Views from a national holding fund on the JEREMIE implementation The case of Hungary: challenges, achievements and perspectives József Vingelman, CEO Venture.

Views from a national holding fund on the

JEREMIE implementation

The case of Hungary: challenges, achievements and

perspectivesJózsef Vingelman, CEO

Venture Finance Hungary Plc.

29/30 November 2010

• Information about Hungary

•JEREMIE Programme in Hungary

•Venture Finance Hungary Plc. (Holding Fund Manager)

•Overview of Financing Programmes

•Summary of experiences and future plans

Area: 93,030 km2

Population: 10 million

Population density: 108/km2

EU accession: 1 May 2004

Area: 93,030 km2

Population: 10 million

Population density: 108/km2

EU accession: 1 May 2004

GDP/cap. (2009): 63% of EU-27 average

No of SMEs: cca. 700 th. (over 99% of total companies)

SMEs produce 50% of GDP

70% of workers employed by SMEs

GDP/cap. (2009): 63% of EU-27 average

No of SMEs: cca. 700 th. (over 99% of total companies)

SMEs produce 50% of GDP

70% of workers employed by SMEs

Hungary at a glanceHungary at a glance

Regions of HungaryRegions of Hungary

Southern Great PlainSouthern Great Plain

Northern Great PlainNorthern Great Plain

Northern HungaryNorthern Hungary

Southern Transdanubia

Southern Transdanubia

WesternTransdanubia

WesternTransdanubia

Central Transdanubia

Central Transdanubia

Central HungaryCentral

Hungary

Development based on GDP/capita(% of EU average in 2006)

107%64.9%58.6%43.7%42.8%41.4%40.8%

Least Most

JEREMIE Programme in Hungary

JEREMIE Programme in Hungary

JEREMIE Programme in Hungary

Aim: To eliminate uncovered market deficiencies (based upon GAP-analysis)

Tool: New financial programmes

1. Refinanced loan programmes (Micro Loan, Small Loan, SME Loan, SME Working Capital Loan)

2. Credit Guarantee

3. Venture Capital

Allocated Funds : cca. HUF 200 billion (EUR 699 million)

Use of funds:

a) As standalone financing, or

b) own sources required for non-refundable subsidies

Funds are granted via financial intermediaries with joint risk-taking

Revolving funds, leverage effect

Aim: To eliminate uncovered market deficiencies (based upon GAP-analysis)

Tool: New financial programmes

1. Refinanced loan programmes (Micro Loan, Small Loan, SME Loan, SME Working Capital Loan)

2. Credit Guarantee

3. Venture Capital

Allocated Funds : cca. HUF 200 billion (EUR 699 million)

Use of funds:

a) As standalone financing, or

b) own sources required for non-refundable subsidies

Funds are granted via financial intermediaries with joint risk-taking

Revolving funds, leverage effect

Kezességvállalás

EDOP (GOP): ~ HUF 178.4 bn (EUR 626 mn)

CHOP (KMOP): ~ HUF 20.9 m (EUR 73.3 mn)

Refinancing facilities

• Microloans;• SME (investment)

loans;• SME working capital

financing

• Portfolio guarantee • Venture capital

JEREMIE „Holding Fund”

MV Zrt. („Fund manager”)

Guaranties Capital financing

Programme overview (1)Programme overview (1)

Programme overview (2)Programme overview (2)

MANAGING AUTHORITY -National Development Agency (NDA)

HOLDING FUND=

Venture Finance Hungary Plc (VFH Plc) +Hungarian State Treasury Account

INTERMEDIARY INTERMEDIARY INTERMEDIARY

SME SME SME

SME SME SME

SME SME SME

Funding Agreement

Intermediary Agreements(Funding Agreements)

Loan;Guarantee;Investment

EU (85%)

Domesticcontribution

(15%)

MilestonesMilestones

Key events: Oct 2006: Approved GAP Analysis Q1 2007: First product term-sheets Aug 2007: Foundation of Venture Finance Hungary Oct-Nov 2007: First call for tenders (Micro Loan, Portfolio Guarantee) Dec 2007: First contract with financial intermediaries Jan 2008: First Micro Loan granted Oct 2008: Modification of Micro Loan conditions Nov 2008: Launch of SME Loan Programme Dec 2008: Notification of Venture Capital Programme Jan 2009: Launch of SME Working Capital Loan Programme Feb 2009: Call for tenders – Venture Capital Programme Oct 2009: Close of Venture Capital tender Apr 2010: Launch of Small Loan Programme Q2 2010: Venture Capital funds start their investment activities Sept 2010: Development of a new financial programme started (combination of Micro

