Market Gaps on Access to Finance - Bank of Valletta

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Malta Business Bureau – <strong>Market</strong> gaps in access to finance April 2013 interest rates or providing similar advantages compared to their ordinary financing activities. Under SMEG a portion of each individual transaction is guaranteed, typically 50% (i.e. guarantee rate). The overall exposure for the EU budget is however limited by a contractually agreed maximum cap on portfolio losses (i.e. cap rate). 75 Loan Guarantee Instrument for TEN-T projects (LGTT) - This instrument is aimed at facilitating larger participation of the private sector in the financing of TEN-T infrastructure. Attracting private sector funding in core European transport projects can be challenging due to the relatively high levels of revenue volatility in the projects' early operating stages. The LGTT partially covers this revenue risk and consequently improves the financial viability of such TEN-T projects. LGTT is financed with a capital contribution from the EU budget. Technically, the LGTT Guarantee is issued in favour of commercial banks which provide a stand-by liquidity facility (SBF) to the project. Such SBF can be drawn upon by the project company in case of unexpected reduction of traffic/usage related income of the project during the initial operating period in order to insure the service of the senior debt facilities. 3.5.2.3 Instruments combining equity and debt support European Progress Microfinance Facility (EPMF) –through the EPMF, set up in 2010, the EU facilitates the granting of credit by providing guarantees, loans and equity to intermediaries who can then lend to small businesses and individuals or make available equity finance. It consists of two parts: 1) a guarantee instrument to providers of microcredit (i.e. loans of up to €25,000, in particular to vulnerable groups in risk of social exclusion, for the purpose of setting small commercial operations) and 2) a structured investment vehicle, the European Progress Microfinance Fund, which offers senior loans, subordinated loans, risk-sharing loans (senior loans combined with risk participation in the micro-credit portfolio) and equity participation to micro-credit providers. The maximum guarantee rate is 75% of the underlying microcredit or guarantee portfolio, while a cap is agreed for each guaranteed portfolio, based on the expected cumulative losses of the portfolio. The maximum liability for the EPMF is set at 20% of each guaranteed portfolio. The Fund has the EU and the EIB as investors while the EIF acts as Management Company. The EU holds the junior shares, which means that it bears the first net losses affecting the fund’s assets, within the agreed cap, while the EIB is protected as holder of the senior shares against the losses borne by the junior shares. The financial intermediaries may be private or public banks, non- bank microfinance institutions and not-for-profit microcredit providers. These providers would lay down the conditions, such as the amount, rate of interest and duration applicable to any microloans granted. The micro-enterprise can further benefit from interest rate rebates, guidance and coaching with the support of the ESF. The EU also provides funding to microcredit providers aimed at covering start-up costs and funding for lending to high-risk target groups, whilst increasing microcredit on-lending volumes 76 . European Energy Efficiency Fund (EEEF) – the EEEF was set up in 2011 using unspent funds from the European Energy Programme for Recovery. The fund is a structured finance vehicle to invest either directly in smaller scale energy efficiency and renewable energy projects of local authorities or invest in such projects indirectly via financial institutions. The Fund aimed at supporting the development of energy service companies. Investors in 75 In its evaluation report, the European Court of Auditors found the EU value added of SMEG not demonstrated since its results might have also been achieved by funding under national schemes (European Court of Auditors (2012), Financial instruments for SMEs – audit report. Audit based on Germany, Hungary, Portugal, Slovakia and the UK). On the other hand, the final evaluation of the EIP found the SMEG to fulfil a demand for finance which otherwise would not have been met (CSES (2011), Final evaluation of the Entrepreneurship and Innovation Programme). 76 Camilleri (2012), Microfinance - Access to Finance for SMEs within a European Context; European Commission (2012), Implementation of the European Progress Microfinance Facility - 2011 Page | 34
Malta Business Bureau – <strong>Market</strong> gaps in access to finance April 2013 3.5.2.4 Structural Funds the Fund include the EU, the EIB, the Italian Cassa Depositi e Prestiti, and Deutsche Bank, who are also acting as investment managers of the fund. Member States and Managing Authorities have the option of using part of the resources made available to them through the ERDF and the ESF to support financial engineering instruments. The ERDF resources are primarily used for support to enterprises, mainly SMEs, urban development and regeneration, energy efficiency and use of renewable energy in buildings, while ESF is used for support to self-employment, business start-ups and micro-enterprises. Many Member States today implement a range of equity and/or debt (loan and guarantee) instruments in at least one of these areas, either directly by contributing resources from an operational programme to a venture capital fund, loan or guarantee fund, or through holding funds set up to invest in several funds. Instruments are implemented through a variety of governance models and legal structures specific to each Member State or region. In Malta, the primary vehicle used to assist enterprises in various sectors were the afore-mentioned grant and assistance schemes made available through a number of intermediary bodies including ME, the ETC, the Ministry for Tourism, the MRRA and the Funds and Programmes Division (see Sections 2.4.2 and 2.4.3). Across the EU, instruments are implemented through investment into holding funds. Under the Joint European Support for Sustainable Investment in City Areas (JESSICA) initiative, holding funds are implemented through the EIB. Under the JEREMIE initiative, holding funds are generally implemented through the EIF or a range of national or regional institutions. In general, depending on the areas of intervention, the EIB or the EIF can receive a mandate to carry out holding fund tasks through a direct award of a contract by Member States or Managing Authorities. Other financial institutions can also be selected to implement operations organised through a holding fund, either by way of public procurement or by way of a grant. As indicated earlier (in particular in Section Error! Reference source not found.), in Malta, a Micro redit scheme under the JEREMIE initiative based on a loan guarantee was launched in 2011. 3.5.3 JEREMIE / MicroCredit scheme As briefly referred to in Section 2.4.3, the JEREMIE Malta Fund is based on a loan guarantee scheme and was set up for the first time in Malta in 2011. The JEREMIE Fund is an initiative developed in cooperation with the EC. The EC encourages Member States to use part of their EU Structural Funds to support local SMEs by providing finance to them by means of equity, loans or guarantees, through a revolving Holding Fund acting as an umbrella fund. JEREMIE is particularly advantageous to SMEs since it reduces their difficulties in accessing finance through the provision of credit risk protection. The JEREMIE Holding Fund (JHF) can provide selected financial intermediaries with SME- focused financial instruments including guarantees, co-guarantees and counter-guarantees, equity guarantees, (micro) loans, export‑credit insurance, securitisation, venture capital, Business Angel Matching Funds and investments in Technology Transfer funds 77 . In Malta, following a call for expression of intent to select financial intermediaries in November 2010, BOV was selected as the financial intermediary to implement this First Loss Portfolio Guarantee financial instrument. A repayable instrument is provided through JEREMIE instead of one off payment of grants. The JHF, managed by the EIF, injected €8.8 million in the JEREMIE Malta Holding Fund. Against this guarantee of €8.8 million, BOV added further capital to reach a loans portfolio of €51 million 78 . This creates a minimum leverage of around 5.8x (without taking into 77 http://www.eif.org/what_we_do/jeremie/index.htm 78 €8.8 million/ (coverage rate of 75% * cap rate of 23%) = c. €51 million Page | 35
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Market Gaps on Access to Finance - Bank of Valletta

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