OREANDA-NEWS. Fitch Ratings has affirmed the European Investment Fund's (EIF) Long-Term Issuer Default Rating (IDR) at 'AAA' with a Stable Outlook and Short-term IDR at 'F1+'.

KEY RATING DRIVERS

EIF's 'AAA' IDR reflects the following key rating drivers:

EIF's ratings are driven by the strong support it would receive from the European Investment Bank (EIB; 'AAA'/Stable; 61.2% of subscribed capital) and the European Union (EU; 'AAA'/Stable; 26.5%). EIF's role in the European Fund for Strategic Investments (the Juncker Plan) alongside the EIB and the EU, are evidence of its strategic importance. The disbursement of EUR1.3bn of subscribed capital since 2014 also demonstrates shareholders' willingness to support the fund.

In 2015, the EIF's own-risk exposures increased at a substantial rate, noticeably above EIF's yearly targets under the Juncker Plan. Based on Fitch's estimates, the plan is likely to increase EIF's growth in own-risk exposures in the near term, especially its own-risk guarantees portfolio, but this should then decelerate during the forecast horizon.

EIF's own-risk drawn guarantees-to-capital improved slightly to 1.3x at end-2015, as the increase in own-risk activities was offset by the disbursement of newly-raised capital. Fitch expects this ratio to peak in 2016 at around 1.4x, commensurate with EIF's sustained growth targets, and to decrease substantially from 2017. Leverage ratios are not meaningful for the EIF as it has no debt instruments.

Credit quality of risks borne by EIF is strong and remains stable. The weighted average rating of the own-risk guarantees portfolio was 'A-' at end-2015, stable since 2011. Despite an increasing amount of financial guarantees called paid in 2015, they still account for only a small amount of outstanding guarantees. The fair value of the private equity books was above its cost value.

At end-2015, the coverage of total liabilities plus drawn guarantees by liquid assets was consistent with the 'BBB/BB' category median for Fitch-rated financial guarantors. However, EIF has no financial debt to pay down and very limited cash requirements for disbursements of calls on own-risk exposures. At end-2015, liquid assets (investment-grade securities and cash) covered risky assets by 4x and 51% of treasury assets were rated within the 'AAA'-'AA' range.

In 2015 EIF's profitability was mainly driven by a strong increase in management fees from external mandates, despite lower returns on its treasury assets. Fitch expects lower profitability in the coming years as a result of the low-interest-rate environment, as well as from staff costs, given the increasing demand for its operations.

EIF's risk management is consistent with the 'AAA' rating. Despite the fundamentally risky nature of the fund's small and medium-sized enterprises (SMEs) focus, EIF keeps own-risk guarantees and private equity portfolios well-balanced and diversified.

RATING SENSITIVITIES

The European Investment Fund's rating is based primarily on strong support from its key shareholder: the EIB. A negative rating action on its mother company, would likely lead to a negative rating action for the EIF.

KEY ASSUMPTIONS

- Callable capital would be provided by EIF's shareholders on a timely basis, if EIF requires it to meet its financial liabilities.

- The strategic relationship between the EIF and the EIB and EU remains strong.

- No significant amount of debt will be issued by the EIF in the medium term.