20-F 1 e47797_20f.htm FORM 20-F

 
 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 20-F

£ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
   
OR
S

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2011

OR
£ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
  For the transition period from _________ to _________
 
OR
   
£ SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
  Date of event requiring this shell company report

Commission file number: 1-8427

EKSPORTFINANS ASA
(Exact name of Registrant as specified in its charter)

Kingdom of Norway
(Jurisdiction of incorporation or organization)

Dronning Mauds gt. 15, N-0250 Oslo, Norway
(Address of principal executive offices)

Jens Olav Feiring
Executive Vice President and General Counsel
Eksportfinans ASA
Dronning Mauds gt. 15, N-0250 Oslo, Norway
Tel: 011 47 2201 2201
Fax: 011 47 2201 2202
(Name, telephone, e-mail and/or facsimile number and address of Company Contact Person)

Securities registered or to be registered pursuant to Section 12(b) of the Act:

Title of each class Name of each exchange on which registered
5.500% USD Notes due 2017 New York Stock Exchange
3.000% USD Notes due 2014 New York Stock Exchange
USD 500,000,000 FRN due October 7, 2013 New York Stock Exchange
2.000% USD 1,250,000,000 Notes due September 15, 2015 New York Stock Exchange
1.875% USD 1,000,000,000 Notes due April 2, 2013 New York Stock Exchange
2.375% USD 1,250,000,000 Notes due May 25, 2016 New York Stock Exchange
USD 500,000,000 FRN due April 5, 2013 New York Stock Exchange
USD 250,000,000 FRN due April 5, 2013 New York Stock Exchange

Securities registered or to be registered pursuant to Section 12(g) of the Act:

None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

See Continuation Sheet

(Title of Class)

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report:

263,914 common shares with nominal value of NOK 10,500 per share

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 the Securities Act.

S Yes     £No

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

£Yes     S No

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

S Yes     £ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

£Yes     £No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer £ Accelerated filer £ Non-accelerated filer S

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

U.S. GAAP £ International Financial Reporting Standards as issued by the International Accounting Standards Board S Other £

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.

£ Item 17     £ Item 18

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

£ Yes     S No 

 
 
 
  

Continuation Sheet — Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

5.500% USD Notes due 2017

3.000% USD Notes due 2014

USD 500,000,000 FRN due October 7, 2013

2.000% USD 1,250,000,000 Notes due September 15, 2015

2.375% USD 1,250,000,000 Notes due May 25, 2016

USD 500,000,000 FRN due April 5, 2013

USD 250,000,000 FRN due April 5, 2013

Accelerated Return Equity Securities (ARES)SM Linked to the Credit Suisse Water Index (Non-principal Protected) Due May 31, 2012

5-Year Commodity Linked Note Linked to the Dow Jones — AIG Commodity IndexSM Due October 26, 2012

5.01% Notes Due November 23, 2013

1.60% Yen 50,000,000,000.00 Notes Due 2014

0.25% Exchangeable Notes Exchangeable for the common stock of Johnson Controls Inc. Due July 30, 2014

5.5% Notes Due June 26, 2017

10-Year LIBOR Range Accrual Note Due April 25, 2018

15-Year Callable Range Notes Due October 11, 2022

15-Year Callable Range Notes Due December 28, 2022

20-Year Callable Leveraged CMS Spread Due June 22, 2027

30-Year Callable Zero Coupon Notes Due May 22, 2037

96.00% Principal Protected BRIC Currency-Linked Notes Due December 5, 2012

10-Year LIBOR Range Accrual Note Due January 25, 2018

95% Capital Protected Notes Based on the Value of a Basket of Two Equity Indices and a Commodity Index Due January 3, 2013

5-Year SIFMA/LIBOR Range Accrual Notes Due February 12, 2013

10-Year CMS Range Accrual Note Due February 28, 2018

Callable Access Securities with Buffered Downside Linked to the Financial Select Sector SPDR Fund Due April 5, 2013

10-Year CMS Range Accrual Note Due March 28, 2018

10-Year LIBOR Range Accrual Note Due November 30, 2017

100% Principal Protected Commodity-Linked Notes Due May 2, 2013

Leveraged Upside Securities Linked to the Deutsche Bank X-Alpha USD Excess Return® Index Due May 15, 2013

30-Year CMS minus 10-Year CMS Range Accrual Notes Due May 30, 2018

15-Year EUR CMS Spread Range Notes Callable after 6 Months Due May 28, 2023

20-Year Callable Corridor Note Linked to the 6 month USD-LIBOR-BBA Due July 25, 2028

$30,000,000.00 Principal Protected Exchangeable Notes Linked to a Basket of Common Stocks Due December 30, 2038

Principal Protected Exchangeable Notes Linked to Mastercard Due December 30, 2038

96.00% Principal Protected BRIC Currency-Linked Notes Due January 7, 2013

90.00% Principal Protected Commodity-Linked Notes Due January 7, 2015

Access Securities with Contingent Downside Protection Linked to the S&P 500® Index Due July 3, 2014

Access Securities Linked to the S&P 500® Index Due August 5, 2014

Enhanced Growth Securities with Leveraged Upside and Buffered Downside Linked to Russell 2000® Index Due June 5, 2013

$1,500,000,000 3.000% Notes Due November 17, 2014

Enhanced Growth Securities Leveraged Upside & Buffered Downside Linked to the S&P 500® Index Due April 5, 2012

Equity Index-Linked Notes Linked to the MSCI EAFE Index Due April 25, 2012

Basket-Linked Notes Linked to the S&P 500® Index, MSCI EAFE Index and the iShares® MSCI Emerging Markets Index Fund Due April 26, 2012

$1,000,000,000 1.875% Notes due April 2, 2013

Access Securities with Capped Upside and Contingent Downside Protection Linked to the S&P 500® Index due October 1, 2013

Access Securities with Capped Upside and Contingent Downside Protection Linked to the iShares® MSCI EAFE IndexSM Fund due November 5, 2013

Principal Protected Notes with Quarterly Averaging Linked to the Dow Jones Industrial AverageSM due February 5, 2016

Enhanced Growth Securities with Leveraged Upside & Buffered Downside Linked to a Basket of Global Exchange Traded Funds due June 5, 2014

Currency Linked Notes Linked to the Performance of the Mexican Peso, Chinese Renminbi, Indian Rupee, Australian Dollar and Norwegian Krone against the U.S. Dollar Due August 30, 2012

Currency Linked Notes Linked to the Performance of the Mexican Peso, Australian Dollar, Norwegian Krone, Indian Rupee, Singapore Dollar and Malaysian Ringgit against the U.S. Dollar Due August 13, 2012

2
  

Enhanced Growth Securities with Upside Participation to a Cap & Fixed Percentage Buffered Downside Linked to the S&P 500® Index due January 3, 2014

Enhanced Growth Securities with Capped Upside Linked to the S&P 500® Index due July 10, 2013

Equity Index-Linked Notes Linked to the S&P 500® Index Due October 31, 2012

Equity Index-Linked Notes Linked to the MSCI EAFE Index Due October 16, 2012

Access Securities – Auto Callable with Fixed Percentage Buffered Downside Linked to the S&P 500® Index due October 10, 2012

Access Securities – Auto Callable with Fixed Percentage Buffered Downside Linked to the iShares Russell 2000 Index® Fund, due November 7, 2012

Access Securities – Auto Callable with Fixed Percentage Buffered Downside Linked to the S&P 500® Index, due November 7, 2012

Leveraged Buffered Equity Index-Linked Notes Linked to the S&P 500® Index, due January 9, 2013

Leveraged Buffered Equity Index-Linked Notes Linked to the MSCI EAFE® Index, due November 8, 2012

Currency Linked Notes Linked to a Basket of Exchange Rates due May 9, 2012

Access Securities – Auto Callable with Fixed Percentage Buffered Downside Linked to the S&P 500® Index, due December 5, 2012

Access Securities – Auto Callable with Fixed Percentage Buffered Downside Linked to the Energy Select Sector SPDR® Fund, due December 5, 2012

Access Securities – Auto Callable with Fixed Percentage Buffered Downside Linked to the S&P 500® Index, due January 4, 2013

Equity Index Linked Notes Linked to the TOPIX® Index Due April 16, 2012

Commodity Basket Linked Notes Linked to a Basket of Five Commodities due December 28, 2012

Access Securities – Auto Callable with Fixed Percentage Buffered Downside Linked to the iShares MSCI Brazil Index Fund, due February 5, 2013

Access Securities – Auto Callable with Fixed Percentage Buffered Downside Linked to the iShares Russell 2000® Index Fund due February 5, 2013

Leveraged Buffered Equity Index-Linked Notes Linked to the MSCI EAFE Index Due August 8, 2012

Accelerated Return Notes Linked to the Rogers International Commodity Index Excess Return Due April 3, 2012

Equity-Index-Linked Notes Due 2012 Linked to the TOPIX® Index Due April 16, 2012

Equity-Index-Linked Notes Due 2012 Linked to the TOPIX® Index Due April 16, 2012

Auto Callable Access Securities with Fixed Percentage Buffered Downside Linked to the iShares® MSCI Emerging Markets Index Fund Due March 4, 2013

Auto Callable Access Securities with Fixed Percentage Buffered Downside Linked to the SPDR® S&P® Metals and Mining Fund Due March 4, 2013

Auto Callable Access Securities with Fixed Percentage Buffered Downside Linked to the iShares® Russell 2000® Index Fund Due April 1, 2013

Auto Callable Access Securities with Fixed Percentage Buffered Downside Linked to the SPDR® S&P® Metals and Mining Fund Due April 1, 2013

Commodity Basket-Linked Notes (Linked to a Basket of Four Commodity Futures Contracts and One Spot Price) Due April 4, 2012

$118,000,000.00 13 Month Floater Notes due April 24, 2012

Equity-Index-Linked Notes Due Linked to the TOPIX® Index April 16, 2012

Currency-Linked Notes Linked to a Basket of Foreign Currencies against the U.S. Dollar due October 7, 2015

$100,000,000.00 Floater Notes due April 24, 2012

Accelerated Return Note Linked to the Gold Spot Price due June 1, 2012

Accelerated Return Notes Linked to the Palladium Spot Price due May 23, 2012

Accelerated Return Notes Linked to the Rogers International Commodity Index Agricultural Excess Return Due May 31, 2012

Auto Callable Access Securities with Fixed Percentage Buffered Downside Linked to the SPDR® S&P® Metals and Mining Fund due May 2, 2013

Auto Callable Access Securities with Fixed Percentage Buffered Downside Linked to the iShares® Russell 2000® Index Fund May 2, 2013

Auto Callable Access Securities with Fixed Percentage Buffered Downside Linked to the SPDR® S&P® Metals and Mining Fund due May 31, 2013

Auto Callable Access Securities with Fixed Percentage Buffered Downside Linked to the iShares® Russell 2000® Index Fund due May 31, 2012

3
  

Accelerated Return Notes Linked to the Linked to the Silver Spot Price due July 3, 2012

Accelerated Return Notes Linked to the S&P Midcap 400® Index due June 29, 2012

Accelerated Return Note Linked to Energy Select Sector Index due June 29, 2012

Enhanced Growth Securities with Leveraged Upside Linked to a Basket of International Indices due July 23, 2014

Leveraged Buffered Index-Linked Notes Linked to the MSCI EAFE Index due November 30, 2012

Accelerated Return Notes Linked to the Palladium Spot Price due July 25, 2012

Accelerated Return Notes Linked to the Rogers International Commodity Index® Agricultural Excess Return due July 31, 2012

Accelerated Return Note Linked to the Gold Spot Price due August 2, 2012

Strategic Accelerated Redemption Securities Linked to the iShares® MSCI Brazil Index Fund – due June 5, 2012

Strategic Accelerated Redemption Securities Linked to the S&P 500® Index – Due June 5, 2012

Leveraged Buffered Index-Linked Notes Linked to the MSCI EAFE Index due January 11, 2013

Auto Callable Access Securities with Fixed Percentage Buffered Downside Linked to the SPDR® S&P® Metals and Mining Fund due July 1, 2013

Auto Callable Access Securities with Fixed Percentage Buffered Downside Linked to the iShares® Russell 2000® Index Fund due July 1, 2013

Buffered Equity Index Fund-Linked Notes Linked to the iShares® MSCI Emerging Markets Index Fund January 24, 2013

Equity-Index-Linked Notes Due Linked to the TOPIX® Index October 9, 2012

Auto Callable Access Securities with Fixed Percentage Buffered Downside Linked to the SPDR® S&P® Metals and Mining Fund due August 1, 2013

Auto Callable Access Securities with Fixed Percentage Buffered Downside Linked to the iShares® Russell 2000 Index Fund due August 1, 2013

Auto Callable Access Securities with Fixed Percentage Buffered Downside Linked to the iShares® MSCI Emerging Markets Index Fund due August 1, 2013

Auto Callable Access Securities with Fixed Percentage Buffered Downside Linked to the Energy Select Sector SPDR® Fund due August 1, 2013

Leveraged Buffered Index-Linked Notes Linked to the MSCI EAFE Index due August 13, 2012

Leveraged Index-Linked Notes Linked to the S&P 500® Index due November 7, 2012

Accelerated Return Notes Linked to the Rogers International Commodity Index® Agricultural Index Excess Return Due September 28, 2012

Strategic Accelerated Redemption Securities Linked to the S&P 500® Index due August 6, 2012

$150,000,000.00 13 Month Floater Notes due September 28, 2012

Leveraged Buffered Equity Index-Linked Notes Linked to the MSCI EAFE Index due December 20, 2013

Leveraged Buffered Index-Linked Notes Linked to the MSCI EAFE Index due March 7, 2013

Leveraged Buffered Index-Linked Notes Linked to the S&P 500® Index due March 21, 2013

Accelerated Return Notes Linked to the Gold Spot Price due November 1, 2012

PLUS based on the value of the SPX 500® Index due September 28, 2012

Leveraged Buffered Equity Index-Linked Notes Linked to the S&P 500® Index due November 8, 2013

Leveraged Buffered Equity Index-Linked Notes Linked to the MSCI EAFE Index due December 9, 2013

Buffered Equity Index-Linked Notes Linked to the MSCI EAFE Index due October 29, 2012

$100,000,000.00 12 Month Floater Notes due September 26, 2012

Leveraged Buffered Equity Index-Linked Notes Linked to the S&P 500® Index due April 4, 2013

Buffered Equity Index-Linked Notes Linked to the S&P 500® Index due December 24, 2012

Accelerated Return Notes Linked to the Dow Jones-UBS Commodity Index - Excess Return Due December 4, 2012

Leveraged Buffered Index-Linked Notes Linked to the S&P 500® Index due May 9, 2013

Bear Market PLUS Based Inversely on the Value of the iShares® Russell 2000® Growth Index Fund due April 13, 2012

$100,000,000.00 Floating Rate Note due October 7, 2013

$100,000,000.00 Floating Rate Notes due October 18, 2012

Equity-Index-Linked Notes Linked to the TOPIX® Index due April 22, 2013

Currency Linked Notes Linked to the Bearish Performance of the Euro against the U.S. Dollar due April 26, 2012

Currency Linked Notes Linked to the Performance of the Chinese Renminbi against the U.S. Dollar due November 27, 2012

Strategic Accelerated Redemption Securities Linked to the S&P 500® Index due November 5, 2012

Enhanced Growth Securities with Leveraged Upside & Buffered Downside linked to the S&P 500® Index due November 16, 2012

