Title: KfW y la Promocin de las Pequeas y Medianas Empresas SME Financing in Germany KfWs Role
1KfW y la Promoción de las Pequeñas y Medianas
EmpresasSME Financing in GermanyKfWs Role
- Dr. Thomas DuveVice President Strategic
Projects, KfW Bankengruppe (KfW banking group) - Lima, 15 November 2007
2Brand structure.
3KfW Mittelstandsbank (KfW SME bank).
- Target group start-ups, small and medium-sized
enterprises, self-employed professionals in
Germany and abroad - Financing products
- Classic promotional loansLong-term financing,
for instance through the product family
Unternehmerkredit (Entrepreneur Loan) - Mezzanine financing
Strengthening
the financing structure through the product
family Unternehmerkapital (Entrepreneur
Capital) - Strengthening companies equity base by providing
private equity - Advisory services
4KfWs Loans, Grants, Guarantees and
Securitisations in 2006
Total 75.9 billion EUR
5Agenda
- German SMEs Facts, Figures and Finance
- KfWs Role in financing SMEs
- Loans
- Mezzanine
- Equity
- Securitisation
6What are SMEs / what is the Mittelstand?
- Generally accepted definition of small and medium
sized enterprises (SMEs, Mittelstand) does not
exist - Frequently used qualitative criteria for SMEs
- Ownership and management of the company coincide
- Company is independent, e. g. it is not a
subsidiary of a large-scale enterprise (LSE) - Frequently used quantitative criteria for SMEs
- KfWs promotional loan programs in
generalmaximum EUR 500 million annual turnover - EU Commission not more than 250 employees,
maximum EUR 50 million annual turnover, and
maximum EUR 47 million total assets - Scientific research not more than 500 employees
and maximum EUR million 50 annual turnover
7The role of small and medium-sized enterprises in
the overall economy
- The 3.5 million SMEs in Germany
- employ almost two-thirds of the workforce
- train 73 of apprentices
- conduct 50 of gross investment by the German
corporate sector - Enterprises with an annual turnover of no more
than EUR 500 million.
Source KfW-Mittelstandspanel 2006
8Role of SMEs for export champion Germany
- Export is main driver of the German economy
responsible for 60 of GDP growth - In particular, RD intensive industrial SMEs
participate in Germanys export growth - Highest share of exporting SMEs compared with
larger EU countries
Share of exporting SMEs
Source ENSR Enterprise Survey 2003
9The banking system in GermanyWho finances
German enterprises?
- Commercial banks in Germany may be grouped into
three broad categories
Savings banks(state owned) Market share in
total assets 34,3 Market share in loans to
non-banks 42.0 Number of banks475 Number of
bank offices 15,000 7 central banks administer
KfW loans
(Private) credit cooperatives Market share in
total assets 11,8 Market share in loans to
non-banks 15.1 Number of banks1,295 Number of
bank offices 14,000 2 central banks administer
KfW loans
Private commercial banks Market share in total
assets 28,2 Market share in loans to non-banks
33.0 Number of bank offices approx.
5,300 Number of banks356, thereof 5 major
partners for KfW loans
10Who finances German enterprises?
Market-shares of German bank groups in loans to
enterprises
KfW works with more than 600 banks Appr. 2/3 of
KfWs promotional loans are commited to only 15
(central-) banks
11 Upheavals in the financial markets
Different investor preferences (higher yields,
riskier forms of investment)
Automation of standard-isable processes (e.g.
