E U R O P E A N F U N D F O R S T R A T E G I C I N V E S T M E N T S

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1 EUROPEAN INVESTMENT BANK SB/04/15 26 October 2015 Document FOR DECISION E U R O P E A N F U N D F O R S T R A T E G I C I N V E S T M E N T S S T E E R I N G B O A R D EFSI Multiplier Methodology Calculation Joint proposal by EC and EIB

2 Questions concerning this note should be referred to EFSI Secretariat: tel: ;

3 EFSI Multiplier Methodology Calculation One of the Key Performance Indicators of EFSI will be the investment impact. The overall target of investment mobilised through the EFSI is EUR 315bn to be delivered on the basis of an overall EFSI contribution of the EU and the EIB of EUR 21bn. This represents a target global multiplier effect of 15x. Based on current assumptions, this would be expected to result in EUR 61bn of new EIB/EIF financing (EIB: 49bn; EIF: 12bn), with reference to the baseline reference scenario as indicated in the EIB Corporate Operational Plan While, the actual global multiplier for EFSI can only be measured on portfolio level at the end of the investment period, it is expected that EIB estimates and monitors also transaction specific multiplier factors on an ex-ante basis 2. In order to achieve this, it is proposed to establish clear rules and coherent assumptions for the monitoring of the EFSI multiplier over time. The proposed EIB multiplier methodology will provide a framework linking the underlying EFSI guarantee 3 available with (a) the amount of EIB financing and (b) the amount of total investment that is expected to be generated by such financing. The proposed methodology has also been discussed with the EIF (in view of its fund and guarantee investments under the SME Window (SMEW)). While the main principles are coherent, the EIF methodology, which is in line with EIF s mandate of supporting SMEs in general rather than financing projects as EIB does, is set out in a different document. The multipliers referred to in this document will be established and their final outcome value calculated in line with the processing of Key Performance Indicators and Key Monitoring Indicators foreseen under Schedule II, section A, paragraph 3 of the EFSI Agreement Ex-ante estimation and monitoring by the EIB should not be interpreted as an exclusion criterion for individual projects which do not meet the 15x global multiplier effect, 3 Under the EIB Infrastructure and Innovation Window, the EFSI guarantee takes the form of a First Loss Piece (FLP) for the debt window and corresponds to the actual amount of EIB financing under the equity/equity-type window. 1

4 KEY ELEMENTS FOR DECISION The EIB multiplier methodology is comprised of 2 independent factors as outlined below: Global Multiplier (GM) = Internal Multiplier (IM) x External Multiplier (EM) Relation between EIB Loan / Equity amount and EFSI Contribution Relation between Total Investment and EIB Loan / Equity amount Relation between Total Investment and EFSI Contribution (A) IM = (EFSI Financing Volume) / (EFSI guarantee) For Investment Loans 4 : (B) EM = (Project Investment Cost) / (EFSI Financing Volume) For Intermediated Operations: (C) EM = (Catalytic Effect; CE) x EM* (D) EM* = (Project Investment Cost) / (Financing Amount from Intermediary) (E) CE = (Financing Amount from Intermediary) / (EFSI Financing Volume) 1. Internal Multiplier (IM) The IM represents the relationship between the EFSI guarantee and EIB s financing. At portfolio level, it can only be measured at the end of the investment period (signature by 30 June 2020). The EFSI guarantee takes the form of a First Loss Piece (FLP) for the debt window and corresponds to the actual amount of EIB financing under the equity/equity-type window. Under the debt window, the FLP is expected to be 25% at the end of the investment period enabling that every of EFSI guarantee leads on average to 4 of EIB financing. Therefore, the ex-ante IM on project level is set at 4x for all debt operations. Under the equity/equity-type window, the IM is set at 1x External Multiplier (EM) 4 For the purpose of this document, the category of Investment Loans includes also direct guarantees and credit enhancement provided to investment projects. 5 While EFSI foresees a 50/50 risk sharing for any EIB investment in this category, the Bank s contribution to such financing is considered to be included in the EUR 21bn EFSI capital commitment. 2

