Commission Implementing Decision of 11 September 2014 on the model of funding agreement for the contribution of the European Regional Development Fund and the European Agricultural Fund for Rural Development to joint uncapped guarantee and securitisation financial instruments in favour of small and medium-sized enterprises (2014/660/EU)

ANNEX 1

UNCAPPED GUARANTEE (1) INSTRUMENT SME Initiative — option 1

SME INITIATIVE UNCAPPED GUARANTEE INSTRUMENT — OPTION 1

This instrument foresees the utilisation of uncapped guarantees provided by the EIF to cover the credit risk of SME loans, leases or guarantees. The SME Initiative Uncapped Guarantee Instrument is based on risk retained at different levels by EU resources (COSME and/or Horizon 2020), ERDF/EAFRD, together with resources from the EIB Group and potentially alongside national promotional banks and national guarantee schemes.

Under the SME Initiative Uncapped Guarantee instrument, the EIF would provide uncapped guarantees up to agreed maximum amounts. The originating financial institutions shall retain a material interest in their respective guaranteed portfolios, by retaining i.e. 20 % economic exposure on each guaranteed loan, in order to ensure the necessary alignment of interest (‘skin in the game’).

The Financial Intermediaries will individually receive an uncapped guarantee from the EIF in exchange for the payment of a guarantee fee. The higher risk of the resulting portfolio will be covered by a combination of MS Contribution and COSME or/and Horizon 2020 resources. The lower risk of the resulting portfolio will be retained by a combination of resources from the EIB Group up to agreed maximum amounts and potentially national promotional banks and national guarantee schemes. Such unfunded risk transfer, allowing for the partial transfer of credit risk to third parties without actually removing the portfolio of assets from the balance sheet of the financial institution would provide the opportunity for the originating financial institution to obtain regulatory capital relief, where feasible. Such operation would have to take into consideration the relevant country's regulatory requirements.

The origination, due diligence, documentation and servicing of the portfolio, made of eligible SME loans, leases or guarantees Transactions, shall be performed by the Financial Intermediaries in accordance with their usual origination and servicing procedures. The Financial Intermediary (or Sub-financial Intermediary in the case of counter-guarantees) shall retain the direct client credit relationship with each Final Recipient. The Financial Intermediary will provide information about the portfolio on a regular basis to the EIF and the EIF will accordingly pass on all relevant information to risk takers pursuant to the relevant agreements.

The Financial Intermediary will fully pass on to the SMEs the State Aid Benefit as defined in the indicative terms and according to the formula specified under sections 5 and 6 below. Moreover, it is considered that the implicit costs (reputational risk, financial risk, administrative risk, risk related to implementation of the compartment(2)) incurred by the Financial Intermediary offset any advantage related to State resources (i.e. the MS contribution) thus ensuring that the Financial Intermediary does not benefit from undue aid.

Unless expressly provided for, defined terms in this Annex 1 have the same meanings as the corresponding defined terms under this model Funding Agreement.