ATMs, fund transfers)
Reliable risk and rating models possible for the
first time
Information available worldwide at the same time
Full integration of national financial markets
into one sole world financial market
Result Drastically increasing competitive
pressure in the financial sector
12Consequences of the upheavals declining
earnings for all banking groups up to 2002
Source Bundesbank
13Reactions of the credit institutions
- Drastic austerity programmes (job cuts,
closing of branches, etc.) - Reluctance New lending especially to smaller
SMEs with caution and an intensive
risk-assessment. - Implementation of newly developed instruments for
surveying (and controlling) costs and risks and
introduction of pricing based on credit ratings
14Financing problems in the German SME sector
Annual turnover
Companies reporting difficulties in accessing
credit ()
Company Survey 2006
15Equity ratio in German enterprises
- Equity ratios of German enterprises are low
compared to other European countries. - Negative effect on ratings
- This has contributed to banks reluctance in
extending loans
In of balance sheet total
Source BACH Database/ 2000
Turnover category
16Impacts on Financing for SMEs
- Risk-based differentiation of credit conditions
- Growing importance of a strong equity base
- Broader spectrum of financing instruments
17Consequences and strategies for German SMEs
- Improve their credit rating (equity ratio)
- Consider financing alternatives (such as
mezzanine capital, private equity, leasing,
factoring, etc) - Ensure active, offensive maintenance of their
relations with their regular business bank - get fit for rating / professionalisation of
management - clear communication of facts and figures -
increase transparency for the bank - take advantage of bank competition
18QA Session I
- What is the size structure of your SME clients?
- Who finances South American SMEs?
- Are there typical means to finance SME
business?(loans, equity) - Structure of the banking system in your
countries? - In 2007 and beyond, overall conditions/trends for
SME finance in South America are?
19Agenda
- German SMEs Facts, Figures and Finance
- KfWs Role in financing SMEs
- Loans
- Mezzanine
- Equity
- Securitisation
20Role and tasks of KfW
- The use of our market conform financing
instruments - helps to
- promote the required structural change of the
German economy, - improve the financing conditions of start-ups and
SMEs sustainably, and - support the development of financial markets.
21KfWs dual SME support strategy
- Continuous improvement of the classical
financing instruments (e. g. long term loans at
favourable interest rates) - introduction of risk-adjusted interest rates
- adjusting loan terms and structure to changing
needs of SMEs - Development of innovative financing instruments
- low-interest global loans (focus on efficient
processing) - securitisation products to give banks and savings
banks more leeway to lend - tapping of new financing opportunities for SMEs
- e. g. design of mezzanine products
22Product offer Main product lines ofKfW
Mittelstandsbank
Mezzanine(subordinated loans)
Equity finance
Loans
E.g. Entrepreneur Loan, Microloan Programme
Entrepreneur Capital, ERP Innovation Programme
E.g. ERP Start Fund
Information and advice
23Commitments in 2006 KfW Mittelstandsbank
(excluding securitisation)
24The Bulk of the Businessis with Small
ClientsBeneficiaries of KfW Mittelstandsbank
Product Lines
Share in No. of commitments by beneficiary's
size class
Size Class (Annual Turnover)
01. January 2007 to 30. June 2007, items with
missing turnover omitted
25Agenda
- German SMEs Facts, Figures and Finance
- KfWs Role in financing SMEs
- Loans
- Mezzanine
- Equity
- Securitisation
26Promotion of SMEs KfWs on-lending concept
National and international capital market (AAA)
On-lending bank / house bank
SME
SME
SME
On-lending bank / house bank
SME
SME
Government funds for special credit programmes,
e.g. ERP
On-lending bank / house bank
SME
Commercial bank
27How to Apply for aKfW Investment Loan
Bank
SME / Investor
Application onKfW-form
Presentation of Project
Project eligible under KfWs promotional
criteria?
- Project appraisal
- Credit risk appraisal
- Collateral
Project
1
2
Project and loan monitoring
3
Commitment
4
Commitment
28E-Commerce KfWs Experience
- KfW committed ca. 385.000 loans in 2006, thereof
about 350.000 via banks - Due to lower administration cost and faster
procedures, E-Commerce was vital in ensuring
continuing interest of banks in selling
promotional loans
Bank
KfW
29Pricing of LoansWhy One fits all is out of date
- According to good banking practice in the past,
interest rates of KfWs loans were the same for
all SMEs no matter the collateral provided or
the rating achieved. - For a long time, cross-subsidisation took place
good risks paid too much, while interest rates
for inferior risks were too low. - With the implementation of newly developed
instruments for surveying (and controlling) costs
and risks, banks could identify cases of
cost-ineffectiveness, e. g. for clients
with lower ratings and poor collateral. - With a uniform risk margin, banks were more and
more reluctant to on-lend KfWs loans. - Increasing difficulties for SMEs to have access
to KfWs loans. - KfW introduced its risk-adjusted pricing system.
