European Investment Fund 2011 docx

European Investment Fund Primary Credit Analyst: Leila Butt, London (44) 20-7176-2138; Leila_Butt@standardandpoors.com Secondary Contact: Benjamin Young, London (44) 20-7176-3574; benjamin_young@standardandpoors.com Table Of Contents Major Rating Factors Rationale Outlook Structure And Shareholders Capitalization Operations Own-Risk Guarantee Portfolio Own-Risk Private Equity Participations Financial Performance Related Criteria And Research October 31, 2011 www.standardandpoors.com/ratingsdirect 1 906713 | 301664923 European Investment Fund Major Rating Factors Strengths: • A solid financial profile, including a debt-free balance sheet. • Strong shareholder support. • In our opinion, prudent statutory and policy controls. • 'AAA' rated callable capital equaling 223% of shareholders' equity. Counterparty Credit Rating Foreign Currency AAA/Stable/A-1+ Weaknesses: • High embedded risk in EIF's portfolio of loan guarantees and venture capital investments. Rationale The European Investment Fund (EIF) is a Luxembourg-based financial institution of the European Union (EU). At Dec. 31, 2010, EIF's shareholders were: the EIB with a 61.2% shareholding; the EU, represented by the European Commission with a 30.0% shareholding; and 28 financial institutions from the enlarged EU with a combined 8.8% shareholding. The EIF's mandate is to promote the creation, growth, and development of micro and SMEs in the enlarged EU and candidate countries. The mandate is pursued in two ways: • EIF guarantees financial institutions' SME loan portfolios in exchange for a fee; and • EIF participates in private equity (PE) funds, including venture capital (VC) funds. The EIF, in effect, operates in two different capacities: it has an own-risk portfolio, but also acts as an agent for other supranationals (primarily the EIB and EU) and national and provincial governments (for instance, Germany, Spain, and Bavaria). The risk that the EIF incurs in this capacity is borne by these entities. At year-end 2010, 93% of the EIF's €5.4 billion private equity (PE) investments were of this type and the remainder was at the risk of the EIF's own account. Similarly, nearly 83% of the EIF's €14.7 billion in outstanding guarantees at year-end 2010 was mandated by the EU, with the remainder at the EIF's own risk. During 2009–2010, the EIF increased its participation in PE funds and its issuance of guarantees to SMEs to meet the challenges of reduced availability of market-based funding. The new PE commitments have increased by 50% since 2008 this includes a 22% increase in commitments at the EIF's own risk. Overall, new-guarantee commitments have increased by nearly 20% since 2008, but the proportion at the EIF's own risk decreased to 17.5% in 2010, from just over 31.0% of total guarantees in 2008. The growth in overall guarantees stemmed from an increase in guarantee trust activity that the EIF manages on behalf of the EC, its member states, and the EIB. The EIF's key shareholders remain firmly committed to its mandate and operations, and we believe that the EIF is an integral part of the EIB group and its future strategy. As evidence of shareholder support, in 2007 shareholders agreed to increase subscribed capital to €3 billion from €2 billion by end-2010, with €200 million of the increase to be paid in, most of which was to come from the EIB. As a result of the capital increase, retained earnings, and statutory reserves, The EIF's shareholders' equity stood at €1,016 million at year-end 2010, from €693 million at Standard & Poors | RatingsDirect on the Global Credit Portal | October 31, 2011 2 906713 | 301664923 year-end 2006. Funding for the EIF's activities for its own account comes entirely from shareholders' equity; under its agreement, EIF cannot borrow for these purposes, although it maintains a €25 million treasury facility for bridging purposes, and we believe funding from EIB would be available if necessary. The EIF's operations require lower liquidity relative to total assets than other multilateral lending institutions (MLIs), since it does not lend or borrow, and outflows of funds result from the undisbursed PE commitments and payments under guarantees. Liquid assets, including securities, benefit from implicit liquidity support from the EIB. Liquid assets decreased to 6.2% of total balance-sheet assets in 2010, compared with 35.6% at year-end 2008, as cash assets have been progressively invested in debt securities and other fixed income securities. We believe the EIF's statutory and policy controls are prudent, and the sum of own-risk PE commitments (valued at cost) may not exceed 50% of shareholders' equity (excluding the fair value reserve), while guarantee exposure cannot exceed three times the amount of subscribed capital. We would expect 'AAA' rated