4
  

TABLE OF CONTENTS

     
    Page
     
Forward-Looking Statements 7
Presentation of Information and Exchange Rates 8
PART I 8
Item 1. Identity of Directors, Senior Management and Advisers 8
Item 2. Offer Statistics and Expected Timetable 8
Item 3. Key Information 8
  A. Selected Financial Data 8
  B. Capitalization and Indebtedness 11
  C. Reasons for the Offer and Use of Proceeds 12
  D. Risk Factors 12
Item 4. Information on the Company 16
  A. History and Development of the Company 16
  B. Business Overview 16
  C. Organizational Structure 34
  D. Property and Equipment 34
Item 4A. Unresolved Staff Comments 34
Item 5. Operating and Financial Review and Prospects 34
  A. Operating Results 34
  B. Liquidity and Capital Resources 43
  C. Research and Development, Patents and Licenses, etc. 49
  D. Trend Information 49
  E. Off-Balance Sheet Arrangements 49
  F. Contractual Obligations and Commitments 49
Item 6. Directors, Senior Management and Employees 50
  A. Directors and Senior Management 50
  B. Compensation 52
  C. Board Practices 52
  D. Employees 55
  E. Share Ownership 55
Item 7. Major Shareholders and Related Party Transactions 55
  A. Major Shareholders 55
  B. Related Party Transactions 55
  C. Interests of Experts and Counsel 59
Item 8. Financial Information 59
  A. Consolidated Statements and Other Financial Information 59
  B. Significant Changes 60
Item 9. The Offer and Listing 60
  A. Offer and Listing Details 60
  B. Plan of Distribution 60
  C. Markets 60
  D. Selling Shareholders 60
  E. Dilution 60
  F. Expenses of the Issue 60
Item 10. Additional Information 60
  A. Share Capital 60
  B. Memorandum and Articles of Association 61
  C. Material Contracts 62
  D. Exchange Controls 62
  E. Taxation 63
  F. Dividends and Paying Agents 75
  G. Statements by Experts 75
  H. Documents on Display 75
  I. Subsidiary Information 76

5
  

     
Item 11. Quantitative and Qualitative Disclosures about Market Risk 75
Item 12. Description of Securities Other than Equity Securities 79
PART II 80
Item 13. Defaults, Dividend Arrearages and Delinquencies 80
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds 80
Item 15. Controls and Procedures 80
Item 16. 80
  Item 16A. Audit Committee Financial Expert 80
  Item 16B. Code of Ethics 80
  Item 16C. Principal Accountant Fees and Services 81
  Item 16D. Exemptions from the Listing Standards for Audit Committees 81
  Item 16E. Purchase of Equity Securities by the Issuer and Affiliated Purchasers 81
  Item 16F. Change in Registrant’s Certifying Accountant 81
  Item 16G. Corporate Governance 81
PART III 83
Item 17. Financial Statements 83
Item 18. Financial Statements 83
Item 19. Exhibits 83
Signatures 85

6
  

FORWARD-LOOKING STATEMENTS

     Except for historical statements and discussions, statements contained in this annual report constitute “forward-looking statements” within the meaning of Section 27A of the U.S. Securities Act of 1933, as amended (the Securities Act), and Section 21E of the U.S. Securities Exchange Act of 1934, as amended (the Exchange Act). Any other document of Eksportfinans ASA filed with the U.S. Securities and Exchange Commission may also include forward-looking statements, and other written or oral forward-looking statements have been made and may in the future be made from time to time by us or on our behalf.

     Forward-looking statements include, without limitation, statements concerning our financial position and business strategy, our future results of operations, the impact of regulatory initiatives on our operations, our share of new and existing markets, general industry and macroeconomic growth rates and our performance relative to these growth rates. Forward-looking statements generally can be identified by the use of terms such as “ambition”, “may”, “hope”, “will”, “expect”, “intend”, “estimate”, “anticipate”, “believe”, “plan”, “seek”, “continue” or similar terms.

     By their nature, forward-looking statements involve risk and uncertainty because they relate to events and depend on circumstances that will occur in the future. These forward-looking statements are based on current expectations, estimates, forecasts and projections about the industries in which we operate, management’s beliefs and assumptions made by management about future events. These forward-looking statements involve known and unknown risks, uncertainties and other factors, many of which are outside of our control, that may cause actual results to differ materially from any future results expressed or implied from the forward-looking statements.

     Actual results, performance or events may differ materially from those in such statements due to, without limitation:

§the decision of the Norwegian Government (the Government) to assume responsibility for the export scheme previously managed by Eksportfinans, which may adversely affect Eksportfinans' business and create uncertainty about the scope and extent of Eksportfinans' business activities,
§certain terms in our contracts, which may adversely affect us in light of the recent and/or future changes to our business,
§further downgrading in Eksportfinans' credit ratings may shorten liabilities as holders exercise early termination options, leading to increased liquidity risk
§the failure of our derivatives counterparties, guarantors for loans and borrowers to honor their contracts,
§foreign exchange rate and interest rate fluctuations,
§volatility in the international financial markets,
§volatility in the fair value of our financial assets and liabilities,
§changes in our credit ratings or other actions by ratings agencies,
§the effects of, and changes in, fiscal, monetary, trade and tax policies,
§operational factors such as systems failure, human error, or the failure to properly implement procedures,
§the effects of changes in laws, regulations or accounting policies or practices, and
§ various other factors beyond our control.

     The foregoing list of important factors is not exhaustive. For further discussion of these and other factors, see Item 3.D. “Risk Factors”, Item 4. “Information on the Company”, Item 5. “Operating and Financial Review and Prospects” and Item 11. “Quantitative and Qualitative Disclosures about Market Risk”.

     As a result of these and other factors, no assurance can be given as to our future results and achievements. You are cautioned not to put undue reliance on these forward-looking statements, which are neither predictions nor guarantees of future events or circumstances. We disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

     All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are qualified by these discussions.

7
  

Website

     Although certain references are made herein to www.eksportfinans.no, neither that website nor any information included thereon or on any pages that can be accessed therefrom are incorporated by reference herein.

PRESENTATION OF INFORMATION AND EXCHANGE RATES

     In this annual report, we use the terms “Eksportfinans”, “us”, “we”, “our” and “Company” to refer to Eksportfinans ASA, and where relevant for periods prior to the disposal of our former subsidiary Kommunekreditt Norge AS, to refer to Eksportfinans and Kommunekreditt as a financial group.

     Except as otherwise specified, all amounts in this annual report are expressed in Norwegian kroner (kroner, NOK or krone).

     For the convenience of the reader, unless otherwise stated, translations of krone amounts into U.S. dollars (U.S. dollars, $ or USD) in this annual report have been made at the rate of NOK 5.9682 = $1.00 ($0.1676 = NOK 1.00), the noon buying rate of the Federal Reserve Bank of New York on December 31, 2011. On March 23, 2012, such rate was NOK 5.7506 = $1.00 ($0.1739 = NOK 1.00). These rates differ from the actual rates used in the preparation of our financial statements, and U.S. dollar amounts used in this annual report may differ from the actual U.S. dollar amounts that were translated into kroner in the preparation of those financial statements. Translations of krone amounts into U.S. dollars in this annual report should not be construed as a representation that the krone amounts have been or could be converted into U.S. dollars at the above rates or at any other rates.

     Certain figures set forth in this annual report have been rounded to the nearest whole number or the nearest decimal. In addition, certain percentages have been calculated using rounded figures. As a consequence of rounding, in certain instances, the sum of the numbers in a column may not conform to the total figure given for that column.

     For further information on exchange rates, see Item 3.A. “Selected Financial Data — Exchange Rates”.

PART I

Item 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

     Not applicable.

Item 2. OFFER STATISTICS AND EXPECTED TIMETABLE

     Not applicable.

Item 3. KEY INFORMATION

     A. SELECTED FINANCIAL DATA

     The following income statement and balance sheet data, expressed in NOK, have been selected from our audited consolidated financial statements as of and for the years ended December 31, 2011, 2010, 2009, 2008 and 2007.

     We prepare our financial statements in accordance with International Financial Reporting Standards as promulgated by the IASB (IFRS).

8
  

     The selected financial data below should be read in conjunction with, and are qualified in their entirety by reference to, our audited consolidated financial statements as of and for the years ended December 31, 2011, 2010, 2009, 2008 and 2007 and the notes thereto.

INCOME STATEMENT DATA
Year ended December 31,

                         
  2011     2011   2010   2009   2008 2007  
  (USD millions)
(except as indicated)		 (NOK millions)
(except as indicated)
Interest and related income on loans due from credit                        
   institutions 138   822   1,175   1,864   5,246 3,993  
Interest and related income on loans due from customers 651   3,888   3,729   3,424   2,785 1,689  
Interest and related income on securities 145   864   869   1,852   3,877 3,077  
Other interest and related income 9   54   44   73   102 41  

 

 

Total interest and related income 943   5,628   5,817   7,213   12,010 8,800  
Interest and related expenses on commercial paper and bond debt 671   4,007   4,196   5,642   11,033 8,181  
Interest and related expenses on subordinated debt 1   4   7   21   49 71  
Interest and related expenses on capital contribution securities 2   10   9   15   36 40  
Other interest and related expenses 10   58   185   65   69 74  

 

 

Total interest and related expenses 684   4,079   4,398   5,743   11,187 8,366  

 

 

NET INTEREST INCOME 259   1,550   1,419   1,470   823 434  

 

 

Commissions and income related to banking services (1) 0   1   2   2   2 4  
Commissions and expenses related to banking services 1   6   7   8   40 7  
Net gains/(losses) on financial instruments at fair value 6,765   40,373   (603 ) (3,793 ) 3,977 (673 )
Other income 3   16   7   15   18 20  
NET OTHER OPERATING INCOME 6,767   40,385   (602 ) (3,784 ) 3,957 (656 )
TOTAL OPERATING INCOME 7,026   41,935   817   (2,314 ) 4,780 (222 )
Salaries and other administrative expenses 30   182   157   152   146 129  
Depreciation 3   20   23   20   19 22  
Other expenses 2   12   14   15   13 11  
TOTAL OPERATING EXPENSES BEFORE IMPAIRMENT                      
     CHARGES ON LOANS 35   214   195   187   178 162  
Impairment charges on loans 0   0   0     0  0 0  
PRE-TAX OPERATING PROFIT/(LOSS) 6,991   41,721   623   (2,501 ) 4,602 (384 )
Taxes*) 1,957   11,682   175   (699 ) 1,288 (110 )
PROFIT/(LOSS) FOR THE YEAR FROM CONTINUING                      
   OPERATIONS 5,034   30,039   448   (1,802 ) 3,314 (274 ) 
Profit/(loss) for the year from discontinued operations, net of taxes —   —   —   1   41 125  
Total comprehensive income 5,034   30,039   448   (1,801 ) 3,355 (149 )
Ratio of earnings to fixed charges (2) (unaudited) 11.21   11.21   1.14   —   1.41 —  
PER SHARE DATA (thousands of USD/NOK) (unaudited):                      
Dividends per share (3) —   —   1.89   2.65   — 1.44  
Shares outstanding at December 31 (number of common                      
   shares) 263,914   263,914   263,915   263,915   263,914 151,765  
Profit/(loss) for the year per share (4) 19.07   113.82   1.70   (6.83 ) 14.22 (0.98 ) 
Dividends in respect of 2011 proposed per share (5) —   —                

*) For further details, see note 1 and 11 to our audited consolidated financial statements in Item 18.

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BALANCE SHEET DATA
As of December 31,

                             
  2011       2011   2010   2009   2008   2007  
  (USD millions)
(except as indicated)		 (NOK millions)
(except as indicated)
ASSETS                            
Loans due from credit                        
   institutions 6,759   40,340   43,014   64,126   36,188   27,334  
Loans due from customers 16,176   96,541   85,095   66,677   112,751   98,777  
Securities 8,697   51,908   67,921   76,090   108,138   80,133  
Financial derivatives 3,258   19,446   15,403   14,344   27,294   9,744  
Deferred tax asset —   —   44   —   —   79  
Intangible assets 3   16   20   26   27   27  
Property, equipment and                        
   investment property 35   210   205   208   217   222  
Other assets 916   5,467   3,847   3,783   12,287   2,404  
TOTAL ASSETS 35,844   213,929   215,549   225,254   296,901   218,720  
LIABILITIES                        
Deposits by credit institutions 0   1   45   38   327   324  
Commercial paper debt 965   5,762   3,307   19,108   33,609   31,277  
Bond debt 22,743   135,727   183,095   178,526   225,431   175,038  
Financial derivatives 2,324   13,871   14,247   14,810   18,368   6,935  
Taxes payable 49   295   374   73   291   122  
Deferred tax liabilities 1,901   11,343   —   157   931   —  
Other liabilities 1,796   10,721   7,175   5,124   8,298   360  
Provisions 21   128   96   89   84   65  
Subordinated debt 174   1,039   1,639   1,502   1,909   1,379  
Capital contribution securities 58   348   417   419   445   559  
TOTAL LIABILITIES 30,031   179,235   210,394   219,846   289,693   216,058  
SHAREHOLDERS’ EQUITY                        
Share capital 464   2,771   2,771   2,771   2,771   1,594  
Share premium reserve 30   177   177   177   177   162  
Other equity 5,319   31,746   2,208   2,460   4,260   906  
TOTAL SHAREHOLDERS’                        
   EQUITY 5,813   34,694   5,156   5,408   7,208   2,662  
TOTAL LIABILITIES AND                        
   SHAREHOLDERS’ EQUITY 35,844   213,929   215,549   225,254   296,901   218,720  
FINANCIAL                        
   RATIOS/OPERATING                        
   STATISTICS (unaudited)                        
Return on average equity (6) 150.76 % 150.76 % 8.48 % (28.55 %) 67.98 % (5.24 %)
Dividend (as a percentage of                        
   share capital) —   —   18.0 % 25.3 % —   13.7 %
Return on assets (7) 0.72 % 0.72 % 0.64 % 0.56 % 0.32 % 0.22 %
Ratio of operating and                        
   administrative expenses to                        
   average assets 0.09 % 0.09 % 0.09 % 0.07 % 0.06 % 0.07 %
BALANCE SHEET                        
   STATISTICS (unaudited)                        
Capital adequacy 19.42 % 19.42 % 17.64 % 13.30 % 11.60 % 9.55 %
Public sector share of total loans                        
   as borrowers/guarantors(8) 40.06 % 40.06 % 34.54 % 23.28 % 48.90 % 56.80 %
   Of which municipalities and                        
      counties 1.65 % 1.65 % 1.66 % 1.71 % 35.65 % 48.99 %
Total loans outstanding/ total                        
   assets 56.94 % 56.94 % 57.25 % 54.25 % 46.89 % 57.01 %

 

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(1)      Includes income on guarantees. For further details, see note 30.3 to our audited consolidated financial statements in Item 18.
(2)      For purposes of calculating the ratio of earnings to fixed charges, earnings include net income (profit/(loss) for the year) plus income taxes and fixed charges. Fixed charges represent interest and commissions on debt and capital contribution securities, other interest and borrowing expenses and estimates of the interest within rental expenses. The ratio of earnings to fixed charges had a deficit in 2009 of NOK 2,155 million (USD 375 million), driven by unrealized losses on the fair value of our own debt. The ratio of earnings to fixed charges in 2007 had a deficit of NOK 210 million (USD 39 million), driven by the impact of reduced market values of our investments on securities in the Liquidity Portfolio (as defined below). For further details, see Item 5.B. “Liquidity and Capital Resources — Liquidity Portfolio”.
(3)      The dividend per share amount for each year represents the distribution out of net income (profit/(loss)) for such year that is approved by the annual general meeting of the shareholders and paid in the following year.
(4)      Total comprehensive income divided by the weighted average number of shares during the year.
(5)      The dividend per share amount for 2011 proposed by the Board of Directors as the distribution of net income (profit/(loss)) for the year to be approved at the annual general meeting of the shareholders of Eksportfinans to be held in April 2012. By statute, a proposed dividend requires approval at the annual general meeting of the shareholders held during the year following the year to which such dividend relates. The approved dividend is paid in the year in which it is approved.
(6)      Profit for the period divided by average equity. Average equity is calculated as the average of starting and ending equity.
(7)      Net interest income for the period divided by average assets. Average assets is calculated as the average of the starting and the ending balance.
(8)      The ratio of public sector loans (municipalities, counties and Norwegian and foreign central government, including the Norwegian Guarantee Institute for Export Credits (the Guarantee Institute or GIEK) as borrowers or guarantors) to total lending.

