REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL AND THE COURT OF AUDITORS ON THE MANAGEMENT OF THE GUARANTEE FUND OF THE EUROPEAN FUND FOR STRATEGIC INVESTMENTS IN 2016
Date: 2017-06-16
Institutions: Directorate-General for Economic and Financial Affairs, European Commission
Subjects: European Investment Bank, European Investment Fund, financial control, fund (EU), investment, operation of the Institutions

EN 

   EN 

   EUROPEAN COMMISSION  Brussels, 16.6.2017  COM(2017) 326 final   REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL AND THE COURT OF AUDITORS ON THE MANAGEMENT OF THE GUARANTEE FUND OF THE EUROPEAN FUND FOR STRATEGIC INVESTMENTS IN 2016 {SWD(2017) 235 final}  
 
 
TABLE OF CONTENTS 

1. 

Introduction .................................................................................................................................................... 3 

2.  Operational context ........................................................................................................................................ 3 

3. 

Financial accounts .......................................................................................................................................... 4 

3.1. 

3.2. 

3.3. 

Financial statements of the EFSI GF as at 31 December 2016 .............................................................. 4 

EFSI operations under the EU guarantee ............................................................................................... 4 

Financial flows and significant budgetary transactions in 2016 ............................................................ 5 

4.  Management of the EFSI GF in 2016 ............................................................................................................. 5 

4.1. 

Financial Management .......................................................................................................................... 5 

4.2.  Market developments in 2016 ............................................................................................................... 5 

4.3.  Major external cash flows ...................................................................................................................... 6 

4.4. 

4.5. 

Composition and key risk characteristics of the portfolio ..................................................................... 7 

Performance ........................................................................................................................................... 7 

5.  Assessment of the adequacy of the target amount and the level of the EFSI GF ........................................... 7 

2 

 
 
 
 
 
 
1.  INTRODUCTION 

The legal basis for this report is Regulation (EU) 2015/1017 of the European Parliament and 
of the Council of 25 June 2015 on the European Fund for Strategic Investments, the European 
Investment  Advisory  Hub  and  the  European  Investment  Project  Portal  and  amending 
Regulations (EU) No 1291/2013 and (EU) No 1316/2013 — the European Fund for Strategic 
Investments1 (the "EFSI Regulation"). The agreement on the management of the EFSI and on 
the  granting  of  the  EU  guarantee  (the  "EFSI  Agreement")  was  signed  by  the  European 
Commission and the European Investment Bank (the "EIB") on 22 July 2015. An amendment 
to this Agreement was signed on 21 July 2016. 

Article 16(6) of the EFSI Regulation provides that the Commission shall, by 31 May of each 
year2,  submit  to  the  European  Parliament,  to  the  Council  and  to  the  Court  of  Auditors  an 
annual  report  on  the  management  of  the  EFSI  Guarantee  Fund  (the  "EFSI  GF")  in  the 
previous calendar year, including an assessment of the adequacy of the target amount and the 
level of the EFSI GF and of the need for its replenishment. This annual report shall contain 
the presentation of the financial position of the EFSI GF at the end of the previous calendar 
year,  the  financial  flows  during  the  previous  calendar  year  as  well  as  the  significant 
transactions  and  any  relevant  information  on  the  financial  accounts.  The  report  shall  also 
include information about the financial management, the performance and the risk of the EFSI 
GF at the end of the previous calendar year. 

In  2016,  an  internal  evaluation  of  the  EFSI  was  carried  out  by  of  the  Commission,  which 
accompanied  the  legislative  proposal3  adopted  by  the  Commission  on  14  September  2016 
("EFSI  2.0  proposal")  to  increase  the  size  of  the  EFSI  and  adjust  the  target  rate  based  on 
findings from the internal evaluation. 

2.  OPERATIONAL CONTEXT 

The EU Guarantee covers (up to EUR 16 billion) financing and investment operations signed 
by the EIB under the Infrastructure and Innovation Window ("IIW") and by the EIF under the 
SME  Window  ("SMEW").  Part  of  the  overall  EFSI  operations  is  covered  by  the  EU 
Guarantee while a part is carried out at the own risk of the EIB Group (at least EUR 5 billion). 

