Page 85 - Annual Report 2010

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Financial Statements

Transactions can be placed under review if there has been any external rating downgrade, any substantial change in the performance of the underlying port folio or any other element of concern which calls for addi -tional scrutiny (e.g. negative news regarding the servicer or originator), even without any external rating action. EIF puts on a ‘watch list’ any transaction with an internal rating below iBa2 level.

Watch Listed and Under Review transactions are closely scrutinised for a possible breach of EIF triggers, which typically motivates a prompt re-run of the rating model. EIF also monitors a set of early warning signals for each transaction, the appearance of which flags up the need for increased surveillance and possibly preliminary action. EIF early warning signals are based on the performance parameters of each transaction (e.g. actual cumulative default rate, actual cumulative average recovery rate), which are compared to a given predetermined threshold level or base case scenario.

The monitoring process includes for instance: checking the compliance of counterparties with any relevant con-tractual covenants and triggers, assessing the expected evolution of operation’s performance compared to esti -mates set prior to its signature, applying rating stress test-ing scenarios and assessing whether the level of capital allocation and provisions made for each operation are still adequate.

As circumstances require, dedicated professionals within the RMM G&S unit submit proposals to the IRC to flag transaction as Under Review with positive or negative outlook and/or to initiate a model re-run.

Furthermore, a committee consisting of staff with adequate skills and appointed by the IRC may be set up in order to propose and negotiate solutions to minimise EIF’s losses in underperforming deals.

The monitoring activities also include the analysis of the G&S portfolio as a whole (Portfolio Review).

3.3.2 Portfolio overview

At the end of 2010, total G&S own risk transactions amounted to EUR 2 580.2m (2009: EUR 2 893.0m) in terms of exposure at risk (i.e. commitment less repayments).

EIF’s own- risk operations consist mainly of the credit enhancement product type which, at the end of 2010, represented 94.5% (EUR 2 438.4m) of total exposure at risk own-risk guarantees. The credit enhancement product serves as an unconditional debt service guarantee (or as a credit default swap), with full or partial coverage of a specific tranche of an SME loan portfolio, and a maxi -mum weighted average term of 15 years. The guarantee is called upon when losses in the portfolio would other-wise have caused a shortfall on a due payment of interest and/or principal on the guaranteed tranche.

In the past EIF also underwrote credit insurance and struc-tured investment vehicles products. As of 31 December 2010, credit insurance products and structured investment vehicles investments accounted for 5.3% (EUR 135.5 m) and 0.2% (EUR 6.3 m) of all own-risk outstanding guar-antees, respectively.

3.3.3 Portfolio quality and performance

As of 31 December 2010, 77.8% (83.0% at year end 2009) of the overall portfolio in relation to the number of transactions was at investment-grade level (rating from Aaa to Baa3 inclusive); 63.2% were rated by at least one external rating agency with the remainder relying on EIF’s internal rating. The credit enhancement portfolio’s average rating deteriorated to Ba2 as a result of limited new origi-nation coupled with downgrades in the existing portfolio.

As of 31 December 2010, 78.7% of the reviewed transac-tions had a “stable” outlook (“performance as expected”) and 21.3% had a negative outlook. 15 tranches were downgraded by EIF in 2010. The total exposure at risk for EIF’s own risk guarantees amounts to EUR 2 580.2m, breaking down as follows: