Chapter 8

Re-lending and Government Loan Guarantees

Government Debt Management is responsible for re-lending and government loan guarantees to a number of companies. Re-lending and government loan guarantees enable the companies to achieve favourable borrowing terms since they can benefit from the central government's high credit rating. At the end of 2008, re-lending amounted to DKK 51 billion, of which DKK 10 billion to Danish Ship Finance. Loan guarantees amounted to DKK 56 billion.

The guidelines for borrowing by companies with access to government loan guarantees or re-lending were revised in 2008 in order to strengthen the companies' risk management. Consolidated risk management of assets and liabilities is a key element. In addition, access to re-lending combined with a forward-rate agreement was granted in 2008.

Purpose and Framework 8.1

A number of companies may raise loans directly from the central government (re-lending) or raise government-guaranteed loans. Re-lending and government loan guarantees derive from the political intention to support the financing of certain projects. The majority are issued to government-owned companies involved in large infrastructure projects, whose purposes and borrowing frameworks are laid down by law.

12 government-owned companies have access to re-lending or government-guaranteed loans, cf. Table 8.1.1. Furthermore, Danish Ship Finance has access to a special re-lending facility.

Re-lending means that loans are raised directly from the central government. Government Debt Management specifies a list of eligible loan types (the re-lending list), cf. section 8.2. By issuing a loan guarantee, the central government assures that the loans raised by the company in the private market will be repaid, thus reducing the borrowing costs.

Guidelines for borrowing by companies
Government Debt Management formulates the general guidelines for borrowing by the companies that have access to loan guarantees or re-lending. The aim is to ensure that the companies do not assume financial risks that the central government itself would not assume.

The guidelines for borrowing by the companies are stated in a set of agreements comprising two main elements¹:

• An agreement between the ministry in question, the Ministry of Finance, Danmarks Nationalbank and the individual company
• A list of eligible loan types, which is specified and updated by Government Debt Management, cf. Box 8.1.

The list of eligible loan types was revised in 2008. The new guidelines are based on the companies' consolidated approach to risk management of their assets and liabilities, cf. Chapter 11. Besides the guidelines for the companies' access to government-guaranteed loans and re-lending, recommendations have been issued for e.g. the management of credit risk on investments, borrowing by affiliated companies and consolidation of credit risk across instruments. It is the responsibility of the companies and their boards to lay down a financing strategy that contains the company's rules for all financial transactions in relation to borrowing.

Access to re-lending combined with a forward-rate agreement was granted in 2008. The intention is to enable the companies to simplify their risk management. Previously, the companies spread their borrowing over the year to reduce the risk of unfavourable market conditions on specific days. Since the companies' redemptions primarily fall due at the end of the year, this has entailed periods with considerable investments at banks, imposing a credit risk on the company. Re-lending combined with a forward-rate agreement enables the companies to lock the interest rate on re-lending during the year and at the same time avoid the credit risk on investments.

Re-lending combined with a forward-rate agreement is based on securities on the re-lending list and granted on the basis of market yields. The forward-rate agreement period is between 1 and 12 months. For a number of years, the re-lending facility available to Danish Ship Finance has included re-lending combined with forward-rate agreements.

Re-lending 8.2

Re-lending operations
The re-lending list comprises all fixed-income government bonds denominated in Danish kroner in the maturity segments between 2 and 10 years, as well as synthetic loans maturing in 2012, 2014 and 2016, cf. Table 8.2.1. Besides the loan types on the re-lending list, other types of re-lending, including forward-rate agreements, may be granted, subject to a motivated request.

When a company requests re-lending, Government Debt Management sets the price of the loan on the basis of the current market conditions. The proceeds of the loan are paid from the central government's account. The resulting borrowing requirement is financed via current issues, which contributes to supporting liquidity in the central government's key on-the-run issues. No specific issuance takes place to hedge the risk on individual re-lending transactions. Re-lending is part of the consolidated risk management of the central-government debt, cf. Chapter 9.

Re-lending to government-owned companies in 2008
In 2008, new re-lending to government-owned companies amounted to DKK 13 billion, cf. Table 8.2.2. The stock of re-lending to government-owned companies totalled DKK 41 billion at end-2008.

Three synthetic loans were granted for a total amount of DKK 1.4 billion. The purpose was to smooth the redemption profile of the companies' loans under the re-lending facility. Furthermore, forward-rate agreements of DKK 700 million were granted in 2008.

In 2008, the Winding-Up Company (Afviklingsselskabet til sikring af finansiel stabilitet A/S) was granted access to borrow under the re-lending facility, cf. Box. 8.2. In addition, Statens Serum Institut intends to use the re-lending facility for the first time in 2009.

Re-lending to Danish Ship Finance
In 2003, Danish Ship Finance gained access to a special re-lending facility in connection with the adoption by the Folketing (Parliament) of a temporary operating subsidy for Danish shipyards, cf. Danish Government Borrowing and Debt 2003, Chapter 10. This facility is subject to a set of agreements equivalent to those applying to government-owned companies.

In 2008, borrowing by Danish Ship Finance under the re-lending facility totalled around USD 700 million, or DKK 3.4 billion. The portfolio of re-lending to Danish Ship Finance was DKK 10 billion at end-2008.

In 2008, the re-lending facility to Danish Ship Finance was extended to include annuity loans as a supplement to the existing serial loan facility. The loans are structured as 12-year loans with semi-annual payments in kroner or dollars. Re-lending can be granted to Danish Ship Finance until the end of 2015. The maximum re-lending amount is DKK 18 billion.

The central government transacts currency swaps between kroner and dollars in connection with the re-lending in dollars, hence the central government does not assume any exchange-rate risk. The pricing of the loan is fixed on the basis of the central government's borrowing terms. In 2008, the situation in the financial markets made it more difficult to conclude swaps between kroner and dollars on re-lending to Danish Ship Finance. In addition, the number of possible counterparties in these transactions has decreased.

loan guarantees 8.3

At the end of 2008, government-owned companies had issued government-guaranteed debt totalling DKK 56 billion, cf. Table 8.3.1. In addition to the government guarantees managed by Government Debt Management, the central government has provided further guarantees for approximately DKK 100 billion, e.g. in connection with subsidised housing, export credits and international institutions, cf. the Government Accounts.

Development of re-lending and Loan Guarantees 8.4

The central government's exposure to a potential loss in the event that the company defaults on its loans is the same for re-lending and government guarantees. Therefore, re-lending and loan guarantees are in principle equivalent with regard to the central government's risk, cf. Danish Government Borrowing and Debt 2004, Chapter 9.

Since 2000, the volume of re-lending and loan guarantees has been stable at around DKK 100 billion. In recent years, the government-owned companies have tended to prefer re-lending over government-guaranteed borrowing in the private market, cf. Chart 8.4.1. This development reflects that re-lending has been a low-cost source of financing for the companies and that re-lending has been the only option available to new government-owned companies.

In a period of large government surpluses, the preference for re-lending over loan guarantees has facilitated the build-up of liquid series of government securities. By ensuring liquid bond series the central government achieves a liquidity premium, which contributes to reducing the borrowing costs of the central government and the government-owned companies. As a result of the declining government debt combined with the higher volume of re-lending, re-lending now accounts for a considerably larger share of the central-government debt, cf. Chart 8.4.1.

re-lending and government loan guarantees	Chart 8.4.1