5 The EM captures the relationship between EFSI Financing Volume and Project Investment Cost. To calculate it, two broad cases have to be differentiated, Investment Loans and Direct Equity/Equity-Type Operations on the one hand and Intermediated Operations on the other External Multiplier (EM) Investment loans and Direct Equity/Equity-Type Formula (B) EM = (Project Investment Cost) / (EFSI Financing Volume) The EM relationship between EFSI Financing Volume and Project Investment Cost is illustrated in the diagram below. EFSI Financing Volume: In the case of EFSI (as well as in other EU/EIB schemes), the applied figure for the Bank s financing volume shall include only EFSI financing and not financing tranches provided from other EIB financing schemes. Project Investment Cost (PIC) is measured in the first instance as the total project cost defined in the EIB loan agreement according to EIB normal methodology. A baseline external multiplier is calculated by dividing the PIC by the EFSI financing volume as specified in formula (B) above. That baseline multiplier is subjected to an economic feasibility check by the Projects Directorate of the EIB and, if warranted, it is adjusted following the principles below. In general, the external multiplier varies across different financial products. Equity-type financing is more effective in crowding in additional finance, followed by junior debt and senior debt. A multiplier of 3 can be considered as a benchmark for senior debt, both based on past experience of the EIB and on the observation that financing at least one-third of any project is bound to be critical for the project to happen. Put differently, should the EIB not finance at least that one-third of the project, its realisation would in all likelihood be questionable. Similar reasoning applies to junior debt and equity-type, where the corresponding reasonable benchmarks can be set at 5 and 15, respectively. The table below summarises the benchmark external multipliers for the three product categories. Should the calculation in formula (B) result in a multiplier value that is sufficiently close to those shown, then that external multiplier value can be considered as economically feasible. Sufficiently close is interpreted as not deviating by more than about one-third from the benchmark. 3

6 Direct Financing: Transaction Type Benchmark External Multiplier Equity/Equit y-type (direct) 15 Junior Debt/ Credit Enhanceme nt 5 Senior Debt 3 However, should the obtained benchmark external multiplier fall outside these ranges, a review and possible adjustment by the Projects Directorate of the EIB is warranted. If the external multiplier deviates from the respective range mentioned above but if the EIB financing is associated with the entire project, the CA report should include a narrative supporting the multiplier calculation. If the EIB/EFSI financing is associated with only one part of the project then the investment cost should equal to that part of the project with which the financing is associated, together with a supporting narrative in the Board report. There are some other special circumstances where the Project Investment Cost needs to be adjusted: a. EU co-financing: If EU grant-financing, EU financial instruments or ESIF grants or financial instruments (including related national public co-financing from Managing Authorities) are used to co-finance the proposed project, this amount shall be deducted from the Project Investment Cost for the calculation of EM. b. More than one EIB/EFSI operation for one project: the PIC of the first operation should be judged according to the methodology described above. Should there be subsequent EFSI operations after the first one, their EM would be considered to be 0x. Only if a subsequent operation will support new EFSI eligible investments not considered for the first operation (e.g. in the case of an expansion) the EM for any subsequent operation would be calculated as follows: EM (subsequent EFSI financing) = (Additional PIC) / (subsequent EFSI financing amount) c. Non-EFSI eligible components: Should a project include components that are not EFSIeligible (e.g. investments outside the EFSI Regulation scope), the EM will consider only the EFSI-eligible part, as the EUR 315bn should only include EFSI-eligible investment. d. Framework Loans (FL): In the case of FLs (one counterpart, multiple small projects to be included in the future), it is not known at the time of approval/signature what exact PIC amounts will be supported under the FL. In order not to overstate the EM, the EM would be considered to be 3x. 4

7 2.2. External Multiplier (EM) Intermediated Operations Formula (C) Formula (D) Formula (E) EM = (Catalytic Effect; CE) x EM* EM* = (Project Investment Cost) / (Financing Amount from Intermediary) CE = (Financing amount from Intermediary) / (EFSI Financing Volume) In intermediated operations, the EM as described above is enhanced through co-financing on the level of the financial intermediary (e.g. investment fund, investment platform, bank, leasing company). This additional factor is called the Catalytic Effect (CE), which is to be multiplied with the EM on project level (EM*). The chart below provides an illustration of this relationship The Catalytic Effect (CE) The CE is calculated in different ways depending on the type of intermediary (see also above for the respective formulas): a. Investment Fund/Platform: the notion of catalytic effect is captured by identifying the part of the targeted size of the fund which would be available for investments 6 and which would be generated following the first closing in which EIB participates 7 and that target EFSI related investments based on its investment policies. To calculate CE, this EFSI related part of the targeted size of the fund available for investments would be divided by the proposed EIB/EFSI investment (i.e. share in the fund/platform of the EIB investment with EFSI support; amount based on first closing in which EIB participates) net of any other EU financing provided to the fund. The benchmark for the CE is 5x; values above that will be explicitly justified. The benchmark for the total EM for intermediated equity financing is 25x. 6 The targeted size of the fund available for investments would be net of fees covering fund management costs and other costs associated to the establishment, operation and closing of the fund. 7 It is typically the case that an early EIB/EFSI participation will unlock significant investments from other investors, thus being instrumental in facilitating the subsequent closings of a fund. 5