Indicative Terms of the Uncapped Guarantees under Option 1

a Only the MS Contribution is relevant for state aid considerations. Resources from the Commission and EIB and EIF own resources do not constitute state aid.
b Guaranteed loan amount = nominal loan amount (nominal guarantee amount) * Guarantee Rate.
c For the cases of counter guarantees.
1. Main characteristics
Scope of the Financial Instrument	The Financial Intermediary originates a portfolio of New Debt Finance (subject to a minimum Leverage Effect) for which it will receive an uncapped portfolio guarantee (in the form of direct, counter- or co-guarantees) from the EIF in exchange for the payment of a Guarantee Fee. The EIF acts as day-to-day manager of the Financial Instrument managing the MS contribution, the EU Contribution (i.e. contributions under [the COSME Regulation] AND/OR [the H2020 Regulation], the EIF Contribution and the credit risk taken by the EIB and possibly national promotional banks.
Guarantee	The Guarantee is provided by the EIF to the Financial Intermediary in exchange of a Guarantee Fee. The Guarantee shall cover a portion (up to the Guarantee Rate) of the credit risk associated with a portfolio of underlying New Debt Finance (the ‘Portfolio’).
Guarantee Rate	Up to 80 % of each and every Transaction in the Portfolio, so that the Financial Intermediary shall retain a material economic interest in the Portfolio, equal at least to 20 % of the economic exposure on it, in order to ensure alignment of interest.
Structure	The Guarantee shall cover, up to the Guarantee Rate, defaulted amounts incurred by the Financial Intermediary in respect of each defaulted eligible Transactions included in the Portfolio. The MS Contribution will be used to cover the highest risk of the Portfolio, up to a percentage that will be a determined having regard to the multiplier effect for the MS contribution agreed in the Funding agreement. This may typically result in 100 % of such amount being absorbed for the coverage of net losses under the Portfolio. The second riskiest part of the Portfolio will be covered by a combination of resources from the EIF, the EU budget and the Managing Authority. The residual risk of the Portfolio shall be covered using a combination of resources from the EIB Group and potentially national promotional banks and national guarantee schemes. The resources provided by the different risk takers shall be defined at a level such that the risk shall be compatible with the risk tolerance of the EIB Group and any other potential risk taker. Each Portfolio shall have sufficient homogeneity and sufficient pool diversification in order for the EIF to be able to assign a rating according to its risk assessment methodology.
Defaulted Amounts	Relate to unpaid principal and interest incurred by the Financial Intermediary in respect of defaulted Transactions included in the Portfolio.
2. Portfolio
Availability Period	The EIF and the Financial Intermediary will agree on an availability period (typically up to 3 years) during which Transactions may be included in the Portfolio.
Eligible Final Recipients	The Final Recipients have to fulfil the eligibility requirements as per CPR Articles 37(4) and 39 as well as the specific eligibility requirements set out in ERDF and EAFRD Regulations.
COSME Eligibility Criteria	See Annex 2.
Horizon 2020 Eligibility Criteria	See Annex 2.
Exclusion Process	If a Transaction does not comply with Eligibility Criteria it shall be excluded from the Portfolio (and shall not be covered by the Guarantee). In certain limited circumstances and in implementation of the requirements of Article 39(2)(a) of the CPR, the determination of whether such non-compliance was within the control of the Financial Intermediary may result in continued guarantee cover.
Leverage Effect requirement for MS Contribution	The Leverage Effect is calculated as the total New Debt Finance to eligible Final Recipients divided by the MS Contribution. The minimum Leverage Effect has to be at least [X] times the total MS Contribution.
Minimum leverage requirement for COSME contribution	Given the contribution under the COSME Regulation, if applicable, a volume of New Debt Finance to eligible Final Recipients in line with the leverage requirements as set out in the COSME legal basis and Delegation Agreement has to fulfil also the COSME eligibility criteria.
Minimum leverage requirement for Horizon 2020 contribution	Given the contribution under the H2020 Regulation, if applicable, a volume of New Debt Finance to eligible Final Recipients in line with the leverage requirements as set out in the H2020 legal basis and Delegation Agreement has to fulfil also the Horizon 2020 eligibility criteria.
3. Pricing
Guarantee Fee	The EIF shall charge to the Financial Intermediary the Guarantee Fee in relation to the Transactions included in the Portfolio. The Guarantee Fee, expressed as [X] % per annum, will be calculated quarterly on the outstanding amount of the Portfolio
Pricing of the MS Contribution	The MS Contribution shall be priced at a level which is commensurate with the relevant risk taken with the exception of the cover of the riskiest part of the Portfolio that shall be priced at zero (i.e. the MS Contribution will be provided free of charge).
4. Miscellaneous
Penalties	See Article 7.
Reporting	See Annex 5.
Monitoring and Audit	See Article 17.
5. Transfer of benefit
Transfer of benefit	The EIF shall assess the mechanism of transfer of benefit to the Final Recipients. That mechanism shall be included in the process for the selection of Financial Intermediaries and it shall form part of the EIF final decision on whether or not entering into a guarantee agreement and at what conditions. The transfer of benefit shall be applied for the part of the New Debt Finance covered by the Guarantee to the standard interest rate charged to the Final Recipients through a reduction of the credit risk/guarantee premium. It shall be documented accordingly.
Total Benefit	The Total Benefit shall be defined for the part of the loan covered by the Guarantee as the reduction in the interest rate or the guarantee fee as the case may be as charged by the Financial Intermediary to the Final Recipients, taking into account the underlying credit risk undertaken and the effect and the cost of the Guarantee. As the Financial Intermediary receives no remuneration/funding from the EIF, the assessment of the Total Benefit shall focus only on the credit risk premium. The Financial Intermediary shall take into account the cost of the guarantee (the Guarantee Fee) in the calculation of the new credit risk/guarantee premium for each loan or guarantee. The Total Benefit is given by the following formula: Total Benefit = standard credit/guarantee risk premium — Guarantee Fee
6. State Aid
State Aid Benefit	The State Aid Benefit for the part of the loan covered by the Guarantee is a portion of the Total Benefit, proportional to the MS Contributiona in the New Debt Finance portfolio, given by the following formula: State Aid Benefit = Total Benefit * % of the MS Contribution in the Guarantee (the guaranteed part of the New Debt Finance portfolio). The State Aid Benefit shall be fully transferred by the Financial Intermediary to the Final Recipient.
Calculation of the GGE	At Final Recipient level, the State Aid Benefit shall be considered as an interest rate subsidy within the meaning of Article 4(2) of the de minimis Regulation. The Gross Grant Equivalent (GGE) shall be calculated according to the following formula: GGE = Guaranteed loan amountb * maturity (weighted average life) of the loan (guarantee)c * State Aid Benefit The Financial Intermediary shall calculate the GGE for each and every loan (guarantee)c in the New Debt Finance portfolio and shall communicate it to the EIF. In all cases the GGE cannot be above the threshold set out in the de minimis Regulation.
State Aid Penalties	The EIF shall charge to the Financial Intermediary a State Aid Penalty in case the State Aid Benefit is not fully transferred to the final beneficiary.

