The ratings are underpinned by the strong extraordinary support Fitch believes it would receive from its shareholders, which at end-December 2016 included the European Investment Bank (EIB; AAA/Stable; 59.9% of subscribed capital), the European Union (EU; AAA/Stable; 28.1%) as well as 31 large financial institutions based in the EU and in Turkey. Shareholders' capacity to support is assessed at 'aaa' by Fitch; this reflects the rating of EIB, which is EIF's key shareholder. Additionally, the agency views EIF shareholders' propensity to support EIF as strong. That assessment primarily reflects EIF's role in leveraging funds for small and medium sized enterprises (SMEs) in the EU, as evidenced by its participation in the European Fund for Strategic Investments (EFSI) alongside EIB and the EU. At end-2016, EIF's shareholders had already subscribed 92% of the EUR1.5 billion capital increase they committed to in 2014, which we view as additional evidence of their willingness support the fund. Based on Fitch's Financial Guaranty criteria, EIF's intrinsic rating is assessed within the 'AA' rating category. In 2016, EIF's own-risk exposures - guarantees and private equity participations - grew at a faster pace than EIF's yearly targets under EFSI. Although Fitch expects EFSI to continue boosting EIF's own-risk exposures growth in 2017, we forecast their annual growth to stabilise at between 10% and 15% over the medium-term. EIF's ratings reflect the fund's robust capitalisation. EIF's own-risk drawn guarantees/own funds ratio worsened to 1.7x at end-2016 (end-2015: 1.3x), reflecting increased business volumes. Fitch expects this ratio to remain consistent with our 'AAA' median of 2.5x for a "high frequency/high severity" guarantee portfolio without currency risk, such as EIF's. Profitability was healthy in 2016, with a return on equity of 6.5%, compared with 5.5% in 2015. The increase was mainly driven by a strong rise in management fees from funds disbursed under EU/EIB mandates, reflecting increased business volumes. Fitch, however, expects lower profitability in the coming years, in line with continued low interest rates and higher staff costs due to increasing demand for EIF financing. Fitch assesses EIF's liquidity as average. At end-2016, the fund's liquid asset buffer was weaker than our 'BBB' median for Fitch-rated financial guarantors. However, EIF has no financial debt and a track record of very limited cash requirements for disbursements of calls on own-risk exposures. At end-2016, liquid assets (investment-grade securities and cash) covered risky assets by 3.4x; additionally 53% of treasury assets were rated within the 'AA'-'AAA' range. The credit quality of risks borne by EIF is strong and remains stable. The weighted average rating of EIF's own-risk guarantees portfolio was 'A-' at end-2016, stable since 2011. Despite the amount paid for called financial guarantees being higher in 2015 and 2016 than in previous years, they still account for only a small share of outstanding guarantees. The fair value of the private equity book was above its cost value at end-2016. In Fitch's views, EIF's risk management is consistent with the fund's 'AAA' rating. Despite the fundamentally risky nature of the fund's focus on SMEs, EIF keeps own-risk guarantees and private equity portfolios well-balanced and diversified and follows strict internal prudential rules. CRITERIA VARIATION ANALYSIS Fitch's analysis of EIF's shareholders' support capacity includes a variation from the agency's Supranational Rating Criteria. While coverage of net debt by callable capital is typically used when assessing the support rating of a multilateral development bank (MDB) whose shareholders have subscribed callable capital, Fitch based its assessment of EIF's support using the average rating of key shareholders. In Fitch's view, this criterion is more appropriate given the specific features of EIF, which is a supranational financial guarantor (SFG) and not a MDB. EIF's operations largely consist of financial guarantees; unlike MDBs, EIF does not need to raise debt to fund loans and its balance sheet is structurally debt-free. Hence, coverage of net debt by callable capital does not provide a meaningful measure of support. RATING SENSITIVITIES As EIF's rating is based on extraordinary support from shareholders, negative rating action on key shareholder EIB would lead to a negative rating action for EIF. A rating downgrade could also be triggered by severe deterioration in intrinsic credit quality, leading to a one notch downward revision of the intrinsic rating. This could result from pressure on liquidity and investment risks or from marked deterioration the fund's financial performance. KEY ASSUMPTIONS - Callable capital would be provided by EIF's shareholders on a timely basis, if EIF requires it to meet its financial liabilities. - The strategic relationship between EIF and the EIB and EU remains strong. - No significant amount of debt will be issued by EIF in the medium term. Contact: Primary Analyst Vincent Martin Director +44 203 530 1828 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Ralf Ehrhardt Director +44 203 530 1551 Committee Chairperson Eric Paget-Blanc Senior Director +33 1 44 299 133 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: Sources of information - EIF financial report 2016 and other analytically-related presentations provided by EIF Additional information is available on Applicable Criteria Insurance Rating Methodology (pub. 26 Apr 2017) here Supranational Rating Criteria (pub. 18 May 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. 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