Exchange Rates

     The following tables set forth, for the periods indicated, information concerning the exchange rate for Norwegian kroner into U.S. dollars based on the noon buying rate of the Federal Reserve Bank of New York, expressed in Norwegian kroner per U.S. dollar.

     The following table sets forth for the most recent five years the average exchange rate, calculated using the average of the noon buying rates on the last business day of each month during the relevant year, and the year-end exchange rate:

  Average Year-end
2007 5.8109 5.4310
2008 5.6366 6.9756
2009 6.3089 5.7899
2010 6.0635 5.8904
2011 5.5605 5.9682

     The following table sets forth the high and low noon buying rates for the periods shown:

   High  Low
September 2011 5.8579 5.3870
October 2011 5.9111 5.4146
November 2011 5.9212 5.6054
December 2011 6.0268 5.7428
January 2012 6.0708 5.8027
February 2012 5.8201 5.5362
March 2012 (through March 23) 5.8228 5.5800

     The noon buying rate on March 23, 2012, was NOK 5.7506 = $1.00 ($0.1739 = NOK 1.00).

     B. CAPITALIZATION AND INDEBTEDNESS

     Not applicable.

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     C. REASONS FOR THE OFFER AND USE OF PROCEEDS

     Not applicable.

     D. RISK FACTORS

     The Government’s decision to assume responsibility for the export finance scheme previously managed by Eksportfinans has adversely affected Eksportfinans' business and created uncertainty about the scope and extent of Eksportfinans’ business activities.

     Eksportfinans was, through an agreement (the 108 Agreement) with the Government, the exclusive provider of government-supported export credits in Norway. However, on November 18, 2011, the Government announced that it will establish a government-run export financing scheme under which a public entity established by the Government will assume responsibility for the provision of government-subsidized loans as export credits. The Government’s decision to terminate its support of export loans provided by Eksportfinans has profoundly altered Eksportfinans’ business model and adversely affected Eksportfinans' business, operations and income, and there can be no assurance that this will not continue or worsen. As a result of the Government's decision and plans, Eksportfinans currently has discontinued making new loans, except for loans for which commitments existed prior to November 18, 2011. The Company is currently assisting the Government to administer government-sponsored export lending during a transition period that is scheduled to end by July 1, 2012. Although Eksportfinans is continuing to operate and manage its existing loan portfolio and expects to continue to do so for a significant period of time, the scope and extent of Eksportfinans' business activities in the future are now uncertain. The Company is currently considering how to structure its business and the scope of its operations following the end of this transition period. For further information see Item 4.B. "General", Item 4.B. "Government-Supported Loans" and Item 7.B. “Related Party Transactions”

     In connection with these events, the ratings assigned to Eksportfinans by Moody's Investors Services and Standard and Poor's have been downgraded significantly, and the senior debt rating assigned by Moody's and Standard & Poor’s is currently below investment grade. These downgrades have directly and indirectly also had, and may in the future continue to have, an adverse affect on our business, operations, income and financial condition.

     Certain terms in our contracts may adversely affect us in light of the recent and/or future changes to our business.

     The terms and conditions of the debt securities issued by Eksportfinans under our EMTN and Samurai programs contain events of default clauses that relate to the cessation of, or the threatening to cease to carry on, the whole or substantially the whole of our business. Although no event of default has occurred to date under these or any other instruments, as a result of the developments described under Item 4.B. “Business Overview — LOANS — Export Lending — Arrangement with the Norwegian Government” and the uncertainty about the scope and extent of Eksportfinans' business activities, it is possible that holders of such securities may assert or allege that such event of default has occurred and seek contractual or non-contractual remedies as a result thereof. Although the cessation of business event of default is not contained in all of our debt instruments, cross-default or cross-acceleration provisions in other debt instruments and other contracts could be triggered by the actual or purported occurrence of such event of default. The occurrence of an event of default is likely to have a material adverse affect on our business, results, financial condition and/or prospects as well as on the market value of our debt securities. Even if such an event of default does not occur, any allegation or assertion of such occurrence or public speculation related thereto could have such material adverse affect.

     The downgrades in our credit ratings may shorten liabilities as holders exercise early termination options, leading to increased liquidity risk.

     In the absence of new funding following the multi-notch downgrades to our credit ratings, it is paramount to maintain a sufficient asset-liability gap. To achieve this, Eksportfinans is seeking to hold a liquidity buffer to meet early terminations on liabilities or their related swaps as our lower ratings may induce a higher call frequency resulting in a shorter liability than otherwise expected. Liquidity risk from maturities that are triggered earlier than expected due to market movements is also a more important risk factor in the absence of new funding. Further downgrades may also shorten liabilities as counterparties may want to use termination options that they otherwise would not have used if we still had a strong investment rating.

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     Our derivatives counterparties, guarantors for loans and borrowers may not honor their contracts.

     The Company uses derivative instruments to hedge market risk and manage the return on its liquidity placements. The Company’s derivative strategies employ a variety of instruments, including foreign exchange forwards, foreign currency swaps and interest rate swaps. Our derivatives counterparties may not honor their contracts.

     As of December 31, 2011, approximately 75.2% of our outstanding export-related loans were secured by guarantees. The remaining loans were supported by pledges on cash deposits with banks (11.9%) or represent loans to banks that are themselves qualified by their creditworthiness to act as guarantors (12.9%). As of December 31, 2011, 32.8% of export-related loans were guaranteed by Norwegian banks. The majority of such guarantees were provided by DNB Bank ASA, which guaranteed 27.5% of outstanding export-related loans as of December 31, 2011. Further, the Company has entered into the Portfolio Hedge Agreement with its shareholder banks, including DNB Bank ASA. For further details, see Item 7.B. “Related Party Transactions — The Portfolio Hedge Agreement”.

     A failure by one or more borrowers, counterparties or guarantors to honor the terms of their derivatives contracts with or the guarantees in favor of the Company could have an adverse effect on the business, results of operations and financial condition of the Company. As the Company now has a sub investment grade rating from both Moody's and S&P, a swap replacement with one or more new swap counterparties will expectedly be much more difficult, because potential counterparties may decline to enter into new swaps with a sub-investment grade rated counterparty.

     Our own credit risk may bring significant volatility into our results.

     Fair value measurements for Eksportfinans’ debt and structured note liabilities take Eksportfinans’ own credit risk into account by discounting cash flows at rates that incorporate Eksportfinans’ currently observable credit spreads based on actual transactions or alternatively by quotes from major broker dealers. This fair value impact may significantly increase volatility in our results, as the correlation with the credit spreads applied to our assets is usually low. After the multi-notch downgrades of the Company's credit ratings by Moody's and S&P following the Government's decision to assume responsibility for the provision of government subsidized export loans, the spread levels and spread volatility have increased significantly and this might continue in the future. As of the end of 2011 the unrealized gains from widening credit spreads on our own debt was NOK 42.1 billion (excluding derivatives) compared to NOK 1.4 billion as of end of 2010. These unrealized gains are expected to be reversed as unrealized losses in the future. For further details, see note 28.7 to our audited consolidated financial statements in Item 18.

     Reduced basis swap spreads may reduce our interest margins.

     A significant part of the Company’s funding is in euros and dollars while a significant part of the loans and liquidity placements are in Norwegian or Danish kroner. Hence the Company has swapped significant amounts from dollars and euros over to Norwegian and Danish kroner, profiting historically from the basis swap spread during the financial crisis when these spreads were at historically high levels. The Company has been partially hedging the basis risk since September 2010. This includes both hedging on portfolio level and for all new loans larger than NOK 500 million and with maturity longer than three years. This hedging amounted to approximately NOK 32 billion as of December 31, 2011 of which NOK 22 billion had between zero and three years remaining duration, NOK 9 billion had four to but excluding five years remaining duration and NOK 1 billion had five years or more of remaining duration. For the unhedged part, a return to historically more normal, reduced basis swap spread levels would impact the Company’s earnings negatively.

     We may experience volatility in our results from our liquidity reserve portfolio.

     In early 2008 shareholders representing 99.5% of Eksportfinans’ shares signed a risk mitigation agreement (the Portfolio Hedge Agreement) whereby they undertook to hedge against further market value declines, including credit losses, in the Liquidity Portfolio (as defined under Item 5.B "Liquidity and Capital Resources – Liquidity Portfolio" below) as it existed on February 29, 2008 (the PHA Portfolio) up to an amount of NOK 5 billion. Approximately NOK 1 billion of this was utilized as of year end 2011 (NOK 0.8 billion as of year end 2010). Upon entering into the Portfolio Hedge Agreement the Company set up a new liquidity portfolio, which is referred to as the “Liquidity Reserve Portfolio”. The Liquidity Reserve Portfolio does not benefit from the Portfolio Hedge Agreement. For further details, see Item 7.B. “Related Party Transactions — The Portfolio Hedge Agreement” and notes 5, 12 and 29.4 to our audited consolidated financial statements in Item 18. Consequently, changes in the market value of the securities in the Liquidity Reserve Portfolio will be reflected as unrealized gains or losses in our results and such losses, particularly during periods of market disruptions, could be material.

13
  

     We are largely dependent on credit ratings from the major credit rating agencies when managing our portfolio.

     The Company relies on credit ratings and analyses from the major rating agencies (Moody’s, S&P and/or Fitch) to monitor the credit quality of all guarantors and credit counterparties in its portfolio of financial investments and in its derivatives portfolio. Eksportfinans’ exposure limits are mainly based on the credit ratings of guarantors and borrowers. These credit ratings may not fully reflect the true risk of a counterparty and we may therefore be exposed to unanticipated losses. Since the beginning of the current financial turbulence, market risk arising from investments in bonds has been significantly higher than corresponding ratings would suggest, resulting in mark-to-market losses despite high and stable ratings. Our credit rating approach might thus not reflect the true credit risk of the counterparties. Further, in certain instances our valuation estimates are dependent on credit ratings. As described in note 4 to our audited consolidated financial statements in Item 18, credit spreads for guaranteed export loans are adjusted upon significant changes in the credit rating for the guarantor since loan origination date. If these credit ratings do not fully reflect the counterparty credit risk, we may face risk of errors in fair value measurement. For further information, refer to note 4 to our audited consolidated financial statements in Item 18.

     Errors in estimates and judgments can have a significant impact on our income statement.

     The Company makes estimates and assumptions that affect the reported amounts of assets and liabilities in the next financial year. Estimates and judgments are continually evaluated and based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances, but may be in error nevertheless. Eksportfinans uses valuation techniques and theoretical models using market information to determine the value of its loans, the PHA Portfolio, its Liquidity Reserve Portfolio, financial liabilities and certain other financial instruments. These estimates are calibrated against industry standards, economic models and observed transaction prices, but are nevertheless based on significant assumptions and estimates as described in note 4 to our audited consolidated financial statements in Item 18. The Company uses quoted prices where this is deemed to represent fair value significantly more accurately. If recent transactions are not available for the particular item, the Company uses quotes for similar assets or model valuations. Since Eksportfinans has adopted the fair value option for the majority of its financial assets and liabilities, changes to assumptions or estimated levels can significantly impact the fair value of an instrument as reported and have a significant impact on the income statement. For further information, see note 4 to our audited consolidated financial statements in Item 18.

     Operational risks are inherent in our business.

     Operational risk and losses can result from fraud, errors by employees, failure to document transactions properly, equipment failures, loss of key personnel, inability to act upon changes in accounting policies and other factors. These risks may be greater because of developments to our business model resulting from the decision of the Government to assume responsibility for the provision of government-supported export lending. Our efforts to mitigate these risks may not be sufficient to prevent losses or otherwise provide the desired protection against these risks.

     Eksportfinans’ performance is largely dependent on the talents and efforts of highly skilled individuals. There can be no assurance that Eksportfinans will be able to attract and retain such personnel, particularly in light of our current situation.

     We are exposed to various concentrations of risk.

     Credit risk concentration may arise from trading, investing and financing activities, and may be affected by economic, industrial or political factors. While the Company is exposed to many different counterparties and industries, it executes a high volume of transactions with, and has aggregate risk exposures of a high value with, counterparties in the financial services industry, such as brokers, dealers, commercial banks and institutional clients. This results in a significant credit concentration with respect to the financial industry generally and to certain financial institutions in particular.

     A significant part of the Company’s business consists of lending to the maritime sector, such as rig and ship building financing. Loans to this sector are fully guaranteed by banks or the Guarantee Institute.

     In the ordinary course of business, Eksportfinans may be subject to a concentration of credit risk to a particular bank guarantor or bond issuer. On the existing portfolios, Eksportfinans also has a concentration of market risk related to currency, interest rate and credit spread volatility, which increases with general market volatility and the general correlation between markets. If currency, interest rate or credit spread volatility increase or the correlation between different currencies, interest rates or credit spreads increases, this may lead to a higher market risk giving more volatile results.

14
  

     Changes in regulation may adversely affect our business and performance.

From time to time we are faced with regulatory and accounting changes that affect our business and our financial statements. Changes to the regulatory frameworks may have an adverse impact on the Company's business, results of operations or financial position. Moreover, an inability to comply with current or proposed legislation increases the risk that Eksportfinans' reputation will be damaged, which may further adversely affect our business, results of operations or financial position.

     We are subject to foreign currency risk.

     As an international business, the Company is subject to currency risk. Most of the Company’s risk capital is denominated in Norwegian kroner, however a somewhat lower portion of the Company’s risk weighted assets is denominated in Norwegian kroner. Because a somewhat higher percentage of the Company’s risk-weighted assets than its risk capital is denominated in other currencies and because there are limitations on the exchange rates used in the translation of risk capital to Norwegian kroner, the Company’s capital ratio is subject to foreign exchange rate fluctuations with respect to Norwegian kroner.

     The Company’s earnings may fluctuate due to currency translations into NOK, and adverse changes in currency exchange rates would cause a reduction in profits.

     Additionally, as the Company’s financial statements are reported in Norwegian kroner, a majority of the items presented are subject to fluctuations as a result of changes in the U.S. dollar/Norwegian krone and the euro/Norwegian krone exchange rate. Also, a strengthening of the krone against other currencies may reduce demand for the products of our customers and thus reduce demand for our loans.

     Our hedging strategies may not prevent losses.