SECURITISATION INSTRUMENT SME initiative — option 2

SME INITIATIVE SECURITISATION INSTRUMENT

This instrument foresees the utilisation of securitisation transactions backed by SME loans, leases or guarantees where EU resources (COSME and/or Horizon 2020), ERDF/EAFRD, together with resources from the EIB Group and potentially alongside national promotional banks, national guarantee schemes and other institutional investors, would subscribe or guarantee certain amounts at different levels of risks.

Under a securitisation instrument, a portfolio of SME eligible financing instruments is used as collateral for tradable securities (tranches), diversified by level of risk.

Unfunded risk transfer arrangements (synthetic securitisation) would also be possible, allowing for the transfer of credit risk to third parties without actually removing the portfolio of assets from the balance sheet of the bank and therefore providing the opportunity for the originating bank to obtain regulatory capital relief. Such operations would have to take into consideration the relevant country's regulatory requirements.

The securitisation instrument will guarantee a significant part of the underlying eligible debt financing portfolio upon an undertaking by the relevant Financial Intermediary to create an additional portfolio also by using resources mobilised as a result of the securitisation transaction for new SME financing.

Under the SME Initiative Securitisation Instrument, the EIF and the EIB (potentially alongside national promotional banks, national guarantee schemes and other institutional investors) would subscribe or guarantee certain tranches up to agreed maximum amounts. The originating financial institutions shall retain a material interest in the transaction, such as an adequate portion (minimum 50 %) of the junior tranche and an adequate exposure to each tranche placed with investors, or similar arrangements, in order to ensure the necessary alignment of interest ‘skin in the game’) and to comply with the risk retention requirement set out in Directive 2013/36/EU and Regulation (EU) No 575/2013.