30KfWs on-lending concept IIRisk-adjusted pricing
system I
- Combination of rating and collateral determines
pricing of loans - Exact pricing by house bank KfW sets upper
limits for each pricing class
10-year loan term with 2 grace years and
10-year fix interest rate
31KfWs on-lending concept IIRisk-adjusted
pricing system II
- The target group of companies for promotional
loans becomes larger due to the implementation of
the risk adjusted pricing system. - Companies with weaker creditworthiness and
limited collateral are now financed, as banks can
charge a margin sufficient to cover the risk
41 of typical SME portfolio coverd by old
pricing system
86 of typical SME portfolio coverd by old
pricing system
32Base Product is the Entrepreneur Loan
- Unternehmerkredit (Entrepreneur Loan)
- Simple and easy loans for start-ups, SMEs and
self-employed professionals with annual turnover
EUR 500 million - Maximum loan amount is usually EUR 10 million
- Conditions
- Favourable interest rates and long maturities
usually 10-year loan term with 2 grace years - Interest rates are determined by a companys
credit rating and collateral available
more information online
www.kfw-mittelstandsbank.de/EN_Home/Loans/
33Focus Small Loans for Start-ups KfW-Startgeld
(starting Jan. 08)
- Problem Low survival rate of start-ups (50
after five years) - High default rates of loans especially to small
start-ups (cumulative value 25-35) - Small start-ups complain about banks reluctant to
extend loans - KfW StartMoney
- Financing purpose start-up investments, working
capital during the first 6 months and business
consolidation for up to 3 years after start-up - Loan amount 5,000-50,000
- Modified on-lending procedure
- House bank receives a fixed margin (1.2 p.a.)
and a lump sum for administration cost ( (500 to
1,000 depending on loan amount) - 80 of the liability is assumed by KfW, KfW
performs own risk assessment based on
documentation - Term 2- 10 years, Nominal interest rate ca. 7
(planned) - Simplified procedure for loan disbursements if
the house bank cooperates with a start-up
advisory centre
34QA Session II
- Would the on-lending concept work in your
countries? - Is risk-adjusted pricing something to consider?
- Should loan technique and actors differ between
Micro Lending and bigger loans?
35Agenda
- German SMEs Facts, Figures and Finance
- KfWs Role in financing SMEs
- Loans
- Mezzanine
- Equity
- Securitisation
36Mezzanine Product Family Entrepreneur Capital
Subordinated capital for start-ups, self-employed
professionals and SMEs
ERP capital for start-ups For start-ups and
young enterprises up to 2 years after business
operations began
ERP capital for growth For young enterprises
whose business operations started more than 2 but
not more than 5 years before application
Capital for work and investments For
established companies active in the market for
more than 5 years
37Subordinated Capital Entrepreneur Capital
Bridging function
- Subordinated capital strengthens a companys
financial structure immediately - Over the loan term a company can improve its
equity ratio by retaining profits -
Retention of Earnings
Equity ratio
Time
Borrowing
Redemption
38Agenda
- German SMEs Facts, Figures and Finance
- KfWs Role in financing SMEs
- Loans
- Mezzanine
- Equity
- Securitisation
39Equity FinanceMain Programme Offers
Early Stage
Later Stage
ERP Participation Programme
Fund Investments
ERP Start Fund
High-TechFoundation Fund
40Product offer for innovators and start-ups Equity
- ERP Start-up Fund Venture capital for technology
start-ups - Co-investment Deal acquisition through VCs and
business angels, financing condition pari passu - Pilot project Cluster Key Accounting Intensive
cooperation with universities, cluster and
network actors in four regions
41Product offer for innovators and start-ups Equity
II
- KfW fund financing
- KfW acts as (cornerstone) investor in private
equity funds - Focus on early-stage technology funds,
later-stage funds with focus on SMEs (expansion,
company succession) - Example Fraunhofer spin-off fund
- High-tech Start-up fund (HTGF) PPP between
government, KfW and industry (BASF, Telekom,
Siemens, Bosch, Daimler, Carl Zeiss) - Seed fund (volume 272 million) investing up to
0.5 million in first round and another 0.5
million in follow-up rounds - Cooperation with side investors (business angels)
and coaches - KfW also gives management and HR support
- Refinancing ERP Participation Programme
- KfW refinances small-scale deals of regional
private equity funds with promotional focus
42QA Session III
- Where does equity come from for SMEs in your
countries? - Do demand and/or supply differ according to
companys life cycle, the use of technology ? - Would a fund concept work?