Loan and non-refundable subsidies)

Venture Finance Hungary Plc.(Holding Fund Manager)

Established in May 2007 with the aim of developing and running financial programmes which will expand the financing options of Hungary’s micro-, small- and medium-sized enterprises (JEREMIE initiative)

Sole activity: fund Management of financial resources committed by European Union and Hungary

o Designated as the Holding Fund Manager by Article 21 (4) of Hungarian Government Decree 255/2006 (XII. 8.)

Belongs to the Group of Hungarian Development Bank (MFB), 100% owned by MAG-Hungarian Economic Development Centre Plc (the Implementing Agency of EDOP). Share capital: HUF 2 billion (EUR 7 million)

Scope of activities and obligations are determined by the National Development Agency (NDA)

Equivalent financial service provider - compliant with BASEL II. criteria

Controlled and regulated by Hungarian Financial Supervisory Authority

Venture Finance Hungary Plc.

Venture Finance Hungary Plc.

1) Prepare the Financial Programmes– Description of the programme– Relevant business terms– Required funding– Role of intermediaries– Scope of beneficiaries

2) Implement the ProgrammesEvaluation and accreditation of intermediaries

Concluding contracts with intermediaries

Monitoring the use of resources and recommending reallocations

Preparing policy for terminating risk takings, withdrawing from investments

3) Audit and control

•Tasks and responsibilities of the Holding Fund Manager

Level 2.

Holding Fund

Manager

Contract 1.

Funding

agreement

Role of Venture Finance HungaryRole of Venture

Finance HungaryThe Funding Agreement also defines the main tasks of the Resource Management Organisation:

National Development Agency

EDOP MA CHOP MA

Venture Finance Hungary (VFH)(private limited company)

M1

M2

Mn

G1

G2

Gn

C1

C2

Cn

SME1

SME2

SME3

SME4

SME5

SME6 SME7

SME8 SME9

SME10

SMEn

VFH’s OrganisationVFH’s Organisation

Founder(Owner)

CEO

Legal

Monitoring

Risk Management

IT Operation

Accounting

Front Office

Business Development

Supervisory Board

Internal Auditor

Assistant

Back Office

Financingand riporting

HR

Marketingand communication

Overview of Financing Programmes

Aim: To eliminate uncovered market deficiencies (based upon GAP-analysis)

Tool: New financial programmes:

1. Micro Loan

2. Portfolio guarantee

3. Venture capital

Further specific programmes can be launched later on (counter guarantee, etc.)

JEREMIE Programme in Hungary

JEREMIE Programme in Hungary

I. Micro LoanI. Micro Loan

Type of fund: refinancing fund for financial intermediaries Financial intermediaries: financial enterprises, local microfinance institutions Contribution by financial intermediaries: 10%

Main conditions of Micro Loan Beneficiaries: micro enterprises Loan size:

Investment loan: max. HUF 10 mn (EUR 35 th.) Working capital loan: max. HUF 6 mn (EUR 21 th.)

Purpose of loan: capital expenditures and/or current assets Interest rate: freely determined by financial intermediaries Loan period:

Investment loan: max. 10 years Working capital loan: max. 3 years

Loan guarantee is available for intermediaries as an option Prohibited use of funds: credit redemption, VAT financing

II. Small LoanII. Small Loan

Type of fund: refinancing fund for financial intermediaries Financial intermediaries: Credit institutions (banks, saving cooperatives), bank-

owned financial enterprises Contribution by financial intermediaries: 25%

Main conditions of Small Loan Beneficiaries: micro- and small enterprises Loan size: max. HUF 50 mn (EUR 175 th.) Purpose of loan: capital expenditures and/or current assets Interest rate: Max. 0.3 * 3m BUBOR + 6% (=currently max. ~7.6% p.a.) Loan period:

Investment loan: max. 10 years Working capital loan: max. 3 years

Loan guarantee is available for intermediaries as an option Prohibited use of funds: credit redemption, VAT financing

III. SME LoanIII. SME Loan

Joint programme of Venture Finance Hungary (MV) and Hungarian Development Bank (MFB)

Main conditons of SME Loan:

Beneficiaries: micro-, small- and medium enterprises

Loan size: HUF 10-100 million (EUR 35 th. – 350 th.)