callable capital to comfortably cover this in a stressed scenario. The EIF is exempt from income taxes, like other MLIs. Unlike most other MLIs, it normally pays a cash dividend to its shareholders. However, the dividend was suspended for the 2009 fiscal year in light of EIF's €7.4 million loss, the first since the EIF began operations. The loss primarily reflected higher provisions for losses on guarantees and some impairments on PE investments. The fund recorded a profit of €7.2 million in 2010, and a minimum amount of €1.4 million in dividend payments is expected to be made in 2011. Outlook Standard & Poor's Ratings Services expects the EIF's capacity to meet its financial obligations to remain extremely strong in the medium term despite suffering from the effects of the global market downturn. The fund's conservative business approach, together with prudent statutory and policy controls, effectively limits its exposure to risks from its operations. Shareholder support remains robust, due to the important role the fund continues to play for both of its main shareholders. Table 1 European Investment Fund Financial Indicators Mil. € 2010 2009 2008 2007 2006 2005 Total assets 1,196 1,158 1,076 1,024 771 739 Liquid assets 74 106 384 292 53 73 Debt securities and other fixed income securities 864 832 496 522 517 504 PE investments (valued at lower of cost or attributable NAV) 194 165 159 168 134 105 PE investments (valued at cost) 228 206 191 168 139 120 Subscribed capital 3,000 2,940 2,865 2,770 2,000 2,000 AAA' callable capital 2,266 2,228 2,239 2,095 1,515 1,522 Paid-in capital 600 588 573 554 400 400 Shareholders' equity 1,016 1,029 1,014 985 693 668 Off balance sheet: SME guarantees at EIF risk (exposure at risk) 2,580 2,893 3,838 3,607 3,050 2,978 www.standardandpoors.com/ratingsdirect 3 906713 | 301664923 European Investment Fund Table 1 European Investment Fund Financial Indicators (cont.) Profit and loss Income from investments in shares and other variable income securities 10.9 0.9 4.6 6.7 6.9 1.9 Commission income 37.1 26.8 23.4 29.1 26.3 17.9 Administrative expenses 43.6 36.4 30.0 26.1 21.6 16.0 Net interest and similar income 31.5 28.6 38.5 30.2 23.6 22.8 Profit 7.2 (7.4) 35.1 50.4 48.6 36.7 Value adjustments in respect of investments in venture capital enterprises N/A N/A N/A N/A N/A N/A Key Financial Ratios Shareholder Equity/Assets (%) 85.0 88.8 94.3 96.2 89.8 90.3 Liquid Assets/Total Assets (%) 6.2 9.2 35.6 28.5 6.9 9.9 Liquid Assets/Shareholder Equity (%) 7.2 10.3 37.8 29.6 7.6 11.0 Liquid assets plus fixed income securities/Total assets (%) 78.3 81.1 81.7 79.5 73.9 78.1 Gearing¶ (%) 107.1 118.0 151.1 151.8 167.2 127.0 Drawn SME guarantees (exposure at risk)/equity (%) 253.8 281.2 378.5 366.1 440.4 445.9 Return on shareholders' equity (%) 0.7 (0.7) 3.6 7.5 7.5 5.8 Return on assets (including guarantees) (%) 0.1 (0.1) 0.3 0.4 0.4 0.4 Commission Income/profit (%) 513.7 (364.1) 66.7 57.7 54.1 48.8 Income from VC investments/profits (%) 150.4 (12.6) 13.1 13.2 14.2 5.2 Commission Income/Administrative Expenses (%) 85.2 73.8 78.0 111.3 121.7 112.1 Structure And Shareholders The EIF, established in 1994 and based in Luxembourg, is a financial institution of the EC. It has a tripartite shareholder structure, comprising the EIB (61.2% at Dec. 31, 2010), the EU represented by the European Commission (30%), and 28 financial institutions (8.8% in total). EIF's shareholding structure and operations were reformed in 2000, following an initiative by the EIB to make the EIF an integral part of the EIB Group. The EIB became the majority shareholder of EIF by purchasing the remaining unallocated shares in the fund, buying shares from other financial institutions, and reducing the number of smaller shareholders. The EIF's mandate is to promote the creation, growth, and development of SMEs, in accordance with a strategy to turn the EU into a dynamic, knowledge-based economy, as set out by the 2000 Lisbon European Council. This is outlined in Article 2 of the Fund's statutes, which determines the EIF's tasks in contributing to the pursuit of European Community objectives. The EIF's statutes also require it to act independently and commercially, seeking a return for shareholders. To pursue its objectives, the EIF is authorized to provide loan portfolio guarantees (guarantees of other institutions' loans to SMEs) and to acquire PE fund participations in private equity funds targeting SMEs. The fund's investments aim to leverage both its own funds and those that are available through mandates (resources that the EIF manages on behalf of the EIB and EU). Mandates from the EIB include the Risk Capital Mandate (RCM) and the Mezzanine Facility for Growth (MFG), while those from the EU include the Competitiveness and Innovation Framework Programme (CIP) and the Joint