     The Company is constantly attempting to manage interest rate risk, currency risk and other market-related risks. The Company seeks to reduce liquidity risk and credit risk through monitoring the mismatch in the maturity profiles of our assets and liabilities and setting what it considers to be prudent limits. However, our hedging strategies and other risk management techniques may not be effective in all markets or against all types of risks, especially in extreme, unanticipated or disrupted market conditions. If any of the variety of instruments and strategies the Company uses to economically hedge its exposure to these various types of risk is not effective, including for such reasons as human error, the Company may incur losses. In addition, the Company may not be able to obtain economically efficient hedging opportunities that will enable it to carry on its present policies with respect to new assets and liabilities.

15
  

Item 4. INFORMATION ON THE COMPANY

     A. HISTORY AND DEVELOPMENT OF THE COMPANY

     Eksportfinans was incorporated in 1962 as a limited liability company under the Public Limited Liability Company Act of the Kingdom of Norway. Its legal name is Eksportfinans ASA. Eksportfinans’ principal executive offices are located at Dronning Mauds gt. 15, N-0250 Oslo, Norway, and its telephone number is (011-47) 22-01-22-01.

     Commencing January 1, 2009, Eksportfinans began reporting three operating segments: export lending, municipal lending and securities. On June 24, 2009, Eksportfinans completed the sale of Kommunekreditt Norge AS, its municipal lending business, but retained a portion of the outstanding municipal loans.

     On November 18, 2011, the Government announced that it will establish a government-run export financing scheme under which a public entity established by the Government will assume responsibility for the provision of government-subsidized loans as export credits. The Government’s decision to terminate its support of export loans provided by Eksportfinans has profoundly altered Eksportfinans’ business model and adversely affected Eksportfinans' business, operations and income, and there can be no assurance that this will not continue or worsen. As a result of the Government's decision and plans, Eksportfinans currently has discontinued making new loans, except for loans for which commitments existed prior to November 18, 2011. The Company is currently assisting the Government to administer government-sponsored export lending during a transition period that is scheduled to end by July 1, 2012. Although Eksportfinans is continuing to operate and manage its existing loan portfolio and expects to continue to do so for a significant period of time, the scope and extent of Eksportfinans' business activities in the future are now uncertain. The Company is currently considering how to structure its business and the scope of its operations following the end of this transition period.

     During 2010 the Articles of Association of the Company were broadened to include the conducting of financing operations that are within the scope of the Financial Institutions Act. However, until the Government's decision, the main business focus of the Company remained the financing of the Norwegian export industry for various purposes.

     In its export lending business, Eksportfinans extended loans to both Norwegian and foreign companies in furtherance of Eksportfinans’ strategy of promoting financing for Norwegian exports and the international operations of Norwegian industry. Eksportfinans provides both commercial loans and government-supported financing. For further details, see Item 4.B. “Business Overview — LOANS — Export Lending — General”. Eksportfinans’ loans are supported by or extended against guarantees issued by, or claims on, certain specific types of entities or collateral. For further details, see Item 4.B. “Business Overview — LOANS — Export Lending — Credit Support, Credit Monitoring and Assessment”.

     B. BUSINESS OVERVIEW

     LOANS

     Export Lending

    The following describes the export lending in which the Company was engaged prior to the Government's decision on November 18, 2011 to create a state-owned export finance entity. The Company currently is not engaging in new export lending except for loans for which legal commitments existed prior to November 18, 2011.     

     General

     Eksportfinans was the only specialized export lending institution in Norway and provided financing for a broad range of exports and for the internationalization of Norwegian industry, including the purchase of foreign assets and other export-related activities. This also included financing for the purchase of Norwegian-produced ships and capital goods by Norwegian companies operating in the international offshore oil and gas industry. Eksportfinans provided both fixed and floating rate commercial loans and government-supported financing. Since 1978 Eksportfinans had been the exclusive provider of government-supported export credits in Norway.

     As of November 18, 2011, however, the Government has decided to assume responsibility for the export finance scheme previously managed solely by Eksportfinans.

16
  

     All of the government-supported loans that were offered by Eksportfinans have been fixed-interest loans in accordance with the OECD Arrangement on Guidelines for Officially Supported Export Credits (the OECD Consensus), which are agreed to by most of the member countries of the Organization for Economic Cooperation and Development (the OECD). Commercial export loans were made at either fixed or floating rates. Most were made at floating rates, often with an option permitting the borrower to convert to a fixed rate. The commercial fixed rate was determined by Eksportfinans according to prevailing market terms when the option is exercised.

     As shown in the table in Item 4.B. “— LOANS — Analysis of Loans”, a significant portion of the Eksportfinans loan portfolio is supported by guarantees (approximately 75.2% of the export-related balance as of December 31, 2011). The remaining export-related loans outstanding as of December 31, 2011 are supported by pledges on cash deposits with banks (11.9%) or represent loans to banks that are themselves qualified by their creditworthiness to act as guarantors (12.9%).

     Consistent with its function as a specialized financial institution providing primarily export-related financing, Eksportfinans considered the following factors when evaluating credit applications: the nature and extent of the credit support offered, the proportional amount of Norwegian material and labor involved, the extent of benefit to Norwegian industry, the market potential for Norwegian exports in the geographic area concerned, the credit terms extended by competing lending institutions, adherence to social and environmental standards and the effect on the importing country.

     Government-Supported Loans. Norway is a member of the OECD and adheres to the OECD Consensus. The terms of the OECD Consensus vary according to the importing country’s gross national product and per capita income, and establish, among other things, minimum interest rates, required down payments and maximum loan maturities applicable to government-supported export financing. The OECD Consensus permits lower interest rates and longer maturities to be offered to poorer nations and prohibits subsidized loans to industrialized countries. The OECD Consensus provides that each government-supported loan entered into after July 1995 must bear interest at a rate equal to the CIRR applicable to the currency and maturity of the loan. The OECD periodically reviews and, if necessary, adjusts CIRRs. The CIRRs represent a reduction in the extent of interest subsidies previously available for export credits. The OECD regularly reviews the system of government-supported export credits.

     Many OECD countries provide financing on the basis of the OECD Consensus, and an important objective of the Government has been to ensure that Norwegian exporters are offered export credit facilities that are in line with those of their foreign competitors. Pursuant to this policy, the Government established an arrangement with Eksportfinans in 1978 which provided that, with respect to certain types of government-supported export credit lending, the Government will make payments to Eksportfinans sufficient to offset any interest and foreign exchange losses that Eksportfinans might incur in connection with foreign currency loans and borrowings and NOK transactions related to such lending as determined in relation to a reference rate set forth in the agreement. Conversely, if Eksportfinans makes any gains in connection with any such transactions, it must pay those gains to the Government. On November 18, 2011, the Government decided to assume responsibility for the provision of CIRR loans as export credits. However, the 108 Agreement governing this arrangement with the Government is expected to remain effective until all loans extended in accordance with the arrangement have been repaid and all gains and losses have been settled. In addition it is expected that Eksportfinans will continue in operation to manage its existing portfolio of loans extended under this 108 Agreement scheme. For further details, see Item 4.B. “Business Overview — LOANS — Export Lending — Arrangement with the Norwegian Government”.

     In government-supported loan transactions, the credit terms offered by Eksportfinans to exporters and buyers of capital goods conform to the OECD Consensus minimum interest rates, required down payments and maximum maturities.

     Commercial Export Loans. Commercial export loans were made at fixed or floating rates with certain options to convert from floating to fixed and vice versa and on a medium- or long-term basis. Commercial loans were offered in most freely convertible currencies and generally have repayment terms that are more flexible than those for government-supported loans. Terms and conditions of Eksportfinans’ commercial loans could be adjusted to match Eksportfinans’ funding and were based on Eksportfinans’ cost of funds in the domestic and international capital markets. Eksportfinans’ commercial loans are, for the most part, supported by bank guarantees, but could also be supported by guarantees from insurance companies, the Guarantee Institute and other Norwegian or foreign governmental agencies or pledges on cash deposits with banks or could be loans to banks for the purpose of refinancing of their loans to the export industry.

     Types of Financing

     Overview. With respect to export-related lending, Eksportfinans engaged in three types of financing: (1) contract financing, (2) financing of international and export related activities and (3) acquisition of loans from banks. Contract financing means financing of export contracts between a Norwegian supplier and a foreign buyer or a Norwegian buyer, primarily those that operate in the

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international shipping and oil and gas industries. Financing of international and export related activities involves loans to finance investments in, among other things, storage facilities, production lines or purchases of companies to assist Norwegian companies in expanding internationally. In 2011, contract financing comprised 68% of our export-related new disbursements, and acquisition of loans from banks and financing of international and export related activities comprised 32%. The corresponding figures for 2010 were 69% and 31%, respectively. Eksportfinans actively marketed its finance products to Norwegian companies and also to buyers abroad that are traditional or potential purchasers of capital goods and services from Norway. Financial alternatives were often discussed with Norwegian exporters at a stage where they contemplated bidding for a contract or were in a bidding contest with foreign exporters. Most of Eksportfinans’ loans were made due to active marketing directed to and/or unsolicited applications directly from Norwegian exporters. Some loans were referred to us via our shareholder banks. All such referrals were on a no-fee basis. Eksportfinans did not hire brokers for the purpose of acquiring new loans. Particularly with respect to major Norwegian export contracts involving contract values in excess of USD 30 million, we invariably face competition, primarily from foreign banks and credit institutions, although this was somewhat reduced as a result of the recent turmoil in the financial markets with the partial withdrawal of foreign banks from Norwegian markets.

     Approximately 75.2% of our outstanding export loans are guaranteed. The remaining loans are supported by pledges on cash deposits with banks (11.9%) or represent loans to banks that are qualified by their creditworthiness to act as guarantors (12.9%). Until approximately four years ago, close to 100% of our loans were guaranteed. The relative increase in loans that are not guaranteed was to a large extent a result of the increase in direct lending by us to certain Norwegian banks for the financing of their clients within the export industry. For further details, see Item 4.B. “Business Overview — LOANS — Export Lending — Types of Financing — Financing of international and export related activities”.

     Contract financing. Contract financing includes supplier and buyer credits and project financing. Supplier credits are those in which Eksportfinans has a direct lending relationship with a Norwegian supplier of goods and services. A buyer credit is one where Eksportfinans lends to the foreign purchaser of goods or services originating in Norway. In either case, Eksportfinans typically advances funds to the Norwegian supplier at the time of delivery of the goods and services. The majority of the credits were extended as buyer credits. Terms of repayment for commercial loans were agreed between Eksportfinans and the borrower. Government-supported loans were subject to the repayment terms set by the OECD for such loans. For further details, see Item 4.B. “Business Overview — LOANS — Export Lending — General — Government-Supported Loans”.

     In the case of potential imports to Norway financed by foreign export credit agencies, Eksportfinans offered loans according to OECD terms to facilitate deliveries from Norwegian suppliers on competitive terms.

     In an export transaction, Eksportfinans was typically involved at an early stage in the negotiations between a supplier of capital goods and a prospective purchaser. A loan offer for either a buyer or supplier credit is an integral part of the underlying transaction and is often given in connection with contract bidding before any agreement has been signed by the parties. Consequently, approximately two-thirds of the offers made by Eksportfinans have historically not been consummated because the underlying transactions were not successfully closed. On average, it took approximately six months from approval of the application to complete the loan and guarantee documentation for a contract financing.

     Financing of international and export related activities. Eksportfinans financed activities related to the Norwegian export industry. The loan purpose was typically to finance investments in buildings and machinery for export production or international expansion. Such loans were guaranteed by Norwegian and international banks and other financial institutions. In 2005 Eksportfinans also started to extend loans to Norwegian savings banks to fund these banks’ loans to their customers within the export business. In 2008, the Company decided to discontinue direct loans to saving banks. Since 2008, loans in co-operation with saving banks were made to a borrower based on a guarantee from the savings bank, which was consistent with the Company’s other lending activities. As a result, total loans outstanding that were extended via Norwegian saving banks decreased to NOK 6,938 million at year end 2011 from NOK 7,264 million in 2010.

     Financing of projects within the renewable energy, cleaner environment and infrastructure sectors. During 2010 the Articles of Association of the Company were changed so that the purpose of the Company was broadened to permit it to conduct financing operations within the scope of the Financial Institutions Act. However, in order to diversify the lending activities to make the Company less dependent on loans derived from the oil and gas industry and to meet demand from Norwegian industry, Eksportfinans also adopted a strategy to focus on financing projects within the renewable energy and cleaner environment sector as well as infrastructure projects.

     Loans acquired from banks. Eksportfinans from time to time entered into agreements with its Norwegian shareholder banks or unaffiliated banks active in financing Norwegian exports to purchase specific loans. The purchases of these loans were based on normal commercial terms, and the loans acquired were of the type extended by Eksportfinans in the normal course of its business.

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     The Company placed an initial deposit with the selling bank, which was used as consideration for the purchase of the relevant loans. Each loan purchased was supported by a guarantee provided by the selling bank. In consideration for the guarantee, the Company paid the selling bank a fee spread over the life of the loan by way of a swap transaction, under which the difference between the interest received on the loan and the interest receivable from the selling bank with respect to the deposit amount was paid to the selling bank. The net effect of these transactions was that Eksportfinans received a specified, individually negotiated return comparable to that received on its other commercial loans. In 2011, 2010 and 2009 Eksportfinans acquired loans from banks amounting to NOK 3,644 million, NOK 2,867 million and NOK 1,263 million, respectively. The volume of loans acquired from banks fluctuated over time based on eligible loans and the funding situation for the banks. The lower amount in 2009 was due to the fact that such financing was not given priority in the first half of 2009 due to the funding environment at that time caused by the international financial crisis.

     Loan Commitments

     Eksportfinans’ total actual and probable loan commitments as of December 31, 2011 amounted to NOK 2.2 billion (compared to NOK 21 billion as of December 31, 2010). The decrease is due to the fact that most of the loan commitments have been transferred to the Government following the decision to establish a new, state owned lending entity. The remaining loan commitments of NOK 2.2 billion are legal binding commitments within contract financing that existed prior to November 18, 2011. The remaining commitments are both on government –supported OECD Consensus terms and market terms. Some of the loans on government-supported OECD Consensus terms have a built in option for the applicant to convert to commercial terms. This must be exercised by the borrower prior to the final disbursement date. The variation in the volume of loan commitments between government supported OECD terms and pure commercial terms is correlated with fluctuations in interest rate movements. In an environment of increasing interest rates, more borrowers will choose fixed rate government supported loans. If interest rates are falling, more borrowers choose purely commercial loans with floating interest rates. The loan commitments that are made are, to a large extent, for projects that are at a very early stage and disbursements of loans may not be made for one to two years or at all. For further details, see Item 4.B. “Business Overview — LOANS — Export Lending — Types of Financing”. 

    Credit Support, Credit Monitoring and Assessment

     Eksportfinans’ Articles of Association require that all credits extended be made:

·with the support of guarantees from Norwegian or foreign banks, Norwegian or foreign insurance companies, Norwegian or foreign companies that, without providing credit support or specific security, are assumed to be capable of raising long-term debt in the international capital markets and money markets, the Government or legal entities including the Guarantee Institute whose guarantee is equivalent to a guarantee from the Government, or with the support of guarantees from sovereign states and their regional or local authorities of high creditworthiness, including legal entities whose guarantee is equivalent to a guarantee from a sovereign state or its regional or local authorities with high creditworthiness,
·with the support of pledge over bank deposits in Norwegian and foreign banks, bonds or other negotiable debt instruments issued or guaranteed by legal entities with the support of whose guarantee credits may be extended pursuant to the bullet point above, or
·without any credit support if the borrower is a legal entity which may issue a guarantee under the first bullet point above.