According  to  Article  12  of  the  EFSI  Regulation,  the  EFSI  GF  shall  constitute  a  liquidity 
cushion  from  which  the  EIB  shall  be  paid  in  the  event  of  a  call  on  the  EU  guarantee.  In 
accordance with the EFSI Agreement between the EU and the EIB, calls are paid by the EFSI 
GF if their amount is in excess of the funds at the disposal of the EIB on the EFSI Account. 
The EFSI Account, managed by the EIB, has been established for the purposes of collecting 
the  EU  revenues  resulting  from  EFSI  operations  under  the  EU  guarantee  and  recovered 
amounts  and  to  the  extent  of  the  available  balance,  for  the  payment  of  calls  under  the  EU 
guarantee.  

1 
2  

OJ L 169, 1.7.2015, p. 1. 
This report is the second report on the EFSI GF. For last year report, see COM (2016) 353 final of 
31.5.2016. 

3   COM(2016) 597 final and accompanying SWD(2016) 297 and 298 final. 

3 

 
 
                                                           
The EFSI GF is provisioned progressively taking into account the increase in exposure borne 
by the EU Guarantee. 

According  to  Article  12(4),  the  resources  of  the  EFSI  GF  are  directly  managed  by  the 
Commission  and  invested  in  accordance  with  the  principle  of  sound  financial  management 
following appropriate prudential rules. 

The EIB and the EIF are responsible for assessing and monitoring the risk  of the individual 
operations and reported back to the Commission and the European Court of Auditors in line 
with Article 16(3) of the EFSI Regulation in March 2017. On the basis of this reporting and of 
coherent and prudent assumptions on future activity, the Commission maintains the adequacy 
of the target amount and the level of the EFSI GF under review.  

Pursuant to Article 16(2) of the EFSI Regulation, the annual report of the EIB to the European 
Parliament  and  Council  shall  contain  specific  information  on  the  aggregate  risk  associated 
with the financing and investment operations carried out under the EFSI as well on guarantee 
calls. 

3.  FINANCIAL ACCOUNTS 

Financial information concerning EFSI is presented, below broken down in three sections; (1) 
the financial situation of the EFSI GF as at 31 December 2016 (2) the EFSI operations under 
the EU guarantee carried out by the EIB Group as at 31 December 2016 and (3) the financial 
flows and significant budgetary transactions in 2016.   

3.1.  FINANCIAL STATEMENTS OF THE EFSI GF4 AS AT 31 DECEMBER 2016 

The net assets of the Guarantee Fund stood at EUR 1,020 million as at 31 December 2016. 
The assets were composed of the investment portfolio, classified as available-for-sale (EUR 
948 million), short term bank deposits (EUR 45 million) and cash and cash equivalents (EUR 
26 million). 

In terms of the 2016 statement of financial performance, the EFSI GF ended the year with an 
economic result of EUR 0.9 million. EUR 1.2 million was generated from interest income and 
realised gains from sales of fixed income securities. This was offset by operating expenses of 
EUR 0.3 million including the underlying FX forward sale of USD used to hedge the currency 
risk of the USD-denominated portion of the portfolio.  

3.2.  EFSI OPERATIONS UNDER THE EU GUARANTEE 

The guarantee exposure of the EU in relation to disbursed outstanding EFSI operations by the 
EIB  Group  amounted  to  EUR  4,392  million,  as  at  31  December  2016,  out  of  the  legal 
commitment  of  EUR  16  billion  guaranteed  by  the  EU  (Article  11  of  the  EFSI  Regulation). 
The amount of EUR 4,392 million is recorded as a contingent liability in the notes to the 2016 
financial statements of the EU. 

In  2016,  EFSI  operations  managed  by  the  EIB  under  the  Infrastructure  and  Innovation 

4  

The  audited  financial  statements  of  the  EFSI  Guarantee  Fund  are  disclosed  in  the  2016  SWD  EFSIGF 
report. 

4 

 
 
                                                           
Window generated revenue of EUR 16.1 million for the EU. Of this amount, a receivable of 
EUR  11  million  was  recorded  in  the  2016  EU  financial  statements  and  was  credited  to  the 
EFSI account in January 2017. Such amounts are subsequently recovered as assigned revenue 
to the EFSI GF. 

