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.
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... PRESENCE OVER THE LIFE CYCLE OF THE COMPANY
Start-
up
Gro
wth
Turnar
ound Business Angels
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: [email protected]: www.aecm.be
Thank you for your attention!