     Eksportfinans relies on credit ratings and analyses from the major rating agencies to monitor the credit quality of all guarantors and credit counterparties in its portfolio of financial investments and in its derivatives portfolio and reports regularly to management and the Board of Directors. Eksportfinans does not perform extensive analyses of the creditworthiness of its borrowers, but instead relies on guarantees and other support for the loans as the ultimate source of repayment. The Board of Directors has established exposure limits based on the credit ratings of the guarantors and borrowers. 99.9% of the rated portfolio consists of investment grade counterparties. For details on our unrated portfolio, see note 28.5 to our audited consolidated financial statements in Item 18. For further details on our reliance on credit ratings, see Item 3.D. “Risk Factors — We are largely dependent on credit ratings from the major credit rating agencies when managing our portfolio”.

     All guarantees obtained from banks to support Eksportfinans’ loans are unconditional and irrevocable, whereas guarantees from GIEK or insurance companies are given subject to certain conditions and limitations, as discussed below.

     Guarantees issued by GIEK, insurance companies and banks generally cover principal, interest and, in most cases, interest on payments past due and expenses.

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     Guarantees issued by GIEK cover political risks (war, internal disturbances, border closings, new legislation, moratoria or the failure by a foreign government or governmental institution to perform its obligations under the credit agreement) and/or commercial risks (the failure by the borrower to perform its obligations under the credit agreement). The Guarantee Institute’s cover of political risks is 100% of a loan, and its maximum cover for commercial risks is 90%. The terms of guarantees issued by the Guarantee Institute generally provide that the Guarantee Institute is to be issued a claim after a default has continued for 90 days. Claims under the guarantees are payable six months from the date a claim is issued. Guarantees issued by the Guarantee Institute supported 39.6% of export related loans as of December 31, 2011 compared with 37.4% of export related loans as of December 31, 2010

     Arrangement with the Government

     As a member of the OECD, Norway adheres to the OECD Consensus. The terms of the OECD Consensus, which vary according to importing country, establish minimum interest rates, among other things, and require downpayments and maximum loan maturities for government-supported export financing. The OECD Consensus provides that each government-supported loan entered into on or after August 1995 must bear the CIRR applicable to the currency and maturity of the loan. The CIRR is adjusted monthly by the OECD.

     In 1978 the Norwegian Ministry of Finance entered into the 108 Agreement with Eksportfinans pursuant to a legislative enactment (Storting Proposition No. 108) to permit Eksportfinans to arrange and extend export credits in accordance with the OECD Consensus. The stated purpose of the agreement is to offer Norwegian exporters of capital goods a competitive export credit system. Since August 1995, the 108 Agreement has enabled Eksportfinans to issue export credits at the OECD’s CIRR rates.

     The 108 Agreement has no set expiration date, but provides that either party may initiate discussions if the agreement does not fulfill the expectations of that party and that each of the parties may with six months’ notice terminate the agreement with respect to future commitments. The agreement will remain effective until all loans extended in accordance with the arrangement have been repaid and all gains/losses have been settled.

     Furthermore, under certain requirements, contracts originated from foreign subsidiaries of Norwegian companies could be financed on CIRR-terms. Since the arrangement significantly assists in securing Eksportfinans’ business and revenues, if it were to be unfavorably amended or terminated, Eksportfinans’ profit margins, income and business would be adversely affected.

     The 108 Agreement guarantees Eksportfinans a fixed gross margin between Eksportfinans’ revenues from loans and its borrowing costs relating to transactions governed by the agreement. To that end, the agreement establishes reference rates with respect to Eksportfinans’ borrowing activities (interest, borrowing costs and foreign exchange) and lending activities (interest, other lending costs and foreign exchange). The fixed margin is determined by the difference between the applicable reference rates for such borrowing and lending. This margin is higher than the average gross margin we receive on commercial loans to compensate for the fact that a typical CIRR loan generally involves more man-hours and costs and expenses than a commercial loan. Up-front lending costs exceeding a specified threshold are also covered by the agreement. The agreement thereby enabled Eksportfinans to issue export credits at the OECD’s CIRR rates.

     The 108 Agreement also protects Eksportfinans against fluctuations in foreign exchange and/or interest rates with respect to loans granted under the agreement by providing Eksportfinans with a guaranteed NOK fixed return. Under the agreement, Eksportfinans is compensated for any losses as a result of currency or interest rate fluctuations and any gains as a result of such fluctuations are credited to the Ministry. The Government also seeks to reduce its exposure to currency and interest rate risk under the 108 Agreement. For this purpose, Eksportfinans enters into currency and interest rate hedging arrangements and otherwise attempts to balance the currencies of its borrowing and lending. As a result, annual fluctuations in gains or losses under the agreement are minimized, which assists the Government in forecasting the amount of its disbursements under the Agreement.

     Eksportfinans is required to keep separate accounts and a settlement account for payables to and receivables due from the Ministry of Trade and Industry under the 108 Agreement. If the settlement account shows a deficit, the Ministry of Trade and Industry makes payments to Eksportfinans; conversely, Eksportfinans pays to the Ministry of Trade and Industry any surplus registered in the settlement account. Settlements take place within 16 months after the end of each accounting year. Historically, amounts have been due from the Government.

     On November 18, 2011, the Government announced that it would assume responsibility for the provision of export credits under the scheme previously managed by Eksportsfinans. As a result, Eksportfinans will no longer extend new loans except for loans for which commitments existed prior to November 18, 2011, but will continue to manage its portfolio under the 108 Agreement until all loans extended in accordance with the arrangement have been repaid and all gains and losses have been settled pursuant to the

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108 Agreement. There is a transitional period from November 18, 2011 until July 1, 2012 during which Eksportfinans will extend export credit loans on behalf of the Government as further described in the agreement referred to under “Related Party Transactions” below (see Item 7.B. “Related Party Transactions — The Transition Agreement with the Norwegian State”).

Approximately 33% of Eksportfinans’ outstanding export-related loans at December 31, 2011 were issued under the 108 Agreement, compared to 35% of export-related loans at the end of 2010. This decrease in loans issued under the 108 Agreement is primarily due to the fact that financing on market terms was generally more favorable than financing on CIRR-terms during most of 2011. For further details, see Item 4.B. “Business Overview — LOANS — Export Lending — Types of Financing”. The following table sets forth certain information regarding the amounts paid or payable to Eksportfinans by the Government under this arrangement:

                                                                                                               
                                  2011   2010   2009   2008   2007   2006   2005    
Amount paid or payable to Eksportfinans (NOK millions)                               382    332    152   38   26   31   35    
Payment in respect of (year)                               2009    2008    2007   2006   2005   2004   2003    

     The increase in the volume of loans in 2007 through 2008 led to an increase in the amount payable by the Government under the 108 Agreement in 2009 through 2011.

     Municipal Lending

     Sale of Kommunekreditt

     In June 1999, Eksportfinans acquired Kommunekreditt. Kommunekreditt, headquartered in Trondheim, Norway, engaged in long-term financing of Norwegian local governments. Kommunekreditt made loans without any form of credit enhancement to Norwegian municipalities, counties and companies that are the joint undertaking of two or more municipalities (so called joint-municipal companies) as well as to private independent companies against guarantees from municipalities, counties, the Government or a bank. From 2006 Kommunekreditt also engaged in direct loans to banks in situations where the bank was able to link the credit to a defined portfolio of public sector company loans that could be refinanced via Kommunekreditt. Kommunekreditt provided loans with fixed or floating rates of interest and terms from one month to 10 years both for refinancing existing loans and for new borrowings.

     On May 7, 2009 Eksportfinans entered into an agreement with Kommunal Landspensjonskasse gjensidig forsikringsselskap (KLP) for the sale of all of the shares in Kommunekreditt Norge AS (the Sale and Purchase Agreement). KLP agreed to purchase the shares in Kommunekreditt at book value, NOK 870 million. The sale closed as scheduled on June 24, 2009 (the Closing).

     In connection with the Sale and Purchase Agreement, Eksportfinans entered into a Term Facility Agreement dated May 7, 2009 (the Term Facility Agreement), under which it granted Kommunekreditt a NOK 34 billion loan, an amount equivalent to Eksportfinans’ outstanding funding of the activities of Kommunekreditt at Closing (excluding the Excluded Portfolio, described below). The loan had a term of approximately two years from Closing with eight equal quarterly amortization payments, the first of which was paid on December 15, 2009 and the last of which was paid on September 15, 2011.

     Further, in connection with the Sale and Purchase Agreement, Eksportfinans entered into an “Excluded Portfolio Agreement”, pursuant to which at the Closing Eksportfinans purchased from Kommunekreditt, at book value (equal to fair value), loans with a book value of approximately NOK 10.9 billion (the Retained Municipal Portfolio). The retained loans in the Retained Municipal Portfolio consist of loans granted by Kommunekreditt to banks and other financial institutions and a selection of loans to municipalities, selected with respect to their maturity but consistent with other loans made by Kommunekreditt.

     The Retained Municipal Portfolio

     The credit risk on loans to or with guarantees from Norwegian municipalities or counties is limited to postponement of payments and does not extend to the termination of the payment obligations with respect to principal, interest and/or penalty interest. After a period of postponement of payments it is expected that the Ministry of Local Government will arrange for payments of the municipality’s payment obligations. The Retained Municipal Portfolio’s credit exposure to the Kingdom of Norway in terms of loans to or guaranteed by Norwegian municipalities or counties was NOK 10.5 billion as of December 31, 2011 (NOK 10.7 billion as of December 31, 2010).

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     In its local government transactions Kommunekreditt offered loans to municipalities or counties or to companies having the support of guarantees from municipalities, counties, the Government or banks. Kommunekreditt typically financed investments in municipal infrastructure projects such as roads, water and sewage systems, health and social care, schools and cultural institutions. Proceeds of Kommunekreditt’s loans were used for new projects as well as for refinancing existing loans.

     Types of Financing in the Retained Municipal Portfolio

     Loans in the Retained Municipal Portfolio have terms ranging from one year to ten years or more. As of December 31, 2011, 37% (as of December 31, 2010, 40%) of the outstanding loans had a remaining term in excess of five years.

     Loans in the Retained Municipal Portfolio include both floating rate and fixed rate terms.

     Floating rate loans bear interest either at a rate linked to the Norwegian Interbank Offered Rate (NIBOR) plus a margin or at a rate that is adjustable at our discretion upon 14 days’ notice. If the borrower rejects the adjusted interest rate, the loan and accrued interest must be repaid immediately. As of December 31, 2011, 81% were at floating interest rates (82% as of December 31, 2010).

     If a loan is fixed interest rate, the fixed interest rate normally applies for the whole term of the loan. Some loans may have a fixed rate of interest for a shorter period than the term of the loan. For such loans, at the end of the initial term either new fixed rates of interest are agreed or the loan is repaid. Prepayments of fixed rate loans are subject to a penalty based on the difference between the agreed interest rate and the market interest rate at the time of prepayment. As of December 31, 2011, 19% of the loans were at fixed interest rates (December 31, 2010, 18%).

     Credit Support, Credit Monitoring and Assessment of the Retained Municipal Portfolio

     Loans to Norwegian municipalities or counties were made without any credit support. Loans to joint municipal companies or private independent companies were made with guarantees from municipalities, counties, the Norwegian central government or a bank. A credit assessment was made for all companies where a guarantee is required, even if the credit risk is borne by the guarantor. The credit limits of municipalities are based on a combination of the outstanding loan balance for the individual municipality/county and the capital adequacy limits regulated by The Financial Supervisory Authority of Norway. Credit limits for banks were set by Eksportfinans. The Retained Municipal Portfolio also includes loans with guarantees from banks, and loans to banks in connection with the refinancing of loans to companies in the public sector.

     Loans in the Retained Municipal Portfolio were made:

·to municipalities and counties,
·to companies, where the credit is secured by guarantees from municipalities, counties, banks or the Government, and
·to banks in connection with the refinancing of loans to companies in the public sector.

     Loans in the Retained Municipal Portfolio were extended to Norwegian municipalities, counties and to inter-municipal companies or companies that are guaranteed by a municipality, county, bank or other financial institution. The risk on loans with municipal security to these entities in Norway is limited to postponement of payments and does not extend to the termination of the payment obligations with respect to principal, interest and penalty interest. This is set out in the Local Government Act, approved by the Norwegian Parliament on September 25, 1992. Under section 55 of the Local Government Act, Norwegian municipalities and counties cannot be declared bankrupt. Sections 56 and 57 of the Local Government Act set out provisions on the procedures a municipality or county must follow if a postponement of payments needs to be implemented. Section 58 contains procedures to be followed on a return to normal servicing of payment obligations. Since 1945 no Norwegian municipality or county has suspended payment.

     Under these procedures, the Government, acting through the Ministry of Local Government, takes over the management of a municipality or county if the local authority is in a financial situation that results in its inability to fulfill its payment obligations. To that end a supervisory board is appointed. As long as the suspension of payments is in force, no payments may be made without the approval and authorization of the supervisory board. The supervisory board is required to approve a new annual budget and a new financing plan for the municipality or county. The annual budget must secure an operating result that is sufficient to cover interest, ordinary installments and necessary provisions. The financing plan must contain a summary of the local authority’s debt burden and how it will be serviced in the coming years. In preparing the financing plan, the supervisory board must consider any government transfers necessary to restore the local authority’s finances to a position where its obligations can once again be

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serviced. Once the Ministry of Local Government has approved the new financing plan and budget, the supervisory board is dissolved and payments are resumed. From that date the municipality or county must resume servicing its outstanding debt, principal and accumulated interest.

     Although the issue is not free from doubt, based upon interpretations by the Ministry of Local Government and the Ministry of Justice, we expect that interest on delayed payments of interest will also accrue during a period of suspension of payment.

     The Government is required to ensure that the municipalities are financially able to carry out the functions allocated to them. The Government exercises a considerable amount of financial control over municipalities and counties, including setting the tax rate and defining the types of income or assets that are taxable. The Government controls municipal expenditure by defining the public services to be undertaken by municipal authorities.

     Detailed rules for financial plans and control systems that municipalities must follow are set for annual budgets, financial plans, financial strategy and account statements. Municipalities and counties that do not comply with these rules need approval of their budgets and borrowings by the Ministry of Local Government (for counties) or the County Governor (for municipalities). Currently, approximately 10% to 15% of the municipalities and counties are in this category, most of them because of minor budget deficits. Over the last two years, the percentage of municipalities and counties in this category has declined.

     Since January 1, 2001, the approval by the County Governor acting on behalf of the Ministry of Local Government is no longer mandatory for the extension of a direct loan to a municipality or county. However, the Ministry of Local Government has the authority to instruct, subject to certain conditions, municipalities to obtain approval from the Ministry of Local Government before taking up loans. Municipalities instructed to obtain approval are listed in a register available to the public. This approval procedure must always be followed for municipal or county guarantees exceeding NOK 100,000. All municipal guarantees issued must be approved by the Ministry of Local Government.

