Page 88 - Annual Report 2010

ANNUAL REPORT 2010

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3.5.1 Credit risk

Credit risk is the risk that another party will cause a finan-cial loss to EIF by failing to discharge an obligation.

Credit risk concerns the EIF’s G&S activity and, to a lesser extent, treasury instruments such as fixed income securities and floating rate notes held in the AFS portfolio, commer-cial paper and deposits. There is no credit exposure for EIF own risk PE portfolio as investments in PE funds rep-resent equity investments and related financing structures and are always made through an equity-like participation. The Fund uses the following instruments, policies, and pro-cesses to manage the credit risk.

3.5.1.A. Portfolio Guarantees & Securitisation

Credit risk arises mainly from EIF’s G&S transactions fund-ed by own resources.

This risk is managed by risk management policies covered by the statutes and Credit Risk Policy Guidelines. The statutes of the Fund limit own- risk guarantees to three times the subscribed capital, which amounted to EUR 3 000.0m at end 2010. Hence, the EUR 2 580.2m exposure at risk at end 2010 was well below the statutory limit of EUR 9 000.0m.

EIF Credit Risk Policy Guidelines ensure that EIF contin-ues to develop a diversified G&S port folio in terms of product range, counterparty exposure, obligor exposure, geographic coverage, and industry concentration.

In the context of EIF’s own risk G&S operations, the credit risk is tracked from the outset on a deal -by-deal basis whilst adopting a dif ferent model analysis approach depending on the granularity and homogeneity of the underlying portfolios.

Concentration risk is limited because of the granular nature of EIF’s transactions; typically the underlying portfolios are highly diversified in terms of single obligor concentration, sectors, and also with regard to regional diversification.

To cover concentration risk, EIF has strict limits (based on capital allocation) on individual transactions and origina-tor level (maximum aggregate exposures for originators and originator groups).

The industry sector exposures are analysed on a deal-by-deal basis through their impact on the ratings assigned by EIF to each transaction/tranche. For instance, depending on the financial model used to analyse the transaction, industry exposures can be reflected in implicit correlation or can be indirectly captured based on assumption of default rate volatility, as a key model input variable.

As of 31 December 2010, EIF’s overall own risk G&S portfolio was spread over 16 countries. The largest nomi-nal individual country net exposures were Italy, United Kingdom and Germany, which jointly accounted for 44.4% of total guarantee commitments.

Consideration of sector exposures also forms part of EIF’s overall portfolio analysis.

Counterpar t y r isk in the own resources por t fol io is mitigated by the quality of EIF counterparties, which are usually major market players, and by rating triggers on the counterparty which require, in case of breach, actions such as substitution of the counterparty or collateralisation of its obligation. EIF performs additional on-site monitoring visits to ensure compliance with procedures and processes during the transaction life. Stress- test scenarios for the port folio of G&S, including extreme case assumptions, are regularly carried out to determine the ability of the capital base to sustain adverse shocks.

The maximum principal exposure to credi t risk (not including possible guarantee calls on interest shortfalls nor foreign currencies fluctuations) in G&S corresponds to the nominal exposure at risk of EUR 2 580.2m.

3.5.1.B. Treasury

The Fund is exposed to credit risk relating to its assets held in the Treasury portfolios. However, the EIF adheres to conservative credit investment guidelines and internal limits. For each portfolio, the eligibility criteria for counter-parties are fixed according to their nature, to their credit quality (as measured by their external credit ratings) and to their own funds.

Any currency arbitrage is ruled out by the statutes.

The following table shows the maximum exposure to credit risk for treasury.