Purpose: capex and directly related current assets (only outside the Central-Hungarian region)

Loan period: max. 10 years

Interest rate: 3m EURIBOR*0.75 + 0.75% + max 5% (=currently max. ~6.4% p.a.)

Prohibited use of funds: credit redemption, VAT financing

IV. Working Capital Loan

IV. Working Capital Loan

Joint programme of Venture Finance Hungary (MV) and Hungarian Development Bank (MFB)

Main conditons of SME Working Capital Loan:

Beneficiaries: micro-, small- and medium enterprises

Loan size: HUF 1-200 million (EUR 3.5 th. – 700 th.)

Purpose: working capital financing serving for expansion of business activity

Loan period: 1 year + 1 day or 2 years

Interest rate: 1M BUBOR * 0.5 + 1.25% + max 4% (=currently max ~7.9% p.a.)

Prohibited use of funds: credit redemption, VAT financing

Facility: automatic portfolio guarantee behind new SME loans

Financial intermediaries: Credit institutions, financial enterprises

Extent of guarantee: max. 80% of the loans

Guaranteed SME loans:

Loans refinanced by Venture Finance Hungary or loans provided from the credit institution’s own funds

Size: max. HUF 200 million (EUR 700 thousand)

Maturity: max. 10 years

Purpose: capital expenditures and current assets

V. Credit GuaranteeV. Credit Guarantee

VI. Venture CapitalVI. Venture Capital Aim: to improve the capital status of the Hungarian SMEs in the early (“seed”,

startup) and growth stage.

Facility: financial resources for venture capital funds 1 Co-investment Fund in the Central-Hungarian Region

7 Joint Funds outside the Central-Hungarian Region

Financial intermediaries: Independent fund managers licensed by PSZÁF

Private contribution required: min. 30%

Investment policy:

Investment size: Max. EUR 1.5 million investment per 12 months per target company (max. in 3 consecutive years)

Target companies: Max. 5-year-old SMEs with less than HUF 1.5 bn (EUR 5 mn) turnover

Sectorial and other restrictions: shipbuilding, coal industry, steel industry, financial sector, enterprises in difficulty

Invested amount cannot be used for: credit redemption, development of real estate for sale, acquisitions

Status of the programmes

(30 September 2010)

Status of the programmes

(30 September 2010)EUR/HUF =285

Financial Programmes

Allocated funds

Contracts with financial intermediaries

Volume of contracts signed with final beneficiaries

HUF bn; (EUR mn)

No.

Committed funds

HUF bn; (EUR mn)

% of allocated funds

No. of cont-racts

From JEREMIE

Fund

HUF bn; (EUR mn)

% of allocated

funds

Total value of the

contracts

HUF bn; (EUR mn)

Micro Loan/Small Loan 55.6 (195) 76 51,67 (181) 93% 2649 14.1 (49) 25% 15.8 (55.4)

SME Loan (only in EDOP)

MV-MFB joint refinancing (HUF 50 bn)

25 (87) 19 25.0 (88) 100% 160 3.18 (11) 12.7% 6.3 (22)

SME Working Capital Loan

MV-MFB joint refinancing (HUF 100 bn)

50 (175) 35 50.0 (175) 100% 111 2.5 (8.8) 5% 5.1 (17.7)

Credit Guarantee 28.22 (99) 47 51.7 (181) 183% 169 2.24 (7.9) 7.9% 2.8 (9.8)

Venture Capital 40.50 (142) 8 31.49 (110) 77.8% 3 0.28 (0.98) 0.72% 0.41 (1.45)

Total 199.32 (699) 185 209.86 (705) 105% 3092 22.3 (78) 11.2% 30.41 (106)

Summary of experiences and future plans

Micro- and Small LoanExperiences and future plans

Micro- and Small LoanExperiences and future plans

Highest utilization (24%) of allocated funds among VFH’s financial programmes, but still under expectations

Best performing financial intermediaries: regional enterprise development foundations and some independent financial enterprises

Credit institutions (banks, saving co-operatives) show limited activity Limited use of funds due to EU regulations (e.g. expansion of business activity) There are other state-run microfinance programmes overlapping loan products