     Transfers of income from the Government and that part of tax revenues which is received by municipalities and counties are evaluated by reference to the tasks given to municipalities and counties by the Norwegian Parliament. On average a municipality generates 40% to 45% of its revenues from taxes levied by it and 40% to 45% of its revenues from funds transferred by the Norwegian central government. The remaining income is mainly derived from charges for services such as water, sewage, garbage collection, kindergarten, etc.

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     Analysis of Loans

     Composition of Loans

     The following table sets forth the nominal amounts (balance sheet values exclusive of interest accrued and fair value adjustments) of the Company’s loan disbursements and loans outstanding for commercial, government-supported and Norwegian municipality and county loans for each of the last five years:

     Year ended December 31,
  (NOK millions) (1)    2011      2010      2009      2008      2007  
  Loan disbursements (during the year):                         
  Export-related commercial loans   27,447    30,923    13,729    11,234    11,242 
  Export-related Government-supported loans (2)   6,238    2,731    14,381    14,062    11,543 
  Municipal and county loans (3)   —    —    10,909    8,047    16,398 
  Loan to KLP Kreditt AS   —    —    34,352    —    — 
  Total (4)   33,685    33,654    73,371    33,343    39,183 
 
  Loans outstanding (at year-end):                         
  Export-related commercial loans   76,699    64,499    42,547    48,820    38,705 
  Export-related Government-supported loans (2)   34,599    35,317    38,828    31,551    17,639 
  Loan to KLP Kreditt AS   —    12,882    30,058    —    — 
  Direct loans to Norwegian local government   5,653    5,719    5,778    53,855    63,553 
  Municipal-related loans to other credit institutions   4,798    4,943    4,943    4,943    4,723 
  Loans to employees   58    52    48    60    69 
  Total   121,807    123,412    122,202    139,229    124,689 

 

(1) Amounts in foreign currencies have been converted to kroner at year-end exchange rates.
   
(2) Export-related government-supported loans refer to all loans given under the 108 Agreement with the Government. Refer to disclosures under the heading “Arrangement with the Government” in this section for further information about these loans. The export-related government-supported loans can be protected by all types of credit support presented under the heading “Credit Support” later in this section.
   
(3)      The figure for 2009 includes the acquisition of NOK 10.9 billion of loans included in the Retained Municipal Portfolio.
   
(4)      Amounts for 2011, 2010, 2009, 2008 and 2007 include loans acquired from shareholders amounting to NOK 3,644 million, NOK 2,867 million, NOK 1,263 million, NOK 2,666 million and NOK 4,715 million, respectively.
   
  The following table represents an analysis of the Company’s loans outstanding for each of the last five years:

 

  (NOK millions) (1)   2011    2010    2009    2008    2007 
  Beginning balance   123,412    122,202    139,228    124,689    99,059 
  Add — disbursements (1)   33,685    33,654    73,371    33,343    39,183 
  Deduct — repayments (2)   (35,422)   (32,416)   (83,820)   (27,683)   (10,831)
  Adjustments related to year-end exchange rates (3)   132    (28)   (6,577)   8,879    (2,722)
      Balance at year-end   121,807    123,412    122,202    139,228    124,689 

 

(1)      Of NOK 73.4 billion in 2009, NOK 45.3 billion is related to funding of Kommunekreditt Norge AS and other municipal related disbursements after the sale of the subsidiary.
   
(2)      Of NOK 83.8 billion in 2009, NOK 44.5 billion is related to repayment from Kommunekreditt Norge AS in relation to the sale of the subsidiary.
   
(3)      Amounts in foreign currencies have been converted to kroner at year-end exchange rates.

 

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     Our export-related loans are divided into three categories: ships, capital goods and additional export-related and international activities, as described in the footnotes to the tables below.

 

     The following tables show the composition of the Company’s loan disbursements and loans outstanding by type of financing for each of the last five years:

Loans disbursements (during the year):

         Year ended December 31,
  (NOK millions)    2011      2010      2009      2008      2007  
  Export-related Loans                         
     of which Ships (1)   9,634    15,879    12,958    15,905    12,288 
     of which Capital goods (2)   13,678    9,124    15,152    7,016    6,452 
     of which Other export-related and international activities (3)   10,373    8,651    —    2,375    4,045 
  Municipal and county loans (4)   —    —    10,909    8,047    16,398 
  Loan to KLP Kreditt AS   —    —    34,352    —    — 
     Total (5)   33,685    33,654    73,371    33,343    39,183 

 

(1)      “Ships” includes loans made in connection with the financing of ships built in Norway for export or for Norwegian ship owners operating in the offshore oil and gas sector, and loans made to Norwegian ship owning companies, but excludes ship equipment, which is included in capital goods.
   
(2)      “Capital goods” includes loans made for ships’ equipment, telecommunications, energy, oil rig and environmental protection equipment industries, as well as a variety of other businesses.
   
(3)      “Other export-related and international activities” comprises the following sub-groups, all related to the international expansion of the Norwegian industry and domestic investments in Norway, as specified below.
   
     Year ended December 31,
  (NOK millions)    2011      2010      2009      2008      2007  
  Renewable energy   4,394    1,425    —      —      —   
  Aviation and shipping   2,816    264    —      —      —   
  Infrastructure   1,064    —      —      —      —   
  Environment   688    —      —      —      —   
  Consumer goods   612    4,649    —      —      46 
  Real estate   411    581    —      655    1,311 
  Banking and finance   388    —      —      197    2,470 
  Oil and gas   —      1,732    —      583    62 
  IT and telecommunication   —      —      —      940    —   
  Aluminum, chemicals and minerals   —      —      —      —      156 
    Total   10,373    8,651    —      2,375    4,045 

 

(4)      The figure for 2009 includes the acquisition of NOK 10.9 billion of loans included in the Retained Municipal Portfolio
   
(5)      Amounts for 2011, 2010, 2009, 2008 and 2007 include loans acquired from shareholders amounting to NOK 3,644 million, NOK 2,867 million, NOK 1,263 million, NOK 2,666 million and NOK 4,715 million, respectively.
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 Loans outstanding at year-end:

     Year ended December 31,
  (NOK millions)    2011      2010      2009      2008      2007  
  Export-related Loans                         
     of which Ships (1)   44,989    45,376    36,376    31,631    19,570 
     of which Capital goods (2)   33,991    31,992    28,347    19,931    10,757 
     of which Other export-related and international activities (3)   32,318    22,448    16,652    28,809    26,017 
  Loan to KLP Kreditt AS   —      12,882    30,058    —      —   
  Direct loans to Norwegian local government   5,653    5,719    5,778    53,855    63,553 
  Municipal-related loans to other credit institutions   4,798    4,943    4,943    4,943    4,723 
  Loans to employees   58    52    48    60    69 
     Total   121,807    123,412    122,202    139,228    124,689 

 

(1)      “Ships” includes loans made in connection with the financing of ships built in Norway for export or for Norwegian ship owners operating in the offshore oil and gas sector, and loans made to Norwegian ship owning companies, but excludes ship equipment, which is included in capital goods.
   
(2)      “Capital goods” includes loans made for ships’ equipment, telecommunications, energy, oil rig and environmental protection equipment industries, as well as a variety of other businesses.
   
(3)      “Other export-related and international activities” comprises the following sub-groups, all related to the international expansion of the Norwegian industry and domestic investments in Norway, as specified below.

 

     Year ended December 31,
  (NOK millions)    2011      2010      2009      2008      2007  
  Banking and finance   6,938    7,264    8,260    8,875    8,325 
  Renewable energy   5,494    1,425    —      —      —   
  Consumer goods   5,375    4,757    3,052    3,715    2,994 
  Aviation and shipping   5,233    264    40    106    89 
  Real estate   5,063    5,626*   5,237    5,569    5,136 
  Oil and gas   2,491    2,935    25    606    1,069 
  Infrastructure   1,060    150    —      —      —   
  Environment   661    —      —      —      —   
  Aluminum, chemicals and minerals   —      3    8    13    213 
  Engineering and construction   —      —      1    30    26 
  Pulp and paper   —      —      —      4,933    3,980 
  IT and telecommunication   —      —      —      4,928    3,981 
  Hydro electric power   —      —      —      —      166 
  Other categories   3    24    29    34    38 
     Total   32,318    22,448    16,652    28,809    26,017 

 

  *Infrastructure of NOK 150 million was included in the line captioned Real estate management as of December 31, 2010.

 

(4)      There were no material loan disbursements to employees in 2011.
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     Maturity of Loans

     The following table shows nominal amounts (balance sheet values exclusive of interest accrued and fair value adjustments) of outstanding loans as of December 31, 2011, categorized by maturity dates.

(NOK millions) 1 year From 1 year up to and
including 5 years		 Over 5 years Total
Municipal and county loans 1,302   6,346   2,803    10,451
Export-related loans 24,259 74,519 12,578 111,356
   Total 25,561 80,865 15,381 121,807

 

     Interest Rate Type of Loans

     The following table shows nominal amounts (balance sheet values exclusive of interest accrued and fair value adjustments) of outstanding loans as of December 31, 2011, categorized by type of interest rate.

(NOK millions) Fixed
interest
rates		 Adjustable
interest
rates		 Total
Municipal and county loans   1,829 8,622   10,451
Export-related loans 34,828 76,528 111,356
   Total 36,657 85,150 121,807

 

     Currency of Loans

     The following table shows the composition of the Company’s loans by currency of the loans, based upon the contract terms, as of December 31, for each of the last five years. All loans to municipalities and counties are denominated in NOK:

  As of December 31,  
(NOK millions,
except percentages) (1)		 2011 2010 2009 2008 2007  
Norwegian kroner 63,392 52.0 % 71,046 57.6 % 85,700 70.1 % 96,530 69.3 % 90,297 72.4 %  
U.S. dollars 55,716 45.7 % 49,023 39.7 % 33,582 27.5 % 33,794 24.3 % 23,602 18.9 %  
Euro 2,116 1.7 % 3,236 2.6 % 1,778 1.5 % 7,424 5.3 % 9,829 7.9 %  
Other 583 0.5 % 107 0.1 % 1,142 0.9 % 1,480 1.1 % 961 0.8 %  
   Total 121,807 100.0 % 123,412 100.0 % 122,202 100.0 % 139,228 100.0 % 124,689 100.0 %  

 

(1)      Amounts in foreign currencies have been converted to kroner using year-end exchange rates.

     For information concerning how the Company manages its foreign currency exposure, see Item 11. “Quantitative and Qualitative Disclosures About Market Risk — Foreign Currency Exchange Risk”.

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Geographic Distribution of Loans

     The following table shows the geographic distribution by country of the Company’s loan portfolio as of December 31 for each of the last five years. Loans are categorized by the country of the borrower, without reference to the country of the guarantor. For information regarding geographic distributions of guarantors, see Item 4.B. “Business Overview — LOANS — Foreign Outstandings”.

     Year ended December 31,
  (NOK millions) (1)    2011      2010      2009      2008      2007  
  Norway (2)   82,366    87,282    90,460    106,640    106,295 
  Bermuda   8,956    10,445    7,746    4,633    2,537 
  USA   3,491    3,331    4,150    5,089    4,676 
  Greece (3)   3,011    498    480    561    26 
  Cyprus   2,936    2,643    1,079    593    506 
  Other (4)   21,047    19,213    18,287    21,712    10,649 
     Total   121,807    123,412    122,202    139,228    124,689 

 

(1)      Amounts in foreign currencies have been converted to kroner using year-end exchange rates.
   
(2) Of which loans related to Norwegian municipalities (including the loan to KLP Kreditt AS) amounted to NOK 10,451 million, NOK 23,544 million, NOK 40,779 million, NOK 58,797 million and NOK 68,276 million in 2011, 2010, 2009, 2008 and 2007, respectively.
   

(3)

All loans to Greek debtors are supported by guarantees given by non-Greek guarantors.

   

(4)     

In 2011, “Other” does not include any individual country amounts greater than those disclosed by individual country for that year.

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     Credit Support

     The following tables provide an overview of the types of our outstanding loans as of December 31, for each of the last five years:

   As of December 31,
Municipal lending:
(NOK millions, except percentages) (1) 		 2011  2010  2009  2008  2007
Loans to Norwegian banks   4,798    45.9%   4,943    21.0%   4,943    12.1%   4,943    8.4%   4,723    6.9%
Norwegian bank guarantees   3,638    34.8%   3,660    15.5%   3,689    9.1%   4,215    7.2%   2,463    3.6%
Loans to or guaranteed by Norwegian                                                  
municipalities   2,015    19.3%   2,058    8.7%   2,089    5.1%   49,639    84.4%   61,090    89.5%
Loan to KLP Kreditt AS   —      —      12,882    54.8%   30,058    73.7%   —      —      —      —   
   Total   10,451    100%   23,544    100%   40,779    100%   58,797    100%   68,276    100%

   As of December 31,
Export-related lending:
(NOK millions, except percentages) (2) (5)		  2011  2010  2009  2008  2007
Government guarantees (4)   46,777    42.0%   39,792    39.9%   26,365    32.4%   18,402    22.9%   9,755    17.3%
Norwegian bank guarantees   21,946    19.7%   21,092    21.1%   14,965    18.4%   23,506    29.2%   19,933    35.3%
Foreign bank guarantees (3)   14,955    13.4%   17,699    17.7%   15,622    19.2%   18,279    22.7%   13,512    24.0%
Pledges over cash deposits with banks   13,977    12.6%   13,563    13.6%   15,795    19.4%   10,405    12.9%   4,318    7.7%
Loans to Norwegian banks   13,255    11.9%   7,263    7.3%   8,260    10.2%   7,316    9.1%   7,220    12.8%
Loans to foreign banks   388    0.3%   407    0.4%   368    0.4%   2,462    3.1%   1,604    2.8%
Corporate guarantees   —      0.0%   —      0.0%   —      0.0%   2    0.0%   2    0.0%
   Total   111,298    100%   99,816    100%   81,375    100%   80,372    100%   56,344    100%
   
(1)      Loan provided with security in the underlying lending portfolio transactions, in addition to KLP Kreditt AS being a Norwegian bank.
   
(2)      Amounts in foreign currencies have been converted to kroner using year-end exchange rates. The relative proportions of the types of credit exposure are affected by exchange rates.
   
(3)      Includes direct loans to foreign banks from which we would accept a guarantee.
   
(4)      Consists of guarantees by the Guarantee Institute, other Norwegian agencies and foreign governments.
   
(5)      In addition, mortgage loans to employees accounted for NOK 58 million, NOK 52 million, NOK 48 million, NOK 60 million and NOK 69 million in 2011, 2010, 2009, 2008 and 2007, respectively.
                                     

     Government guarantees supported 42.0% of total outstanding export-related loans as of December 31, 2011, substantially all of which was covered by the Guarantee Institute. The percentage of government guarantees for export-related lending has increased substantially from 22.9% as of December 31, 2008 to 32.4% as of December 31, 2009 and then 39.9% as of December 31, 2010 because many commercial banks have reduced lending due to conditions in the financial markets and capital constraints.

     No loans to a single customer guaranteed by the Government or its agencies exceeded 3.8 % of total export-related loans as of December 31, 2011. Guarantees issued by two Norwegian banks, DNB Bank ASA and Nordea Bank Norge ASA, which together owned approximately 63.2% of the Company’s share capital as of December 31, 2011, supported 37% of total export-related loans. As of the same date, guarantees issued by one of those banks, DNB Bank ASA, supported approximately 30% of total export-related loans. No loan to a single customer guaranteed by DNB Bank ASA exceeded 4.8% of total loans in 2011.