The rating of the senior and the mezzanine tranches shall be compatible with the risk tolerance of the EIB Group and potentially national promotional banks, national guarantee schemes and third party institutional investors who may also invest in the senior tranches of such securitisations thus increasing the leverage of committed budgetary resources.

Junior and mezzanine tranches not retained by the originator are subscribed by a combination of ERDF/EAFRD, COSME/Horizon 2020 and EIF's own resources.

Managing Authorities who are willing to participate in the guarantee scheme (via the EIF, but at the risk of the ESI Funds contribution) guarantee/invest up to 50 % of the Junior tranche.

The origination, due diligence, documentation and servicing of the securitised portfolio, made of eligible SME loans, leases or guarantees to SME and companies with less than 500 employees, shall be performed by the Financial Intermediaries in accordance with their usual origination and servicing procedures. The Financial Intermediaries typically retain the direct client credit relationship with each SME. The Financial Intermediaries will provide information about the securitised portfolio as well as the Additional Portfolio (newly originated SME financing) on a quarterly basis to the EIB and EIF respectively until termination of the securitisation transaction.

Indicative Terms of the Securitisation

a Only the MS Contribution to the EIF for the securitised portfolio is relevant for state aid considerations. Resources from the Commission and EIB and EIF own resources do not constitute state aid
1. General Terms
Scope of the Financial Instrument	By securitising assets, Financial Intermediaries aim at releasing regulatory and economic capital and/or obtain new funding sources allowing the Financial Intermediary to originate New Debt Finance to eligible Final Recipients (to build an Additional Portfolio). The Financial Intermediary will receive a guarantee/investment from the EIF to cover the Securitised Portfolio in exchange for the payment of a Fee and commit to originate a portfolio of New Debt Finance (subject to a minimum Leverage Effect). The EIF acts as day-to-day manager of the Financial Instrument managing the MS contribution, the EU Contribution (i.e. contributions under [the COSME Regulation] AND/OR [the H2020 Regulation], the EIF Contribution and the credit risk taken from the EIB and possibly national promotional banks.
Transaction structure	Either cash (‘true sale’) or synthetic (‘unfunded’) securitisations are allowed. A cash securitisation is a transaction in connection with which an originator (the Financial Intermediary) securitises assets by pooling them into the Securitised Portfolio and selling the Securitised Portfolio to a special purpose entity (the ‘SPE’). The SPE finances the purchase of the Securitised Portfolio through the issuance of notes secured by such assets (Asset-Backed Securities — ‘ABS’). The proceeds from the issuance of these notes are used by the SPE to pay the purchase price of the Securitised Portfolio to the Financial Intermediary. In a synthetic securitisation, the Financial Intermediary retains the relevant assets on its balance sheet and the EIF covers part of the risk on the Securitised Portfolio. This potentially results into capital relief for the Financial Intermediary. The EIF shall tranche the Securitised Portfolio according to the risk of the underlying transactions. The Junior Tranche shall consist of the riskiest part of the Securitised Portfolio up to a predefined percentage, taking into consideration the characteristic of the portfolio, the credit enhancement requirements and the Leverage Effect requirement for MS Contribution. The MS Contribution will cover up to 50 % of the Junior Tranche, while the residual portion of the Junior Tranche shall be retained by the Financial Intermediary. This may typically result in 100 % of such amount being absorbed for the coverage of net losses under the Portfolio. The Mezzanine Tranche shall consist of the second riskiest part of the Securitised Portfolio and comprise three sub-tranches using a combination of resources from the EIF, the EU budget and the Managing Authority. In particular, the MS Contribution shall cover the risk of the Lower Mezzanine Tranche. The contribution under [the COSME Regulation] and/or [the H2020 Regulation] shall cover the risk of the Middle Mezzanine Tranche. The EIF Contribution shall cover the risk of the Upper Mezzanine Tranche. The size of the Mezzanine will be determined by EIF taking into consideration the characteristics of the portfolio, the credit enhancement requirements and Leverage Effect requirement for MS Contribution. The Lower Mezzanine and the Middle Mezzanine Tranches shall be up to [predetermined percentages of the Securitised Portfolio. The Senior Tranche shall consist of the residual risk of the Securitised Portfolio and be funded/retained by using a combination of resources from the EIB Group up to an agreed maximum amount and potentially national promotional banks and national guarantee schemes and other investors. The Senior and the Upper Mezzanine Tranches shall be defined at a level such that the risk shall be compatible with the risk tolerance of the EIB Group and any other participating risk takers.
