CHAPTER 8

Re-Lending and Government Loan Guarantees

Government Debt Management is responsible for re-lending and loan guar antees to a number of companies. Government re-lending and guarantees enable the companies to achieve favourable borrowing terms since they can benefit from the central government's high credit standing.

In the context of the financial crisis, the central government has expanded its volume of re-lending and guarantees. Re-lending facilities have been established for the Financial Stability Company and Eksport Kredit Fonden, and government capital injections into banks and mortgage-credit institutes have been introduced. In addition, rescue packages have provided for government-guaranteed bond issues.

Purpose and Framework 8.1

Re-lending and government loan guarantees derive from the political intention to support certain projects. The majority are issued to govern ment-owned companies involved in large infrastructure projects, whose purposes and borrowing frameworks are laid down by law.

Government Debt Management manages re-lending and loan guar antees for 13 government-owned companies, cf. Table 8.1.1. Furthermore, Danish Ship Finance has access to a special re-lending facility.

Guidelines for borrowing by the companies

Government Debt Management formulates the general guidelines for bor rowing by the companies that have access to loan guarantees or re-lend ing. The aim is to ensure that the companies do not assume financial risks that the central government itself will not assume. The guidelines for bor rowing 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.

Access to re-lending and loan guarantees
Re-lending means that loans are raised directly from the central government. When a company requests re-lending, Government Debt Man agement sets the price of the loan on the basis of the current market con ditions. The proceeds of the loan are paid from the central govern ment's account. The resulting financing requirement is met via the key on-the-run issues. No specific issuance takes place to hedge the risk on in di vid ual re-lending transactions. Re-lending is an element of the con solidated risk management of the central-government debt, cf. Chapter 9.

By issuing a loan guarantee, the central government assures that the loans raised in the private market will be repaid. This reduces the costs of financing since the central government assumes the credit risk for which the companies would otherwise have to pay in the market.

Credit Facilities Resulting from the Financial Crisis 8.2

In connection with the financial crisis, two financial rescue packages were adopted (Bank Rescue Package I and the Credit Package)², under which the Financial Stability Company and Eksport Kredit Fonden (EKF) were given access to government re-lending, cf. Box 8.2. The same guidelines ap ply as for other government-owned companies with access to re-lending.

The Financial Stability Company
The Financial Stability Company has access to re-lending in bullet loans with maturities ranging from 1 month to 10 years. Loans in short-term government bonds contribute to simplifying the management of interest-rate risk as the Financial Stability Company holds assets that are exposed to short-term interest rates.

In order to facilitate liquidity management by the Financial Stability Company, the Company has been granted access to re-lending of up to one month's duration for a maximum of DKK 625 million, corresponding to the monthly contributions by the Danish Contingency Association. In addition, the Financial Stability Company has access to re-lending in foreign currency.

Eksport Kredit Fonden
EKF has access to re-lending on the basis of bullet loans with maturities of 2 to 10 years, as well as re-lending with a serial redemption profile of up to 15 years. Access to serial loans reflects the fact that according to international agreements EKF may provide export credits by way of serial loans. EKF has access to re-lending up to a limit of DKK 20 billion. Access to new re-lending ceases at the end of 2011.

Government capital injections into credit institutes
The Credit Package paved the way for government capital injections into Danish banks and mortgage-credit institutes by way of hybrid core capital up to a maximum of DKK 100 billion, provided that the institutes were solvent. The scheme is administered by the Ministry of Economic and Busi ness Affairs. When the scheme expired at end-2009, capital injections totalled DKK 46 billion, distributed on 43 institutes.

The rate of interest on individual capital injections was set at the 5-year zero-coupon rate plus a risk premium. The average interest rate is 10.08 per cent. The premium relative to government securities reflects the high er credit risk on capital injections. The capital injections did not increase the central government's issuance requirement in 2009, but were financed by drawings on the central government's account at Danmarks National bank.