     Guarantees issued by Nordea Bank Norge ASA, another shareholder, supported 6.9% of total export-related loans. No loan to a single customer guaranteed by Nordea Bank exceeded 1.3% of total loans. For further details, see Item 7.A. “Major Shareholders” and Item 7.B. “Related Party Transactions”.

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     Non-Performing Loans

     Default interest accrues if the borrower fails to pay any amount owed when due. Default interest includes additional interest for not performing according to the loan contract. Default interest normally exceeds the normal interest rate agreed to in the loan contract by 100 to 300 basis points. Default interest accrues from and including the date on which the payment was due. Default interest is intended to make up for any of the Company’s lost investment opportunities or cost of funds, as the case may be.

     The table below sets forth the Company’s non-performing loans of more than 90 days, as of December 31, for each of the last five years:

  Year ended December 31,
(NOK millions) 2011 2010 2009 2008 2007
Interest and principal installments more than 90 days past due (1) 504 511 416 12   4
Not matured principal on loan with payments more than 90 days past due (2)   17 453   58 39 16
Total 521 964 474 51 20
Interest and principal installments more than 90 days past due          
expected to be collected from guarantor (3)     6   18     5   1   4

 

(1)      Of the amounts for 2011, 2010 and 2009, NOK 498 million, NOK 493 million and NOK 408 million, respectively relates to Icelandic banks.
   
(2)      Where the principal on loans has not matured the distribution of amounts to be collected either from the guarantor or from the borrower is uncertain. Therefore the split has not been presented.
   
(3)      All loans expected to be collected from a guarantor are loans where the borrower is a foreign counterparty. The amount represents a partly-delayed settlement from the Guarantee Institute. Terms of the credit insurance issued by the Guarantee Institute provide that claims are payable six months from the date of the borrower’s default. For further details, see note 28.4 to our audited consolidated financial statements in Item 18.

With the adoption of IFRS, all loans, with the exception of government-supported loans and a loan to KLP Kreditt are measured at fair value. Loans measured at fair value are not subject to separate impairment losses as any impairment would be included in the fair value measurement. The fair value measurements of loans are described in notes 4 and 28.7 to our audited consolidated financial statements in Item 18. The loan portfolios carried at amortized cost are continuously assessed for impairment. This applies for government-supported loans (the loans under the 108 Agreement with the Government) and the loan to KLP Kreditt. The method the Company uses to monitor credit risk is the same for loans carried at amortized cost and loans measured as at fair value through profit or loss. The credit monitoring of the amortized cost loans is used in the impairment assessment while the credit monitoring of the fair value loans is used in the fair value measurement. The Company reviews all non-performing loans for impairment on a quarterly basis. No loan loss provisions have been made to cover losses arising from circumstances existing at December 31, 2011.

     The Company monitors the following factors to identify any impaired loans:

§Adverse changes in credit rating levels, both for the debtor and the guarantor
§Adverse changes in credit spreads
§Payments past due
§Other indications of financial distress

     At the core of the Company’s lending plan is the decision to not assume credit risk on borrowers. Guarantees are required for all loans given by the Company. In this manner, the loans will have “double default” characteristics, i.e. both the debtor and the guarantor need to default in order for the Company to be exposed to credit losses.

     The Company obtains both government guarantees (primarily from the Guarantee Institute) and non-government guarantees. The non-government guarantees are obtained from large international and domestic banks. The lowest rating that is accepted for

30
  

international banks (excluding the three largest owner banks: DNB Bank, Nordea and Danske Bank) is A- /A3. If banks fall below this level, the Company has the option to demand a new guarantor. For the three largest owner banks and other domestic banks, the Company will have a subjective right to demand a new guarantor if the Company no longer finds the guarantor acceptable.

     The Company (through the Risk Management Department) monitors the rating of the individual debtor and guarantor. Credit spreads (including the liquidity of such spreads) are also monitored continuously when available for the guarantors and debtors. Furthermore, breaches of loan agreements are followed up closely, including and in particular payments past due. When such a breach occurs, the debtor is contacted no later than five banking days after the payment is past due. The guarantor is informed with copies of the correspondence and the process of securing necessary payments from the guarantors is initiated. For loans with a remaining nominal value of more than NOK 50 million, the Credit Committee (with members from the Group Management Board) is informed.

     Other relevant available information is also considered, independent from credit rating movements, credit spread development and loans being past due. This could be news releases about the relevant debtors or guarantors, financial reports and separate reports from the international credit rating agencies. At the end of each reporting period, the Company assesses whether the above described credit monitoring process provides any objective evidence that a loan is impaired. It applies thresholds for adverse credit rating changes, changes in credit spreads and delinquencies in order to determine if a loan is impaired. The significance of other available information is assessed on a case by case basis.

     If the Company determines that a loan is impaired, the impairment amount is determined individually for the relevant debtor. The impairment will be the difference between the carrying amount of the loan and the present value of estimated future cash flows. When estimating future cash flows, the Company takes cash flows from the debtor and guarantor into account. The estimated future cash flows are discounted using the original effective interest rate. The calculation is performed by the Risk Management Department, which is also responsible for the fair value measurement of loan portfolios measured at fair value through profit or loss.

     As discussed in Item 4.B. “Business Overview — LOANS — Export Lending — Credit Support, Credit Monitoring and Assessment”, all export related loans are supported by or extended against guarantees issued by, or claims on, certain specific types of entities or collateral. Loans to municipalities and counties are not guaranteed or otherwise credit enhanced due to the fact that Norwegian municipalities and counties cannot be declared bankrupt. For further details, see Item 4.B. “Business Overview — LOANS — Municipal Lending — Credit Support, Credit Monitoring and Assessment of the Retained Municipal Portfolio”. Municipal loans to companies included in the Retained Municipal Portfolio are extended against guarantees from municipalities, the Norwegian central government, counties or banks.

     Guarantees from banks, which comprise the major type of credit support for loans by Eksportfinans, and recently, but still to a minor extent, loans in the Retained Municipal Portfolio, also cover the obligation of the borrower to pay default interest.

     Guarantees from the Guarantee Institute typically do not cover any default interest. However, guarantees from the Guarantee Institute would cover the principal interest rate of the loan agreement from the due date until payment is made under the guarantee. Accordingly, if a loan guaranteed by the Guarantee Institute defaults, the guarantee will cover the principal interest rate or actual cost of funds from the due date under the loan agreement until payment is made under the guarantee.

     In October 2008, Iceland introduced an emergency law to deal with its national banking crisis. Three of the major Icelandic banks were nationalized and placed under Icelandic government ownership, control and supervision. At that time, Eksportfinans discovered that Glitnir hf, which had acted as agent bank and guarantor, had failed to perform its duties as agent by not transferring to Eksportfinans prepayments of three loans that had been legally prepaid by the borrowers. The total amount not reimbursed to Eksportfinans by Glitnir hf was NOK 414 million (at exchange rates applicable at December 31, 2011). To protect its claim against the bank, Eksportfinans has pursued and continues to pursue various legal measures and strategies to reclaim the unlawfully withheld amount in Iceland. Eksportfinans also participates in a syndicated loan to Glitnir hf, with Eksportfinans’ exposure being NOK 84 million (at exchange rates applicable at December 31, 2011). As of December 31, 2011, the fair value of the amount not reimbursed had been increased to 30.7% (from 27.7% as of December 31, 2010) of the principal amount of the loans, leading to an accumulated fair value reduction of NOK 345 million as per December 31, 2011 (at exchange rates applicable at December 31, 2011) with respect to both exposures. Save for these unauthorized actions by Glitnir hf acting as agent and the outstanding amounts under the Icelandic syndicated loan, the Company has incurred no loan losses to date.

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     Foreign Outstandings

     The following table sets forth outstandings to obligors in foreign countries where aggregate outstandings to each country exceed 1.5% of the Company’s total assets at December 31, 2011. Additionally, it sets forth under “Other Countries” the aggregate outstandings for countries which each represent between 0.75% and 1.5% of the Company’s total assets. Outstandings consist of loans, securities and receivables. Guaranteed amounts are reflected as outstandings only in the country of the guarantor and not in the country of the borrower. These amounts are primarily outstanding against foreign banks.

  Year ended December 31,
  2011 2010 2009 2008 2007
(NOK million) Outstanding
United Kingdom 11,701   11,753   16,466   22,267   13,956  
Denmark 9,392   10,939   10,999   14,848   5,266  
Finland 9,103   8,633   8,675   5,538   2,332  
France 7,961   5,363   3,668   8,081   4,458  
Germany 7,553   6,824   5,956   10,851   5,324  
The Netherlands 7,403   5,484   6,87   12,689   5,767  
USA 6,537   8,992   10,380   11,383   12,687  
Sweden 3,908   (1)   —   4,394   —  
Italy 3,385   4,523   9,068   9,241   8,159  
Spain (1)   4,295   8,378   9,730   8,886  
Austria (1)   (1)   —   —   —  
Australia (1)   (1)   5,889   5,682   5,984  
Ireland —   (1)   4,668   4,598   4,336  
Japan —   (1)   2,293   4,194    —  
Other countries (1) 6,583   17,271   3,145   4,267   3,350  
Total 73,526   84,073   96,572   127,763   80,505  

 

(1)      Represents countries with respect to which the Company’s outstandings were between 0.75% and 1.5% of total assets. This includes Spain, Australia and Austria as of December 31, 2011. Austria, Australia, Ireland, Sweden, Belgium, Japan and the Philippines as of December 31, 2010. Canada as of December 31, 2009, Austria and Luxembourg as of December 31, 2008, and Canada and Sweden as of December 31, 2007.

     FINANCIAL GUARANTEES

     Eksportfinans issues financial guarantees in connection with cross-border leasing and export transactions. The beneficiary is normally the foreign lessor or a buyer of capital goods exported from Norway. In the latter case, the financial guarantee consists of various contract bonds to support the exporter. In all such financial guarantees Eksportfinans has full recourse to prime international or Norwegian banks.

     FINANCIAL INVESTMENTS

     Liquidity Portfolio

     Eksportfinans holds significant amounts of liquid securities in our PHA Portfolio and our Liquidity Reserve Portfolio, which together comprise the Liquidity Portfolio. These portfolios are in place to provide liquidity. The securities in the PHA Portfolio are mainly held to maturity and consist mostly of investment-grade debt and debt-related securities, mainly senior bank notes and bonds, highly rated asset-backed securities and some bonds issued by unrated Norwegian savings banks. The Liquidity Reserve Portfolio contains instruments with shorter weighted average maturities than those in the PHA Portfolio and does not contain asset-backed securities. For further information on the Liquidity Portfolio, see Item 5.B. “Liquidity and Capital Resources — Liquidity Portfolio”.

     Credit default swaps

     Eksportfinans has issued several credit linked notes. In order to hedge the exposure under the note, Eksportfinans enters into a swap with an acceptable swap counterparty. This swap contains an embedded credit default swap where Eksportfinans sells the protection which represents the risk assumed by the investor under the note.

32
  

     Eksportfinans does not enter into credit default swaps for income generating purposes as an alternative to investing in ordinary bonds, although it has done so in the past. The last of these swaps expired in 2008.

     FUNDING

     For further information on funding and related derivative activities, see Item 5.B. “Liquidity and Capital Resources”.

     SUPERVISION AND REGULATION

     The Company is subject to regulation under several Norwegian statutes, among others the Public Limited Liability Companies Act of June 13, 1997 No. 45 and the Act on Financing Activity and Financial Institutions of June 10, 1988 No. 40. The Financial Institutions Act is the principal act with respect to licenses to carry on finance activities; lawful area of activity; minimum requirements as to capital adequacy; overall credit to a single customer; ownership, cooperation and conflicts of position; financial groups; relationship to customers and money laundering. The Financial Institutions Act supplements the Public Limited Liability Companies Act with respect to formation, requirements of articles of association, governing bodies, etc. In addition to these acts, the Financial Supervision Act of December 7, 1956 No. 1 and Act on Securities Trading of June 29, 2007 No. 75 and Act on Regulated Markets of June 29, 2007 No. 74, replacing previous acts, also play important roles in the daily business and supervision of financial institutions.

     Under the Financial Institutions Act, a financial institution must be licensed by the Government. The articles of association of a financial institution must be approved by the Ministry of Finance and Customs. The Articles of Association of Eksportfinans, among other things, provide for the Company’s management through the Board of Directors’ supervision and control, the Council of Representatives and the Control Committee. For further details, see Item 6. “Directors, Senior Management and Employees”.

     As provided for by the Financial Institutions Act, the Ministry of Finance and Customs has prepared guidelines for measuring capital adequacy. As the principal measure of capital adequacy, the guidelines use a risk-weighted asset ratio, which compares the sum of total assets and off-balance sheet items, weighted to reflect their relative risk as measured by category of assets, to the capital base. Capital is divided into core capital (share capital, other equity and other types of capital specifically approved by the relevant Norwegian authorities), supplementary capital (subordinated debt less than 20% for each of the last five years prior to maturity) and general reserves. The minimum capital requirement is 8%. Effective January 1, 2008, Eksportfinans implemented the new Basel II capital adequacy regulations. The new regulations did not have any significant impact on Eksportfinans’ capital adequacy. Eksportfinans employed the standard approach for credit risk and market risk and the basic indicator approach for operational risk. The Company’s policy is to maintain a strong capital base compared to the regulatory minimum. For further details, see Item 5.B. “Liquidity and Capital Resources — Capital Adequacy”.

     The Financial Institutions Act places certain limits on the total credit that a financial institution may extend to a single customer. As a general rule, the regulations provide that a regulated entity shall not have an exposure towards one single customer amounting to more than 25% of its regulatory capital. The exposure (as defined in the regulations) includes on- and off-balance sheet items.

     However, with effect from January 1, 2011, the Norwegian Ministry of Finance introduced new regulations concerning exposure towards a single customer. The most important change was that risk weighting for exposures to banks was discontinued. The maximum allowed exposure, equaling 25% of the institution’s regulatory capital, applies under the new provisions. Under the previous rules for calculating and reporting large exposures, Eksportfinans applied a risk weight of 20% for all loans that were secured by on-demand guarantees from banks. If the aggregated exposure to a borrower exceeded an amount equal to 25% of Eksportfinans’ regulatory capital, the excess amount was reported as an exposure towards the guaranteeing bank, and such 20% risk weighting was applied to the remaining exposure. That meant that maximum exposure to a single client (borrower and guaranteeing bank together in the manner described above) equaled NOK 7.1 billion based on Eksportfinans’ regulatory capital as of December 31, 2010. The new Norwegian provisions for large exposures are the same as the prevailing provisions applicable in the European Union (Directive 2006/48/EU) and such provisions do not permit the bank guarantee risk weighting that we employ. As a result, under the new rules the maximum exposure of Eksportfinans to borrower and guaranteeing banks would be approximately NOK 1.4 billion based on Eksportfinans’ regulatory capital as of December 31, 2010. Eksportfinans initially was granted a transitional period ending December 31, 2011, during which it could use the 2010 reporting standards for large exposures. On October 19, this temporary exemption was extended until December 31, 2012. However, the Government decided not to grant Eksportfinans a permanent exemption and also rejected a proposal by Eksportfinans and certain of its shareholders to recapitalize the Company in order to comply with the new rules. On November 18, 2011, the Government announced that it would assume responsibility for the export finance scheme previously managed by Eksportfinans, a decision that has profoundly affected Eksportfinans' business model with the removal of government supported loans from its lending business. The Company currently has a number of exposures that would exceed the limit following the termination of the transitional period. However, on February 13, 2012,

33
  

the Financial Supervisory Authority of Norway (the FSA) granted the Company a new prolongation of the transitional period for the five lending transactions currently expected to exceed the regulatory limit for large exposures at December 31, 2012. The new temporary time limit for each of these five loans is based on scheduled repayments of principal on those loans reducing the outstanding loan balance of each of the five loans such that Eksportfinans’ exposure would be in compliance with the statutory limits. The new time limits are specific to each loan and fall within the period of December 31, 2014 – December 31, 2016.