8 This approach will represent the expected CE at the moment of the approval of the EIB/EFSI investment. The expected CE will be updated, where needed, at the time of signature of EIB/EFSI participation in the relevant closing(s) and at the fund's final closing. The realised CE will be calculated at the end of the fund's investment period based on actual investments made by the fund. The diagram below provides an illustration of the calculation of the CE in case of an investment fund operation. Example: EIB invests EUR 30m under EFSI in a second closing (EUR 150m) in an infrastructure fund with a target fund size or EUR 250m. According to investment policies, the fund invests 20% in projects outside the EU and 80% inside the EU. Therefore, the targeted size of the Fund available for EFSI investment would be EUR 120m. The fund normally provides ca. 50% of the equity in any infrastructure project (the typical equity ratio of the targeted project is 20%). Fund Level Closing 1 Closing 2 EUR 150m EUR 100m 20% outside the EU CE = 120m / 30m = 4x EFSI Inv. 30m EUR 250m Project Level PIC = 120m x 2 (=1/50%) * 5 (=1/20%) = EUR 1.2bn EU Investment (eligible for EFSI) EUR 1.2bn EM* = 1200m / 120m = 10x EM = CE x EM* = 10 x 4 = 40x EUR 1.5bn b. Bank (Loan for SMEs & Mid-Caps/Risk Sharing): In risk-sharing operations, CE is calculated on the basis of the guarantee amount covered by the EIB (e.g. if the EIB guarantees up to 25% of the Financing amount from the Intermediary 8, the CE is considered to be 4x). In funding operations (e.g. Loans for SMEs), it is assumed that EIB provides 50% of the Financing amount from the Intermediary (CE = 2x) The Project Level External Multiplier (EM*) In addition to the CE, intermediated operations also foresee a project level multiplier (EM*). This additional factor is calculated in different ways depending on the type of intermediary: a. Investment Fund/Platform: EM* is calculated by dividing (i) the total PIC (expected to be eligible for EFSI) by (ii) the share of the targeted size of the fund available for investments that is foreseen to support EFSI eligible projects. Past closings on fund level are not considered for this calculation (see above). In the case of corporate investments, EM* is calculated as follows: EM* Equity: 1 / (Investment Fund s assumption on the average share of equity in corporates 8 In case of EIB operations supported through different risk sharing instruments or partners, an appropriate methodology will be developed. 6

9 total capital defined as equity + debt) EM* Debt: 1 / (Investment Fund s assumption on the average share of debt in corporates total capital defined as equity + debt) b. Bank (Global Loan/Risk Sharing): In this case, EM* is calculated assuming that the intermediary bank finances always 70% of the PIC. This is based on an average EU equity ratio of SMEs and Mid-Caps of 30%. Hence, EM* in these type of operations is assumed to be 1.4x (flat). 3. Reporting The EIB will also report on: a. Annually aggregated multipliers for Financial Products (average, volume weighted). For example, the list of Financial Products could include Investment Loans, Guarantees (and Credit enhancing) Direct Equity/Equity-Type and Intermediated Operations (Investment Fund/Platform and Bank Global Loans/Risk Sharing. This list is indicative and could be adjusted as appropriate; b. Annually aggregated multipliers for the different sectors (average, volume weighted) as per Article 9.2 of the EFSI regulation within the Infrastructure and Innovation Window; c. For each project, separately the amount of public and private finance mobilised as well as the project-specific ex-ante global multiplier (when and as submitted to the Investment Committee). These amounts will be annexed to the report prepared in the context of the bi-annual operational report referred to in Schedule II, Section B, paragraph 3 of the EFSI Agreement. d. For each project, if EIB own risk financing is used to co-finance EFSI financed projects, the EIB will also report a separate multiplier using the methodologies as described in section 1 and 2, but also including an additional project cost adjustment as per section 2.1 for EIB own risk financing. This separate multiplier will be annexed to the report prepared in the context of the bi-annual operational report referred to in Schedule II, Section B, paragraph 3 of the EFSI Agreement. For the avoidance of doubt, for the calculation of EFSI Key Performance/Monitoring Indicators, only the estimated ex-ante Global Multiplier and the unadjusted PIC will be used as a basis for calculation (Schedule II, Section A, paragraph 3 of the EFSI Agreement). 7