Loans to Iceland and Latvia
To support the Icelandic economic stabilisation programme, which has been prepared in cooperation with the IMF, Denmark and the other Nor dic countries have jointly committed themselves to a loan totalling EUR 1.775 billion. The scheme is managed by the Ministry of Finance. Den mark's share is provided in euro up to a limit of EUR 480 million. The loan runs for 12 years, with no repayments for a period of 5 years from the first in stal ment (EUR 81 million), which was disbursed in December 2009. The re mainder of the loan is expected to be disbursed during 2010, provided that Iceland continues to implement the IMF programme and meets its international obligations.

Latvia has also been granted access to loans from the Nordic countries in con nection with an economic stabilisation programme prepared in co oper ation with the IMF. Denmark has committed itself to a maximum of EUR 378 million.

Re-Lending in 2009 8.3

Re-lending by Government Debt Management in 2009 amounted to DKK 35 billion, cf. Table 8.3.1. The stock of re-lending totalled DKK 82 billion at year-end. The pronounced increase in the volume of re-lending is attributable to the Financial Stability Company, which in 2009 borrowed DKK 25 billion under the re-lending facility, of which DKK 21 billion related to its acquisition of Roskilde Bank in August 2009. The Financial Stability Company is expected to reduce its volume of re-lending in 2010.

Sund og Bælt Holding A/S was given access to re-lending in 2009. The company used the facility to finance a capital injection into the subsidiary Femern A/S. Eksport Kredit Fonden took a 15-year serial loan for DKK 2.6 billion under the re-lending facility 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 tem por ary operating subsidy for Danish shipyards, cf. Danish Government Bor rowing and Debt 2003, Chapter 10. This facility is subject to a set of agree ments equivalent to those applying to government-owned com panies.

In 2009, borrowing by Danish Ship Finance under the re-lending facility totalled DKK 2.0 billion. At year-end, the stock of re-lending to Danish Ship Finance was DKK 10.6 billion. Danish Ship Finance does not plan to use the facility in 2010.

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 govern ment transacts currency swaps between kroner and dollars in connection with re-lending in dollars, and therefore 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.

Government Loan Guarantees in 2009 8.4

At the end of 2009, government-owned companies whose loan guarantees are managed by Government Debt Management had issued govern ment-guaranteed debt totalling DKK 50 billion, cf. Table 8.4.1.

In addition, the central government has provided further guarantees for ap proximately DKK 100 billion, e.g. in connection with subsidised housing, export credits and international institutions, cf. the Government Accounts.

Guarantees linked to the financial rescue packages
Bank Rescue Package I includes a full government guarantee until 30 Sep tember 2010 for all depositors' and other unsecured creditors' claims in banks and mortgage-credit institutes comprised by the guarantee scheme.

As part of the Credit Package a transitional arrangement was adopted under which the Financial Stability Company, acting on behalf of the Dan ish government, can conclude agreements to provide individual govern ment guarantees to banks and mortgage-credit institutes against pay ment of guarantee commission. The individual government guarantee com prises bonds with a maturity of up to three years. Until now, the Euro pean Commission has approved issuance under this scheme until 30 June 2010. The transitional arrangement ensures that banks and mortgage-credit institutes have access to government guarantees for medium-term loans, as is the case under guarantee schemes in other countries.

At end-2009, loans with individual government guarantees totalled DKK 53 billion.

Development in Re-Lending and Loan Guarantees 8.5

In recent years, the government-owned companies have tended to use re-lending over government-guaranteed borrowing in the private market, cf. Chart 8.5.1. This development reflects that re-lending has been a cheaper source of financing for the companies and that re-lending has been the main option available to new government-owned companies. The increase in the volume of re-lending in 2009 is primarily attributable to re-lending to the Financial Stability Company.

re-lending and government loan guarantees administered by government debt management	Chart 8.5.1

The central government's exposure to a potential loss in the event of default 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.