European Resources for Micro to Medium Enterprises (JEREMIE). For example, the JEREMIE initiative started in 2005 to facilitate SMEs' use of EU structural funds over the period 2007-2013. The Standard & Poors | RatingsDirect on the Global Credit Portal | October 31, 2011 4 906713 | 301664923 European Investment Fund EIF also began to scale up its microfinance activity in 2010 and launched the European Progress Microfinance Facility (EPMF) in that year, which serves as an umbrella initiative for the fund's microfinance activities. This focuses on micro-borrowers, micro-entrepreneurs, and groups with limited access to the conventional banking system. The fund's key shareholders are firmly committed to the EIF's objectives and operations. The EIF plays an integral role in the operation of its majority shareholder, the EIB, acting as the EIB's specialist arm for PE and SME guarantee operations under the umbrella of the EIB group. Following the reform of the fund in 2000, overlaps in the operations of EIB and EIF were removed by transferring the EIF's portfolio of guarantees under the trans-European transport, telecommunications, and energy networks to the EIB. In return, the EIB transferred management of its SME PE portfolio to the EIF and gave the fund a mandate for future operations on behalf of the EIB. In addition, certain tasks previously carried out within the EIF, such as treasury management and internal auditing, were outsourced to the EIB. The EU, represented by the European Commission, is the EIF's second-largest shareholder and plays a specific role. Not only was the EU the initial driver behind the EIF's creation , it also sets the EU objectives to which the EIF is committed through its statutes. The EIF represents the most important platform for SME projects from the EU budget, providing specialized expertise in SME financing while at the same time ensuring effective use of EU budget resources. At Dec. 31, 2010, the EIF's third group of shareholders was made up of 28 financial institutions that generally have expertise and a commercial interest in SME finance, comprising national development and commercial banks. Many of these institutions are not only shareholders, but cooperate with the EIF at the operational level, as demonstrated by guarantee operations carried out with KfW (AAA/Stable/A-1+), Caisse Des Depots Et Consignations (AAA/Stable/A-1+), and a number of commercial banks. Capitalization The EIF's subscribed capital was €3 billion at end-2010, of which 20% has been paid in, amounting to €600 million. Callable capital from 'AAA' rated shareholders was 223% of shareholders' equity. Given that the sum of own-risk PE commitments (valued at cost) may not exceed 50% of shareholders' equity (excluding fair value reserve), while guarantee exposure must not exceed three times the amount of subscribed capital, 'AAA' rated callable capital of €2.3 billion at end-2010 should suffice to cover all potential payment obligations even under the most severe stress scenarios. At end-2010, EIF own-risk guarantees amounted to €2.6 billion, less than a third of the statutory limit of €9 billion, while net PE commitments totaled €389 million, below the €523 million statutory limit. Shareholders' equity therefore covered one-third of the EIF's own-risk guarantees and PE operations in 2010 (shareholders' equity was more than twice own-risk PE operations). Callable capital may be called by a general meeting, on a proposal of the board of directors, to meet the fund's liabilities to creditors. Payments are required be made within 90 days. This explicit deadline for the capital pay-in is unusual among supranationals. Considering also that almost all of the EIF's 'AAA' rated callable capital comes from its two main shareholders, capital calls should be implemented fairly swiftly. If the EIF required liquidity at shorter notice than provided for by callable capital procedures, however, we would expect the EIB to act as a lender of last resort and to provide interim credit. www.standardandpoors.com/ratingsdirect 5 906713 | 301664923 European Investment Fund Given the previous growth rates of the EIF's business, the board of directors approved a 50% capital increase from €2 billion to €3 billion for subscribed capital in 2007. The amount of paid-in capital was also increased by 50%, or €200 million, and was fully paid in 2010. Any potential capital increase requires an 85% majority at the general meeting; in other words, it requires the votes of both the EIB and the EC, which together hold just over 91% of the EIF's shares. EIF management does not expect another increase in the near future, however. The ongoing capital increase throughout 2010 (which amounted to €21 million) and the related increase of €9 million in the share premium account resulted in EIF shareholder equity