- competition between institutions non-transparent system for potential beneficiaries

Strategic goals, planned reforms: Introduction of a simple, easy-to-remember brand name Further standardization of the loan’s terms & conditions Simplified procedures Restructuring of the support system on state-level to eliminate parallel loan products

and parallel intermediary networks Motivation of the best performing financial intermediaries, drawing in new

intermediaries

SME LoanExperiences and future plans

SME LoanExperiences and future plans

Low utilization (under 12%) of allocated funds More complex procedures as the programme is jointly run by VFH and MFB longer

lead-times At a smaller loan size, competition with other JEREMIE products (Micro Loan, Small

Loan) There are other state-run working capital loan programmes overlapping loan

products - competition between institutions non-transparent system for potential beneficiaries

Not available in the Central-Hungarian Region

Strategic goals, planned reforms: Reduction of allocated funds from HUF 50 billion (EUR 175 mn) to HUF 20 billion

(EUR 70 mn) Restructuring of the support system on state-level to eliminate parallel loan products

and parallel intermediary networks Simplification of procedures, reduction of MFB’s lead-times

Working Capital LoanExperiences and future plans

Working Capital LoanExperiences and future plans

Very low utilization (under 5%) of allocated funds Limited usability of funds due to EU regulations (e.g. expansion of business activity) More complex procedures as the programme is jointly run by VFH and MFB longer

lead-times There are other SME loan programmes overlapping loan products - competition

between institutions non-transparent system for potential beneficiaries

Strategic goals, planned reforms: Reduction of allocated funds from HUF 100 billion (EUR 351 mn) to HUF 15 billion

(EUR 53 mn) (Programme period ends in December 2010) Further decrease of the loan period might improve the product’s competitiveness Simplification of procedures, reduction of MFB’s lead-times Performance of currently inactive saving co-operatives may boost as a result of VFH’s

targeted communication

Credit GuaranteeExperiences and future plans

Credit GuaranteeExperiences and future plans

Competitiveness of the guarantee product is limited:

To join the Programme, credit institutions have to implement expensive and time consuming IT and other developments

No standard view on the risk weight to be applied to loans guaranteed by the Holding Fund Manager (Basel II rules)

The guarantee fund is too small as compared to the banks’ SME portfolio

Credit institutions prefer to use other, traditional guarantee products on the market

Strategic goals, planned reforms:

Reduction of allocated funds from HUF 28 billion (EUR 98 mn) to HUF 15 billion (EUR 53 mn)

Expanding the circle of guaranteed SME loans (loan products of saving co-operatives etc.)

Elaboration of counter-guarantee schemes Offering risk-free guarantee for traditional guarantee institutions (e.g. Garantiqa) with a large portfolio

Venture CapitalExperiences and future plans

Venture CapitalExperiences and future plans

All the 8 venture capital funds were set up in the first half of 2010 Funds started their activity some months ago – first investment decisions and

investments has been made HUF 9 billion (EUR 32 mn) has not been allocated to venture capital funds – the

reserved amount may be reallocated within or outside the programme based on future experiences

Problems on the level offinancial intermediariesProblems on the level offinancial intermediaries

Micro Loan, Small Loan:

Credit institutions (banks, saving co-operatives) show limited activity due to low loan size

Limited usability of funds due to EU regulations (e.g. expansion of business activity)

Credit Guarantee:

Competitiveness of the guarantee product is limited:

To join the Programme, credit institutions have to implement expensive and time consuming IT and other developments

No standard view on the risk weight to be applied to loans guaranteed by the Holding Fund Manager (Basel II rules)

The guarantee fund is too small as compared to the banks’ SME portfolio

Credit institutions prefer to use other, traditional guarantee products on the market

ProspectsProspects

BUSINESS TASKS Competition between programmes subsidied by State → simplifying list of products Review of relationship of present intermediaries Implementation of new products and modification of present products (e.g.

redemption limit) based on market requirements Renew communication campaign (tailor-made communication by intermediaries)

OPERATIONAL ISSUES Simplifying data transfer Implementing unique IT system in favour of intermediaries Upgrade of service connection toward partners

New financialprogrammesNew financialprogrammes

Combination of Micro Loan and non-refundable subsidies in a „one stop shop” system for micro enterprises (under development)

Refinancing loans to factoring companies

New or revised guarantee schemes

Thanks for your attention!