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:

The EIF's ratings are underpinned by a strong level of support from its key shareholder - the European Investment Bank (EIB; AAA/Stable; 63.7% of subscribed capital) - and from the European Union (EU; AAA/Stable; 24.3% of subscribed capital). The remaining shares are held by 26 other financial institutions with which the EIF maintains good operational relationships. Based on Fitch's financial guaranty criteria, EIF's intrinsic rating is consistent with the 'AA category'.

Shareholders have paid in 20% of the subscribed capital, with the EU (represented by the European Commission) expected to fulfil three remaining tranches of payments from the capital increase by 2017, to bring the total subscribed capital to EUR4.5bn (50% increase on 2013 subscribed capital), with paid-in capital of EUR900m. A resolution by the General Meeting of shareholders is required to call on the remainder of the subscribed but not paid in capital, if it is required in order for EIF to fulfil its liabilities to its creditors. The capital increase is strong evidence of EIF's shareholders' willingness to support the fund, and also of the strategic importance of EIF's operations to its shareholders.

New mandates were introduced in 2014 following the capital increase, but also announced in November 2014 as part of the EU's Investment Plan for Europe (otherwise known as the 'Juncker Plan'). The plan aims to mobilise investments to support small and medium-sized enterprises (SMEs), innovation and infrastructure, with EUR5.3bn of additional new financing being channelled through the EIF. The largest part of this investment will be made under EIB and EU mandates. Together with the 2014 capital increase, this will see EIF's operations expand significantly over the forecast horizon, especially in the share of mandate activity from the EIB and the EU.

Capitalisation is stronger than most 'AAA' peers, and the equity/adjusted-assets ratio has improved to 32.6% (2013: 24.5%) largely due to the newly-raised capital in 2014. This offsets the expected increase in own-risk activity, which would result in a gradual decline in capitalisation as disbursements rise in the forecast horizon. Leverage ratios are not meaningful for EIF as it has no debt instruments.

Liquidity is a rating strength for the EIF, with treasury assets 4.5x total liabilities. EIF does not issue any debt, and its own-risk financial guarantees and private equity businesses require limited cash liquidity to meet guarantee calls and investment disbursements. Treasury assets are also highly rated with an weighted-average rating of 'A+', and 52% of the portfolio rated 'AA-' or higher. Exposure to Greek sovereign debt is limited at EUR20m with EUR10m maturing in 2017 and EUR10m in 2018. EIF benefited from a preferred creditor treatment in the Greek debt restructuring in 2012, but it is uncertain if this would be upheld in a repeated crisis.

The EIF's profitability is strong, with a ROE of 5.9% in 2014 (2013: 4.2%). Profitability is expected to become increasingly stable as commission income from mandate operations forms the bulk of EIF's gross income. 52% of gross income was from commission fees in 2014 (2013: 48%), without adding any risk to EIF's financials.

The EIF's risk management framework is prudent and supports the 'AAA' rating. The EIF's well balanced and broadly diversified guarantee and private equity portfolios mitigate the intrinsically risky nature of operations in the SME sector. Concentration risk is a key risk for the supranational, but declined in 2014, with the largest five exposures for the own-risk portfolio falling to 19.1% of total guarantees exposure-at-risk (2013: 28.2%) and 11.1% of the private equity portfolio (2013: 12.3%).

RATING SENSITIVITIES
The Stable Outlook reflects Fitch's opinion that there is a low probability of EIF's 'AAA' rating being downgraded in the next 12-18 months.

EIF's rating is based primarily on strong support from its key shareholder, the EIB. A negative rating action on the EIB would lead to negative rating action on 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.