of €1,016 million at the end of 2010 (€693 million at end-2006). EIF statutes require the appropriation of at least 20% of net income toward the statutory reserve as long as reserves are less than 10% of subscribed capital. However, the appropriation requirement was not implemented in 2010 on the basis of the net loss of €7.4 million in 2009, the first since the EIF began operations. The loss primarily reflected higher provisions for losses on guarantees and some impairments on PE investments. The fund recorded a profit of €7.2 million in 2010, and a minimum of €1.4 million in dividend payments is expected to be made in 2011. Operations The EIF uses two instruments to promote and support SMEs: portfolio guarantees and PE participations. It also operates in two different capacities: it has an own-risk portfolio, but also acts as an agent for other supranationals (primarily the EIB and EU) and national and provincial governments (for instance, Germany, Spain, and Bavaria). The risk that the EIF incurs in this capacity is borne by these entities. During 2009–2010, the EIF increased its participation in PE funds and its issuance of guarantees to SMEs to meet the challenges of reduced availability of market-based funding. Total outstanding guarantees at year-end 2010 amounted to €14.7 billion (see table 2). These have increased by nearly 20% since 2008, but the proportion at the EIF's own risk decreased to 17.5% in 2010, from just over 31% of total guarantees in 2008. The growth in overall guarantees therefore stemmed from an increase in guarantee trust activity that the EIF manages on behalf of the EC, its member states, and the EIB. Total PE commitments have increased by 50% since 2008 this includes a 22% increase in commitments at EIF's own risk. At year-end 2010, 93% of the EIF's €5.4 billion PE investments were of this type and the remainder was at the risk of the EIF's own account. The total number of PE funds was 351 at end-2010, of which 189 were at the EIF's own-risk. Table 2 European Investment Fund Guarantees And Venture Capital Commitments Mil. € 2010 2009 2008 2007 2006 Guarantees 14,701 13,594 12,334 10,919 10,385 Of which own risk 2,580 2,893 3,838 3,607 3,050 Of which Mandates (EC) 12,121 10,701 8,496 7,312 7,335 Venture capital* 5,367 4,103 3,534 3,480 3,274 Of which own risk 389 340 317 331 287 Of which Mandates 4,978 3,763 3,217 3,148 2,987 *Sum of drawn (minus capital repayment) and undrawn commitments. EC European Commission. EIB European Investment Bank. N/A Not applicable. Standard & Poors | RatingsDirect on the Global Credit Portal | October 31, 2011 6 906713 | 301664923 European Investment Fund On the guarantee business, the EIF manages a mandate on behalf of the European Commission, whereby the Commission guarantees part of the expected losses of SME portfolios to local financial institutions. The EIF is responsible for managing the latest version of this program, the High Growth and Innovative SME Facility (GIF) under the Competitiveness and Innovation Framework Programme (CIP), which covers the period 2007-2013. Total resources for guarantees under this program amount to €550 million. Meanwhile, for PE investments, apart from using its own resources, the EIF manages resources under mandate from its shareholders. This includes a Risk Capital Mandate (RCM), which the EIF has operated on behalf of EIB since 2000, when the fund became responsible for all EIB Group VC investments in Europe. The €4 billion available under this facility account for the majority of EIF's VC investments. In addition, under a Joint European Resources for Micro to Medium Enterprises (JEREMIE) with the EC, the EIF facilitates SMEs' use of EU structural funds through financial institutions and intermediaries. The EIF also manages third-party mandates with funds-of-funds from non-shareholders. The EIF generally co-invests its own resources alongside these third-party resources. However, these mandates are not included in the EIF balance sheet. For example, the EIF manages Dahlia, a pan-European fund-of-funds of €300 million launched jointly with Natixis Private Equity, Paris, with an EIF contribution of €75 million committed under the RCM mandate and EIF own resources in 2008. The EIF supports SMEs, not through direct investments but through equity investments in private equity funds, particularly those that are early-stage and technology-oriented. In return for managing the respective portfolios under mandate, the EIF receives management fees, and, in the case of PE mandates, a performance fee. Funding for EIF activities for its own account comes entirely from shareholders' equity; under its agreement, the EIF cannot borrow for these purposes, although it maintains a €25 million treasury facility for bridging purposes, and we believe funding from EIB would be