43Agenda
- German SMEs Facts, Figures and Finance
- KfWs Role in financing SMEs
- Loans
- Mezzanine
- Equity
- Securitisation
44How does securitisation work?
- In the process of securitisation, illiquid assets
are transformed into tradable securities. - Credit risk is transferred from the banks
balance sheet to the capital market. - Securitisation is the transfer of a portfolio of
assets from a bank (originator) to the capital
market.
45Securitisation and promotion of SMEs The
framework for SME promotion
46 Impact of securitisation The banks
perspective
By taking advantage of asset securitisation banks
are in a position to provide more loans to
customers (e.g. SME loans), without the need to
raise more equity
Bank
Debt
SME-loans
Equity
New SME loans
Capital release through asset securitisation
47 Impact of securitisation The companies
perspective
- Customer relationship between company and bank
remains unchanged. - Banks can extend additional loans.
- Companies benefit from more favourable loan
conditions. - By transferring risks from the bank to investors,
SMEs obtain indirect access to the capital market.
48Impact of securitisation Summary
- Securitisation releases (regulatory and economic)
capital. - Thus, banks are able to supply new loans to their
customers (more loans can be produced with the
same level of equity). - The relationship between banks and customers is
not affected. - Improved access to finance for SMEs
- More loans
- Better conditions
- Broader product range
49KfWs securitisation activities Our focus
- Mission Improvement of the credit supply for our
target groups - Liquid secondary markets / access to capital
markets - Regional Focus European Union
- Emerging Markets (in context of German
Development Cooperation) - Asset Classes SMEs Leasing
- Micro finance
- Housing / mortgage loans
- Infrastructure and PPP
- DPR (diversified payment rights)
50KfWs securitisation activities KfWs
synthetic platforms basic structure
Senior CDS
OECD-BankSuper senior tranche of the
portfolio (80 - 90 )
KfW
Bank
Credit Default Swap (CDS)
AAA
Certificate of indebtedness (Schuldscheine)
Risksof thereferenceportfolio
Reference portfolio
CLN Issue
AA
SPVin Germany
A
Issue proceeds of CLN
Proceeds
BBB
BB
FLP
51KfWs securitisation activities Promotional
effects of KfWs securitisation platforms
52KfWs securitisation activities Achievements so
far (2000-2007)
- KfW-Mittelstandsbank Securitisation of SME risk
- Inception of PROMISE December 2000
- 19 transactions executed under PROMISE
- 6 other deals including SME related assets
- Notional amount transferred to capital markets
EUR 41.4 billion
(17.09.2007)
53KfWs securitisation activities KfWs platforms
- achievements so far
- KfW has kicked-off the development of secondary
markets for asset classes which are relevant from
a developmental perspective - KfW has expanded the scope of the platform
according to market demand - World leader in synthetic securitisation market
65 transactions EUR 113.0 billion default risk
transferred to investors
more information online
www.kfw.de/EN_Home/Loan_Securitisation/Disclaimer.
jsp
- Market existence banks originate new loans with
the objective to securitise - Market access smaller banks can also securitise
their portfolios - Market width challenging asset classes (e.g. SME
loans, acquisition finance) are securitised - Market depth continuous deal-flow increases
liquidity in secondary market
54QA Session IV
- Are SMEs an already established asset class
insecuritisation? - What is or could be a rationale for SME
securitisation in South America?
55 Conclusion
- KfWs SME-promotion
- improves financing conditions for SMEs, and
- is making a major contribution to establishing
new financial market segments and financing
instruments for SMEs and - enhances structural changes in the overall
economy and the financial sector - The further development of SME promotion is an
ongoing task.
56For more information
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