For  the  EFSI  operations  managed  by  the  EIF  under  the  SME  Window,  the  EU  incurred  in 
2016  an  amount  of  EUR  0.945  million  concerning  EIF  administrative  fees.  The  amount  is 
payable to the EIF on 30 June 2017. In addition, a SMEW start-up fee of EUR 5 million was 
paid to the EIF from a dedicated budget line in 2016.  

3.3. FINANCIAL FLOWS AND SIGNIFICANT BUDGETARY TRANSACTIONS IN 2016  

A  budgetary  appropriation  of  EUR  2,100  million  was  committed  in  2016  relating  to  the 
provisioning of the EFSI GF in compliance with Commission Decision C(2016)3115 for the 
financing of the Fund. 

A  total  amount  of  EUR  ca.  1,018  million  was  effectively  paid  into the  EFSI  GF  during  the 
year.  Of  this,  the  bulk  came  from  payment  appropriations  of  the  general  budget  of  the  EU, 
while  an  amount  of  EUR  6.3  million  was  recovered  from  the  EFSI  Account  (as  assigned 
revenue). 

4.  MANAGEMENT OF THE EFSI GF IN 2016 

4.1. FINANCIAL MANAGEMENT 

The  Fund’s  liquid  assets  are  invested  in  accordance  with  the  management  principles  laid 
down  in  Commission  Decision  C(2016)165  of  21  January  2016  approving  the  asset 
management guidelines of the guarantee fund of the European Fund for Strategic Investments.  

These guidelines foresee that the managed assets shall provide sufficient liquidity in relation 
to the potential guarantee calls, while still aiming at optimising the return and risk level that is 
compatible with maintaining a high degree of security and stability.  

Investment and risk management strategies were adopted reflecting the investment objectives 
and outlook of market conditions. The investment approach aimed at enhanced diversification 
across various fixed income asset classes.  

4.2. MARKET DEVELOPMENTS IN 2016 

In  2016  the  European  fixed  income  market  was  characterised  by  elevated  market  volatility. 
Sovereign  bond  yields  continued  to  decline  till  September,  as  a  result  of  the  low  nominal 
growth and the accommodative monetary policy. The market reactions to the UK referendum, 
held on 23 June 2016, on the membership of the European Union and to the US presidential 
elections in November 2016 were also major milestones in 2016.  

During  the  building  phase  of  the  EFSI  GF  portfolio,  April  –  December  2016,  there  was  a 
pronounced twist in the European benchmark yield curve around the 7 years maturity point. In 

5   Commission Decision C(2016)311 of 27 January 2016 on the adoption of DG ECFIN's annual work 

programme 2016, including procurement and grants, in the field of economic and financial affairs, serving 
as a financing decision. 

5 

 
 
                                                           
particular, the short and medium term rates decreased by a range of 15 to 35 basis points (1 
basis point = 0.01%) , increasing the levels of the bond prices (prices are inversely related to 
the  interest  rates).  On  the  other  hand,  long-term  rates  increased  by  10  basis  points,  thus 
changing the slope of the yield  curve, which rose to  its steepest levels in  more than a year. 
Importantly,  interest  rates  at  certain  key  maturity  points  fluctuated  significantly  during  this 
period6.  

In  particular,  there  was  high  market  volatility  in  the  first  half  of  the  year,  as  the  market 
sentiment  was  driven  by  the  economic  slowdown  in  China,  some  weak  spots  in  the  US 
recovery  and  declining  commodities'  prices,  fuelling  recessionary  concerns,  as  well  by  the 
changes in the modalities of the ECB Extended Asset Purchase Programme (EAPP). The so-
called  core  and  semi-core  benchmark  yields  (DE,  FR,  NL,  etc.)  were  negative  across 
maturities up to ~7years (depending on the jurisdiction). At the end of the second quarter, the 
UK  referendum  led  to  a  sudden  but  short-lived  rise  in  volatility  followed  by  an  important 
decrease in yields. The yield for 10-year German government bonds, for the first time, edged 
down below zero.  

Bond markets were calmer during the third quarter, the highlight during the period being the 
Bank of Japan’s monetary policy shift in September (signalling caps on Japanese Government 
bond yields), which accelerated market participants' expectations for fiscal policy support for 
global economies.  