2. Reference Portfolio (Securitised Portfolio)
Securitised Portfolio	The Securitised Portfolio might include existing assets (debt finance to SMEs and other enterprises with less than 500 employees) as well as portfolios of new debt finance to SMEs. Each Securitised Portfolio shall have sufficient homogeneity and sufficient pool diversification in order for the EIF to be able to assign a rating according to its risk assessment methodology. Existing portfolios shall not be included in the Securitised Portfolio after the Commitment Period.
3. Additional Portfolio
The Additional Portfolio	Each Financial Intermediary will be contractually required to provide New Debt Finance to eligible Final Recipients (Additional Portfolio). The breach by the Financial Intermediary of any of the requirements specified in the relevant Operational Agreement shall not affect the guarantee issued in relation to the Securitised Portfolio.
Leverage Effect requirement for MS Contribution	The Leverage Effect is calculated as the total New Debt Finance to eligible Final Recipients divided by the MS Contribution. The minimum Leverage Effect has to be at least [X] times the total MS Contribution.
Availability Period	The EIF and the Financial Intermediary will agree on an availability period (typically up to [3] years) during which Transactions shall be included in the Additional Portfolio.
Eligible Final Recipients	The Final Recipients have to fulfil the eligibility requirements as per CPR Articles 37(4) and 39 as well as the specific eligibility requirements set out in ERDF and EAFRD Regulations.
COSME Eligibility Criteria	See the COSME Regulation.
Horizon 2020 Eligibility Criteria	See the H2020 Regulation.
Minimum leverage requirement for COSME contribution	Given the contribution under the COSME Regulation, if applicable, a volume of New Debt Finance to eligible Final Recipients in line with the leverage requirements as set out in the COSME legal basis and Delegation Agreement has to fulfil also the COSME eligibility criteria.
Minimum leverage requirement for Horizon 2020 contribution	Given the contribution under the H2020 Regulation, if applicable, a volume of New Debt Finance to eligible Final Recipients in line with the leverage requirements as set out in the H2020 legal basis and Delegation Agreement has to fulfil also the Horizon 2020 eligibility criteria.
4. Pricing
Fee	The Fee shall be established on the basis of the pricing by each of the Financial Instrument risk takers for their respective tranches (see pricing below). The EIF shall charge to the Financial Intermediary [X] % per annum in relation to the covered part of the Securitised Portfolio.
Pricing of the Senior Tranche	It shall be set to a predefined percentage per annum by the EIB and other potential risk takers in accordance with their pricing policy.
Pricing of the Mezzanine Tranche	The Mezzanine Tranche shall be set to [X] % per annum by the EIF in accordance with its pricing policy. The Middle and Lower Mezzanine Tranches shall be priced to sustain the risk in relation to the expected losses of the respective tranches. In duly justified cases, the pricing can also be further reduced to attract Financial Intermediaries.
Pricing of the Junior Tranche	It shall be equal to zero (i.e. the Junior Tranche other than the tranche retained by the originator will be provided free of charge).
5. Miscellaneous
Penalties	See Article 7.
Reporting	See Annex 5.
Monitoring and Audit	See Article 17.
6. Transfer of benefit
Transfer of benefit	The EIF shall assess the mechanism of transfer of benefit from the Financial Intermediary to the Final Recipients in the Additional Portfolio. That mechanism shall be included in the scoring system for the purpose of selecting Financial Intermediaries and it shall form part of the EIF final decision on whether or not entering into a guarantee or investment agreement and at what conditions. The transfer of benefit shall be applied to the standard interest rate charged to the Final Recipients under New Debt Finance in the Additional Portfolio through a reduction of the credit risk premium. The mechanism of transfer of benefit shall be documented accordingly.