available if necessary. This capital is used to credit enhance tranches of SME loan or lease-securitization transactions placed on the capital market transactions. The fund also provides credit insurance for SME loan and lease portfolios to financial institutions. Generally, the EIF aims to leave a certain amount of headroom to provide an additional cushion. EIF's operations are restricted to activities within the EU, and in accession countries. We believe the EIF's statutory and policy controls are prudent as the sum of own-risk PE commitments (valued at cost) may not exceed 50% of shareholders' equity (excluding fair value reserve), while guarantees cannot exceed three times the amount of subscribed capital. At end-2010, the EIF's net PE commitments (commitments made to underlying funds less capital repayments) totaled €389 million, below the €523 million statutory limit, while own-risk guarantees totaled €2,580 million, less than total subscribed capital of €3,000 million and therefore well below the statutory limit. We would expect 'AAA' rated callable capital to comfortably cover total own-risk commitments in a stressed scenario. All prospective guarantees and PE transactions undergo comprehensive due diligence before, and ongoing monitoring after, completion by the respective operational departments. A separate and independent risk management and monitoring division provides a second opinion on the risk assessments of the operational departments. www.standardandpoors.com/ratingsdirect 7 906713 | 301664923 European Investment Fund Own-Risk Guarantee Portfolio Statutes limit the amount of guarantee exposure extended by the EIF at its own risk to 3x the amount of subscribed capital, which is equivalent to €9 billion under the current arrangement, in line with the approved capital increase. This limit is in relation to €2.6 billion in net guarantee exposure at risk at end-2010. The halt in the securitization market during 2009 and the maturing of some guarantees has led to the decline in overall guarantees extended from €4.3 billion in 2007. The present policy, which requires shareholders' equity to fully cover both capital allocation for guarantees and PE commitments fully at all times for the EIF's own-risk portfolio, ensures that the level of guarantees will not approach the present statutory limit for the foreseeable future. The EIF uses its capital to credit enhance SME loan tranches or lease securitization transactions placed on capital market transactions. It also provides credit insurance cover for SME loan and lease portfolios to financial institutions. Credit enhancement accounted for about 95% of total own-risk guarantee exposure (€2.4 billion) as of end-2010. The EIF provides an unconditional, irrevocable guarantee on principal and interest to noteholders to enhance the credit quality of bonds backed by a securitized portfolio, or acts as a credit-default-swap counterparty, usually for mezzanine tranches. There are two other subportfolios that the EIF is focusing on less and less. These are credit insurance and reinsurance, and structured investment vehicles, which at end-2010 accounted for 5.3% (€135.5 million) and 0.2% (€6.3 million) of all own-risk outstanding guarantees, respectively. Table 3 European Investment Fund Own-risk Guarantee Portfolio, December 2010 (Mil. €) Outstanding Proportion of total outstanding (%) Gross capital charge Proportion of total gross capital charge Average capital allocation, % Credit Enhancement 2,438.4 95.1 522.1 99.4 21.7 Credit Insurance and Reinsurance 135.5 4.8 1.0 0.2 0.8 Structured Investment Vehicles 6.3 0.1 2.0 0.4 57.3 Defaulted 0.0 0.0 0.0 0.0 0.0 Total 2,580.2 100.0 525.1 100.0 20.7 At year-end 2010, called guarantees relating to the EIF's own-risk portfolio had reached a cumulative €16 million over 2005-2010 (of which €6.7 million fell in 2010). This figure is low in relation to the amount of guarantees extended (€3.2 billion in 2010). Provisioning for such calls amounted to €107.5 million in 2010 and a call of €6.7 million from two transactions were made in 2010. In terms of the outstanding amount of own-risk guarantees at end-2010, 18.1% were to pan-EU projects, 40.3% were in countries which had a 'AAA' sovereign rating, then Italy (12.8%), Spain (7.2%), and Ireland, Portugal, and Greece at a combined 8.4%. Standard & Poors | RatingsDirect on the Global Credit Portal | October 31, 2011 8 906713 | 301664923 European Investment Fund Guarantees trust activity The EIF is extending and managing a portfolio of guarantees on behalf of, and at the risk of, the EC. At year-end 2010, committed guarantee facilities under the EC mandate were €11.7 billion, up by a third from 2008. Own-Risk Private Equity Participations At year-end 2010, own-risk PE commitments on a net basis amounted to €389 million, with 189 