In  the  last  quarter  of  2016,  the  bond  market  turned  due  to  heightened  political  risks.  There 
was a spike in volatility and an overall increase of medium to longer term benchmark interest 
rates;  in  particular  the  benchmark  German  10-year  yield  turned  positive  again.  In  contrast, 
short-term  rates  remained  anchored  at  deeply  negative  rates.  Besides  uncertainty  among 
market  participants  concerning  the monetary  policy  stance  of  major  central  banks, the  main 
driver was the policy to be followed by the newly elected US president.  

The  result  of  the  US  presidential  election  sparked  a  significant  re-pricing  of  many  asset 
classes as particular attention was given to his economic policy plans for fiscal stimulus, tax 
reform and deregulation. From his election to year-end, the market priced higher growth and 
inflation  expectations,  downplaying  potential  risks  associated  with  certain  themes  of  his 
election campaign concerning his trade and foreign policy approach. As a result, there was a 
big shift into equities and out of bonds in developed markets. 

4.3. MAJOR EXTERNAL7 CASH FLOWS  

An amount of EUR 500 million in payment appropriations was initially made available to the 
Fund  for  2016.  This  amount  was  paid  in  to  the  EFSI  GF  gradually  between  April  and  July 
2016. 

During December 2016, an additional EUR 518 million was paid into the Fund, the bulk of 
which represented payment appropriations reallocated from other budget lines as part of the 
global transfer procedure.  

6  

7  

Example: the 10-year Bund yielded about 10 bps at the beginning of April. This dropped to a low of about -
19 bps in early July, to finish the year at about + 20 bps. 
'External' is defined by reference to the Fund. External cash flows include flows from/to the EU budget or 
from/to the EIB for guarantee revenues or guarantee calls but exclude cash flows 'endogenous' to the asset 
management activity (e.g. payments/receipts to/from counterparties for acquiring/selling securities). 

6 

 
 
 
                                                           
There were no guarantee calls or any other outflows from the Fund in 2016. 

It  is  presently  foreseen  in  the  EU  budget  that  around  EUR  2.3  billion  will  be  paid  into  the 
EFSI GF during the course of 2017 bringing its total assets to an expected level of EUR 3.3 
billion. 

4.4. COMPOSITION AND KEY RISK CHARACTERISTICS OF THE PORTFOLIO 

At the end of December 2016, the portfolio was made predominantly of securities issued by 
Sovereigns (42% of EFSI GF Market Value) as well as by Sub-sovereigns, supranationals and 
agencies (SSA) (23%). The remainder was mainly allocated to covered bonds and unsecured 
bonds issued by corporates and financial institutions. About 15% of the portfolio (included in 
the  42%  allocation  to  sovereigns)  was  invested  in  liquid  and  highly-rated  (AAA)  USD 
denominated investments. The currency risk exposure of these investments has been hedged. 

The portfolio duration8 at the end of 2016 was 3.5 years. Average credit rating is A. 

The bulk of the portfolio is invested in liquid securities and an adequate part (23% of the total 
portfolio value) matures in less than 12 months. 

The profile of the portfolio, in terms of duration, credit risk and liquidity, has been calibrated 
in  line  with  the  forecasted  cash-flows  arising  from  the  EFSI  operations  under  the  EU 
guarantee (e.g. projected calls, revenues). 

4.5. PERFORMANCE 

As  the  first  inflows  into  the  EFSI  GF  arrived  on  11  April  2016,  the  year-to-date  (YTD) 
performance refers to the period April-December 2016 and it is calculated on a time-weighted 
basis in order not to be affected by the size of the portfolio, which grew considerably during 
the year.  

The  Fund  delivered  a  YTD  absolute  performance  of  0.23%  in  2016.  This  slightly  positive 
return  was  achieved  against  a  background  of  volatile  markets  and  deeply  negative  rates, 
especially for what is perceived by the markets as "credit risk free" and liquid exposures.9 

5.  ASSESSMENT OF THE ADEQUACY OF THE TARGET AMOUNT AND THE LEVEL OF THE 

EFSI GF 

As  of  end-2016,  total  cumulated  signatures  under  EFSI  amounted  to  EUR  21.3  billion 
covering  28  Member  States,  of  which  EUR  14.2  billion  was  signed10  by  the  EIB  (121 
operations) and  EUR  7.1  was  signed  by  the  EIF  (225  operations).  Overall,  this  represents  a 
significant increase compared to 2015, at the end of which total signatures amounted to EUR 
1.2 billion.  