Total Benefit	The Total Benefit shall take into account the benefit provided to the Financial Intermediary, in each tranche of the Securitised Portfolio. The Total Benefit shall be calculated as the difference between the market price and the price charged by the EIF on each tranche with the same level of risk. The risk level of each tranche shall be defined by the internal rating methodology of the EIF. In the absence of a market price, the EIF shall apply the safe-harbour premium for an equivalent risk level for guarantees laid down in the Commission notice on the application of Articles 87 and 88 of the EC Treaty to state of aid in the form of guarantees (OJ C 155, 20.6.2008, p. 25). The safe-harbour premium for the Junior tranche amounts to up to 10 % per annum. The Total Benefit is given by the following formula: Total Benefit = Sum of Benefits of Individual Tranches The Benefit of Individual Tranche is calculated as follows: Benefit of Individual Tranche = (market price of the tranche – Fee) * Total EUR amount of tranche * maturity of the tranche (weighted average life)
7. State Aid
State Aid Benefit	The Total State Aid Benefit is a portion of the Total Benefit, proportional to the MS Contributiona in the Securitised Portfolio. The Total State Aid Benefit provided to a Financial Intermediary shall be calculated according to the following formula: Total State Aid Benefit (in EUR) = Sum of (Benefit of Individual Tranche * the % of the MS Contribution in the tranche). The Total State Aid Benefit shall be fully transferred by the Financial Intermediary to all the Final Recipients included in the Additional Portfolio. The State Aid Benefit for each Final Recipient shall be calculated according to the following formula: State Aid Benefit (interest rate subsidy in bps) = (Total State Aid Benefit/New Debt Finance in the Additional Portfolio)/Maturity of Additional Portfolio (weighted average life)
Calculation of the GGE	The State Aid Benefit provided to Final Recipients in the Additional Portfolio, shall be considered as an interest rate subsidy within the meaning of Article 4(2) of the de minimis Regulation. The Gross Grant Equivalent (GGE) shall be calculated according to the following formula: GGE = nominal loan amount * maturity (weighted average life) of the loan * State Aid Benefit The Financial Intermediary shall calculate the GGE for each and every loan in the Additional Portfolio and shall communicate it to the EIF. In all cases the GGE cannot be above the threshold set out in the de minimis Regulation.
No additional benefit on capital relief	In application of the relevant national rules on capital requirements, the volume of New Debt Finance shall not be set at a level lower than the volume of debt finance to SMEs which could be expected to be generated by the Financial Intermediaries using the capital freed up as a result of the MS Contribution.
State Aid Penalties	The EIF shall charge to the Financial Intermediary a State Aid Penalty in case the State Aid Benefit is not fully transferred to the final beneficiary.

(1)

‘Uncapped guarantee’ is the term used in Article 39 of the CPR.

(2)

The specific requirements related to the participation in the compartment include:

(a)

Minimum Leverage Effect to achieve a Portfolio with a minimum volume of New Debt Finance, which shall comply with the eligibility requirements for the MS Contribution;

(b)

Minimum volume of New Debt Finance which shall also comply with the parameters for the eligibility under COSME and/or under Horizon 2020;

(c)

Assessment and control of the eligibility criteria;

(d)

Penalties, in case the minimum Leverage Effect is not reached at the milestones and if the State Aid Benefit is not transferred;

(e)

Transfer of benefit undertakings, including the assessment of its mechanism and the reporting to EIF;

(f)

Calculation of the GGE for each and every loan in the portfolio of new debt finance and the reporting to EIF;

(g)

Visibility of the EU support in the contractual documentation with the final recipients and the marketing material;

(h)

Audit and monitoring undertakings in relation to the European Commission and the European Court of Auditors.

The above risks and requirements represent an implicit cost for the Financial Intermediary which receives no remuneration for the management activities of the Transaction, including no administrative fees and no performance fee.