funds. The EIF maintains a balanced portfolio with a focus on technology-oriented, early-stage, and general mid- and later-stage funds. It does not directly acquire participations in companies, but instead invests in selected PE funds, with a view to private-sector investors providing at least 50% of the equity. Co-investors sometimes come from financial institutions holding shares in EIF. All risk to EIF from its own-risk PE operations is fully covered by shareholders' equity. As a subceiling, PE commitments may not exceed 50% of shareholders' equity (excluding the fair value reserve), equivalent to €523 million at year-end 2010. By comparison, net commitments at end-2010 stood at €389 million. Of the €490.5 million of own-risk funds committed in 2010, €321 million has been disbursed. Following the IFRS methodology, EIF records value adjustments on a line-by-line basis either through the profit and loss in case of impairment or through the fair value reserve, which forms part of the EIF's shareholder's equity. Consequently, net disbursed own-risk funds (at cost) of €219.4 million are valued at €194.4 million in EIF's 2010 balance sheet. For the PE portfolio, 61% was in countries that had a 'AAA' sovereign rating, then Italy (5%), Spain (8%), with Ireland, Portugal, and Greece at a combined 5%. The EIF usually insists on a no-fault divorce clause in the funds in which it invests, allowing a qualified majority of investors to remove the manager of the respective PE fund. In addition, the EIF usually has a representative on the advisory boards of the PE funds in which it invests, and seeks cooperation with other investors to ensure prudent management of the fund and monitor its investments more closely. After investment, the performance and status of the respective PE fund, based on expected performance, operational status, and contractual compliance, are monitored regularly. Venture-capital trust activity EIF's PE investments from own-risk funds are relatively small when compared with the PE portfolios EIF manages on behalf of, and at the risk of, EIB, EC and other entities. For example, at year-end 2010 EIF had net disbursed amounts and undrawn committed investments of €3.8 billion from EIB resources under the EIB risk capital mandate, €217 million under the Multiannual Program for Enterprise and Entrepreneurship (CIP) and €59 million from EU funds under the ETF start-up facility. The composition of the overall PE portfolio is in many respects similar to the own-risk portfolio, due to an initial co-investment agreement with EIB that required EIF to co-invest its own resources into PE funds to which it committed capital under the EIB risk capital mandate. Remuneration for these PE operations is based on actual use. Financial Performance Due to the adverse financial environment during 2009 overall European private equity fundraising dropped by 85% from 2008 levels and securitization markets were adversely affected and filtered through to EIF's overall performance. Impairments on EIF's fund portfolio increased from 22% to 23.6% of total funds from 2008 to 2009 www.standardandpoors.com/ratingsdirect 9 906713 | 301664923 European Investment Fund and provisions for guarantees increased from €8.5 million in 2008 to €65 million in 2009 (as a result of which overall net income from guarantees totaled a loss of €20 million from a profit of €18 million in 2008). Overall, the EIF made a loss of €7.4 million as a result. Until 2009, the fund had generated a profit in every year of its existence, although profits in early years were almost exclusively due to income from the treasury. Impairments on the fund portfolio continued to rise in 2010, owing to the still difficult operating environment in that market, and stood at 25.2% of the EIF's portfolio based on committed funds, while provisions on guarantees reached €107 million (as a result of which overall net income from guarantees generated a loss of €25 million). Despite this, the EIF realized profit of €7.2 million in 2010, due to higher gains from equity and guarantee income. In recent years, the EIF core business has increasingly surpassed treasury as the main income provider. However, total income has fallen since 2008, owing to a fall in net income from guarantee operations, usually a large component of the core business. Commission income and net interest and similar income are now the largest components of total income. At the same time, staff costs have increased due to increased staffing intended to bolster ongoing surveillance efforts. EIF's operations are almost exclusively based on shareholders' equity, which is the basis for PE investments and capital allocation for guarantees. Consequently, EIF does not borrow funds. Liquidity is less important for EIF's operations than for multilateral lending