9  

8   Duration figures refer to 'modified duration' which measures the price sensitivity of a bond to interest rate 
movements. This figure is based on the concept that a security price and interest rates are inversely related. 
For example, the average yield of German 5 year bonds was – 46 basis points (ranging from – 29 to – 63 
bps). 

10   The difference between total signatures and signed exposure depends on several factors, such as the latter 
excluding EIB share in equity-type operations as well as differences due to repayments and applied foreign 
exchange rates.  

7 

 
 
 
                                                           
As  of  end-2016,  the  overall  outstanding  disbursed  exposure  covered  by  the  EU  Guarantee 
amounted to nearly EUR 4.4 billion up from EUR 0.2 billion in 2015. The exposure of the EU 
budget  to  possible  future  payments  under  the  EU  Guarantee  in  terms  of  signed  operations 
(disbursed and undisbursed) amounted to EUR 11.2 billion. 

Under  the  IIW  the  outstanding  disbursed  exposure  covered  by  the  EU  Guarantee  was  EUR 
4.02 billion, of which EUR 3.98 billion for debt operations and EUR 0.04 billion for equity-
type operations11.  

Should there be any losses due to these operations, these will be covered by the EU Guarantee 
in accordance with the terms set out in the EFSI Agreement. In particular, the EU Guarantee 
under  the  IIW  is  granted  in  the  form  of  a  Portfolio  First  Loss  Piece  coverage  for  EIB  debt 
operations and in the form of a full guarantee for equity/equity-type operations where the EIB 
invests at its own risk on a pari passu basis the same amount of resources.  

As of end 2016 under SMEW, the total outstanding exposure covered by the EU Guarantee 
was 369.7 million, of which EUR 364.8 million for guarantee operations and EUR 5.0 million 
for equity operations12.  

Should there be any losses due to these operations, those would be covered primarily by the 
contributions of the InnovFin SME Guarantee Facility, the COSME Loan Guarantee Facility, 
and the EaSI Guarantee Financial Instrument. In the case of the SMEW Equity Product, any 
losses would be covered by the EU guarantee under the EFSI and the InnovFin Equity First 
Loss Piece (in the case of Sub-window 2). 

The target amount of the EFSI GF is set at 50% of the total EU guarantee obligations, which 
currently  stand  at  EUR  16  billion.  This  target  was  calculated  before  the  start  of  EFSI.  The 
Commission's internal evaluation of EFSI13 concluded that the provisioning of the Guarantee 
Fund could be safely lowered. 

The  risk  assessment  of  the  different  products  supported  by  the  EU  Guarantee  shows  that 
overall  the  Union  budget  would  be  adequately  shielded  from  potential  calls  under  the  EU 
Guarantee with an adjusted target rate for provisioning the EFSI GF of 35% (as proposed by 
the Commission in the EFSI 2.0 proposal), taking into consideration recoveries, revenues and 
reflows from EIB operations. The Court of Auditors has confirmed this assessment14. 

11   As at end 2016, the total signed (disbursed and undisbursed) exposure of the IIW portfolio benefitting from 
the EU Guarantee was EUR 13.38 billion  of which EUR 12.84 billion for debt operations and EUR 0.54 
billion  for  equity-type  operations.  However,  due  to  the  first  loss  piece  coverage  of  the  EU  Guarantee, 
potential losses for the EU budget under the IIW were capped at EUR 10.6 billion. 

12   As evidenced in the financial statements of the EU for end-2016, not including guarantee contracts whose 
availability  period  starts  in  2017,  amounts  committed  and  undisbursed  for  guarantee  operations  under 
COSME,  and  those  committed  and  undisbursed  for  equity  operations.  Including  all  the  latter  categories 
would imply a total outstanding (disbursed and undisbursed) exposure to be potentially covered by the EU 
Guarantee of EUR 701.3 million. 

13   SWD(2016) 297 final. 
14   Opinion  No  2/2016  concerning  the  proposal  for  a  Regulation  of  the  European  Parliament  and  of  the 
Council  amending  Regulations  (EU)  Nos  1316/2013  and  2015/1017  and  the  accompanying  Commission 
evaluation in accordance with Article 18(2) of Regulation (EU) 2015/1017. 

8