institutions, because outflows of funds stem only from committed but yet-to-be-disbursed PE and potential payments on called guarantees. EIF's liquidity position benefits from implicit liquidity support from the EIB. However, liquidity, which was generally high, fell sharply in 2009-2010; cash assets as a percentage of total balance-sheet assets fell to 6.2% in 2010 from 35.6% in 2008, as liquid assets have been progressively invested in debt securities and other fixed income securities. EIF's treasury financial assets are restricted to a list of eligible instruments (money-market, long-term debt, and foreign exchange instruments). Any currency arbitrage not directly required to carry out EIF's operations is ruled out by the statutes. Treasury management has been outsourced to EIB under a treasury management agreement signed by both parties, and is carried out according to EIF treasury guidelines. The financial assets of EIF are held in two different portfolios, besides cash or equivalent: • The operational portfolio consists of liquid, highly rated (minimum short-term rating of 'A-1'), short-term instruments. Treasury guidelines prescribe that no less than €30 million of total treasury funds should be kept in the operational portfolio. • The investment portfolio (available for sale portfolio) consists of long-term debt instruments, and floating- and fixed-rate instruments. According to treasury guidelines the investment portfolio needs to be sufficiently diversified by issue, issuer, and share of corporate bonds. The EIF has altered its purpose-related exposure in line with achieving its objectives of enhancing its position as Europe's leading developer of risk financing for entrepreneurship and innovation. It has liquidated most of its asset-backed securities (ABS) holdings (at year-end 2010 it had three ABS positions with a total nominal value of €22.1 million, or 2.4% of the nominal portfolio), compared with €88 in 2008. It still holds a proportion of covered bonds, which have performed better than the ABS. It has also limited the amount of sovereign bonds that they can purchase, which are now contingent upon the maintenance of a rating at the 'BB+' level. However, the downgrade of Greece to below this rating in 2011 means that this requirement has been breached. By May 2011, 32.7% of debt and other fixed income securities had an 'AAA' rating, 35.9% were in the 'AA' Standard & Poors | RatingsDirect on the Global Credit Portal | October 31, 2011 10 906713 | 301664923 European Investment Fund [...]... equity was 0.7% in 2010 and dividends are again to be distributed in 2011 a minimum amount of €1.4 million is required to be appropriated in 2011 Related Criteria And Research • Criteria For Rating Multilateral Aid Agencies, July 6, 2009 • Group Methodology, April 22, 2009 Ratings Detail (As Of October 31, 2011) European Investment Fund Counterparty Credit Rating Foreign Currency AAA/Stable/A-1+ Counterparty.. .European Investment Fund category, 2.9% were in the 'A' category, 17.6% were in the 'BBB' category and 5.6% was sub -investment grade (this exposure was to Greece) Exposure to the weaker euro zone countries is high: in May 2011, total treasury portfolio exposure to Spain and Italy was 16.5% and 20.7%, respectively,... to purchase, hold, or sell any securities or to make any investment decisions S&P assumes no obligation to update the Content following publication in any form or format The Content should not be relied on and is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment and other business decisions S&P's opinions and... Sovereign Ratings; SovereignLondon@standardandpoors.com Additional Contact: Sovereign Ratings; SovereignLondon@standardandpoors.com www.standardandpoors.com/ratingsdirect 11 906713 | 301664923 Copyright © 2011 by Standard & Poors Financial Services LLC (S&P), a subsidiary of The McGraw-Hill Companies, Inc All rights reserved No content (including ratings, credit-related analyses and data, model, software... employees, advisors and/or clients when making investment and other business decisions S&P's opinions and analyses do not address the suitability of any security S&P does not act as a fiduciary or an investment advisor While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information... third-party redistributors Additional information about our ratings fees is available at www.standardandpoors.com/usratingsfees Standard & Poors | RatingsDirect on the Global Credit Portal | October 31, 2011 12 906713 | 301664923 . 3 906713 | 301664923 European Investment Fund Table 1 European Investment Fund Financial Indicators (cont.) Profit and loss Income from investments in shares. guarantees and venture capital investments. Rationale The European Investment Fund (EIF) is a Luxembourg-based financial institution of the European Union (EU).