 

     The prolongation of the transitional period is conditioned on Eksportfinans not increasing its exposures under these loans beyond the level of exposures that are currently contemplated by such loans. The FSA has also requested Eksportfinans to adapt to, to the extent possible, the statutory requirement as soon as possible.

     Previously, a 10% limit was placed on ownership of the shares of a financial institution by any single entity. Subject to approval by the Banking Insurance and Securities Commission, ownership of 10% or more is now permitted. For further details, see Item 7.A. “Major Shareholders”.

     COMPETITION

     Before the Government's decision caused Eksportfinans to cease new lending, Eksportfinans competed indirectly with export credit agencies of other OECD member countries in providing government-supported export credits. Deregulation and globalization of the world’s financial markets had resulted in an increasingly competitive environment for financial institutions, including the Company, both in making commercial loans in particular and for obtaining funding. In making commercial loans, the Company competed with funding offered by Norwegian and, to a lesser extent more recently, foreign financial institutions. The Company also competed with such institutions and other entities for funds in the domestic and international capital markets. We believe that the competitiveness of the Company’s loans reflected our relatively low cost of funds, low operating costs and favorable credit ratings, as well as the terms of the program we administered on behalf of the Government.

     C. ORGANIZATIONAL STRUCTURE

     Following the liquidation of eFunding AS during 2010 and the sale of Kommunekreditt Norge AS in 2009, Eksportfinans has no subsidiaries. eFunding AS was an empty shell company formed to prepare for the commercialization of the eFunding Platform (see item 5.B. “Liquidity and Capital Resources – General”), an idea that was subsequently abandoned.

     D. PROPERTY AND EQUIPMENT

     Eksportfinans owns 68.3% of an office building in Oslo, Norway, in which its offices have been located since 1980. Eksportfinans utilizes approximately 52% of the portion of the building owned by it and leases the remainder to unrelated parties.

Item 4A. UNRESOLVED STAFF COMMENTS

     None.

Item 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

     The principal source of the Company’s revenue is the interest earned on its assets and capital, and the Company’s principal expense is the cost of its debt obligations, including interest, related borrowing costs and underwriting commissions. With respect to certain types of government-supported lending, the Company’s net lending rates and borrowing costs (after receipt of government compensatory payments) are defined by an arrangement with the Government, which is designed to provide the Company with a fixed profit margin and protection against exchange rate fluctuations on its government-supported lending business. For further details, see Item 4.B. “Business Overview — LOANS — Export Lending — Arrangement with the Government”. The Company also offered credit terms in commercial loan transactions that were based on prevailing market conditions.

      A. OPERATING RESULTS

           General

     Throughout 2011, profits from the underlying business operations remained strong, and disbursements of export credits through November 2011 have been at the same level as in 2010, which was a record high. In all, Eksportfinans disbursed NOK 33.7 billion in new export related loans in both 2011 and 2010.

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      Results of Operations

     The following table sets forth our results for the years ended December 31, 2011, 2010 and 2009.

  Year ended December 31,
(NOK millions) 2011 2010 2009
Total interest and related income 5,628   5,817   7,213  
Total interest and related expenses 4,079   4,398   5,743  
NET INTEREST INCOME 1,550   1,419   1,470  
Commissions and income related to banking services 1   2   2  
Commissions and expenses related to banking services 6   7   8  
Net gains/(losses) on financial instruments at fair value 40,373   (603 ) (3,793 )
Other income 16   7   15  
NET OTHER OPERATING INCOME 40,385   (602 ) (3,784 )
TOTAL OPERATING INCOME 41,935   817   (2,314 )
Salaries and other administrative expenses 182   157   152  
Depreciation 20   23   20  
Other expenses 12   14   15  
TOTAL OPERATING EXPENSES 214   195   187  
PRE-TAX OPERATING PROFIT/(LOSS) 41,721   623   (2,501 )
Taxes 11,682   175   (699 )
PROFIT/(LOSS) FOR THE YEAR FROM CONTINUING OPERATIONS 30,039   448   (1,802 )
Profit/(loss) for the year from discontinued operations, net of taxes 0   0   1  
TOTAL COMPREHENSIVE INCOME 30,039   448   (1,801 )
   

     The assets of the Company are its loans and investments, which are financed by the Company’s equity capital and by borrowings principally in the international capital markets. Interest rates and average total assets affect interest income and interest expense during the year.

     As of December 31, 2011, approximately 80% of the Company’s assets were denominated in foreign currencies. Through interest rate and foreign currency swap arrangements, all assets and liabilities are converted to floating-rate (primarily 3 month), mainly in Norwegian kroner, euro and U.S. dollars. As a result of this large proportion of floating-rate transactions, the Company experiences fluctuations in gross income and expense as interest rate levels vary. Fluctuations in gross amounts have a limited effect on net interest income on the debt-funded assets, because both the assets and the underlying liabilities, which are funded by issuing debt, are either denominated in or swapped into floating rates in the same currency. Average interest earning assets were higher than average interest bearing liabilities as of December 31, 2011, 2010 and 2009. Management believes the difference can be looked upon as equity-funded assets. As the equity of the Company is denominated in NOK, fluctuations in interest rates in NOK may affect the return on equity-funded assets.

     During 2011 the average short-term Norwegian kroner NIBOR interest rate increased by approximately 0.4 percentage points from 2010. During 2010 the average short-term Norwegian kroner NIBOR interest rate increased by approximately 0.1 percentage points from 2009 and decreased by approximately 3.8 percentage points during 2009. The average short-term euro London Inter-Bank Offered Rate (LIBOR) increased approximately 0.6 percentage points during 2011, it had decreased about 0.4 percentage points during 2010 and decreased about 3.4 percentage points during 2009. The average short-term U.S. dollar LIBOR interest rate stayed at the same level during 2011 and decreased about 0.3 percentage points during 2010 and decreased about 2.2 percentage points during 2009.

     Fluctuations in foreign currency rates, especially fluctuations in the U.S. dollar/NOK exchange rate and the euro/NOK exchange rate, affect the Company’s results and assets and liabilities. We translate foreign currency items in the statement of income at the exchange rate on the date of settlement of the transaction. We translate the amount of assets and liabilities denominated in foreign currencies into Norwegian kroner at the relevant exchange rates prevailing on the date of the balance sheet.

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     During 2011 the Norwegian kroner appreciated 0.7% against the euro and depreciated 2.3% against the U.S. dollar. During 2010 the Norwegian kroner appreciated 6.0% against the euro and depreciated 1.4% against the U.S. dollar. During 2009 the Norwegian kroner appreciated 15.7% against the euro and appreciated 17.5% against the U.S. dollar.

     As of December 31, 2011, the Company’s net foreign currency position amounted to NOK 1 million in U.S. dollars and NOK 1 million in euros. As of December 31, 2010, the Company’s net foreign currency position amounted to NOK 40 million in U.S. dollars and NOK 5 million in euros (NOK 4 million in U.S. dollars and NOK 7 million in euros in 2009). Net loss in foreign exchange in 2011 amounted to NOK 4 million, compared to a profit of NOK 9 million in 2010 and a loss of NOK 101 million in 2009, as a result of changes in foreign exchange rates.

     There was a decrease in both total interest income and total interest expense in 2011 compared to 2010 and a decrease in both items in 2010 compared to 2009. The main reasons for the decrease in both total interest income and total interest expenses during 2011 were the decrease in the average balance of interest bearing assets and liabilities. The main reasons for the decrease in both total interest income and total interest expenses during 2010 were the decrease in the average short-term euro LIBOR interest rate and the average short-term U.S. dollar LIBOR interest rate.

     Total interest and related income in 2011 was NOK 5,628 million, compared to NOK 5,817 million in 2010, a decrease of NOK 188 million, or 3.2%. Total interest and related income in 2010 was NOK 5,817 million, compared to NOK 7,213 million in 2009, a decrease of NOK 1,396 million, or 19.4%. Changes in total interest and related income are discussed in the following paragraphs.

     Interest and related income on loans decreased by NOK 194 million, or 4.0%, from 2010 to 2011. Interest and related income on loans decreased by NOK 384 million, or 7.3%, from 2009 to 2010.

     Interest and related income on securities and other interest and related income increased by NOK 5 million, or 0.5%, from 2010 to 2011. Interest and related income on securities and other interest and related income decreased by NOK 1,013 million, or 52.6%, from 2009 to 2010.

     Total interest and related expenses in 2011 was NOK 4,079 million compared to NOK 4,398 million in 2010. Interest and commissions on the Company’s debt decreased by NOK 319 million (7.3%) from 2010 to 2011. Total interest and related expenses in 2010 was NOK 4,398 million compared to NOK 5,743 million in 2009. Interest and commissions on the Company’s debt decreased by NOK 1,345 million (23.4%) from 2009 to 2010.

     The reasons for such changes are described in the paragraphs above. See also “— Average balance sheet and net interest income” and “— Changes in net interest income — volume and rate analysis.”

     The Company’s net interest income is composed of interest income on equity-funded assets and net interest income on debt-funded assets, represented by the Company’s loans and other investments. Net interest income in 2011 was NOK 1,550 million, a 9.2% increase from net interest income of NOK 1,419 million in 2010. The main reason for the higher net interest income in 2011 was mainly due to higher margins on lending and placements in securities. Net interest income in 2010 was NOK 1,419 million, a 3.5% decrease from net interest income of NOK 1,470 million in 2009. The main reason for the lower net interest income in 2010 was the accrual for preference share dividends to the Government as part of the borrowing agreement between Eksportfinans and the Government entered into in 2008.

     In addition to net interest income, profit/(loss) for the year is affected by commissions earned and paid, gains/(losses) on financial instruments at fair value, other income and total operating expenses. Changes in these factors are discussed in the following paragraphs.

     Commissions earned and income related to banking services amounted to NOK 1 million in 2011 and NOK 2 million in 2010 and 2009. These commissions consist of income on guarantees to our clients.

     Net gains/(losses) on financial instruments at fair value showed a total gain of NOK 40,373 million in 2011, compared to a loss of NOK 603 million in 2010 and a loss of NOK 3,793 million in 2009.

     During 2011, volatility in the international capital markets continued to cause fluctuations in the fair value measurements of financial instruments. After the implementation of the Portfolio Hedge Agreement with Eksportfinans shareholders on February 29, 2008, the fluctuations in the fair value of bond investments hedged by this agreement have been neutralized. Fluctuations in fair values in the accounts after that date have to a large extent been caused by changes in fair value on Eksportfinans’ own debt and on

36
  

loans. In 2011, unrealized gains on Eksportfinans’ own debt amounted to NOK 43,054 million, compared to unrealized gains of NOK 2,997 million in 2010 and unrealized gains of NOK 4,516 million in 2009 (see note 5 to the accompanying audited consolidated financial statements). Net of derivatives, this amounted to an unrealized gain of NOK 40,653 million in 2011, compared to an unrealized loss of NOK 390 million in 2010 and a loss of 3,842 million in 2009 (see note 29.4 to the accompanying audited consolidated financial statements). Accumulated in the balance sheet, the unrealized gain on Eksportfinans’ own debt, net of derivatives, is NOK 42.1 billion as of December 31, 2011. The unrealized gains are caused by the spread increase following the ratings downgrades of Eksportfinans. These unrealized gains on own debt will be reversed as unrealized losses in future periods following credit spread tightening and running of time. The capital adequacy will not be affected by this effect in any material way.

     Of the total net gains on financial instruments at fair value of NOK 40,373 million in 2011, NOK 40,515 million is unrealized gains on financial instruments. Of the total net losses on financial instruments at fair value of NOK 603 million in 2010, NOK 554 million is unrealized losses on financial instruments. Of the total net losses on financial instruments at fair value of NOK 3,793 million in 2009, NOK 3,858 million is unrealized losses on financial instruments. See note 5 to our audited consolidated financial statements in Item 18 for a specification of the unrealized loss per class of financial instruments. For most classes of financial instruments presented in note 5, there is an economic hedge in place to hedge against changes in credit risk, foreign currency risk or other market risk. Since we do not apply hedge accounting for any of our financial instruments, an analysis of each individual line item in note 5 will not be meaningful. For example, a change in fair value of one financial derivative will have an offsetting change in fair value on the bond debt line item in note 5. A more meaningful analysis can be made on unrealized gains or losses after the impact of economic hedges. Such numbers are presented in the table in note 29.4 to our audited consolidated financial statements.

     As shown in the table in note 29.4 to the audited consolidated financial statements, the unrealized gains of NOK 40,609 million in 2011 come almost entirely from unrealized gains on bond debt of NOK 40,653 million. The unrealized losses of NOK 554 million in 2010 come mostly from unrealized losses on bond debt of NOK 390 million. Of the unrealized losses of NOK 3,793 million in 2009, NOK 3,842 million is related to bond debt. The fair value of bond debt is established using a discounted cash flow model as presented under the heading “Other bond debt” in note 4.1 to our audited consolidated financial statements. The most significant assumption impacting the fair value of bond debt is the credit spread assumption. During 2011, the credit spreads on the Company’s bond debt increased from an interval ranging from negative 9 to 68 basis points for different maturities as of December 31, 2010 to an interval of 532 to 650 basis points for different maturities as of December 31, 2011. As of December 31, 2009, the credit spreads on the Company’s bond debt were in an interval ranging from 21 to 92 basis points for different maturities. The significant increase in credit spread in 2011 compared to 2010 has caused a significant decrease in the fair value of the Company’s bond debt in 2011, which is reflected in the level of unrealized gains on bond debt in 2011.

     The Company recorded unrealized losses on loans of NOK 52 million in the year ended December 31, 2011, compared to losses on loans of NOK 89 million in the year ended December 31, 2010 and losses of NOK 49 million in the year ended December 31, 2009. The fair values of loans are determined using a discounted cash flow model, incorporating appropriate yield curves and credit spreads obtained from the market. The most important reason for the unrealized losses recorded is an increase in credit spreads of our borrowers.

     For the year ended December 31, 2011, the Company recorded unrealized gains of NOK 19 million on securities, compared to unrealized losses of NOK 62 million in the year ended December 31, 2010 and unrealized gains of NOK 99 million in the year ended December 31, 2009. The fair value of the securities portfolio is established using a valuation model or quoted market prices. The most significant inputs to the valuation model are indices based on credit spreads and liquidity.

     Other income amounted to NOK 16 million in 2011, compared NOK 7 million in 2010 and NOK 15 million in 2009.

     Total operating expenses were NOK 214 million in 2011, compared with NOK 195 million in 2010 and NOK 187 million in 2009, with the increase in 2011 mainly due to additional expenses related to the Government's decision to assume responsibility for the provision of export credit loans.

     Pre-tax operating result showed a profit of NOK 41,721 million in 2011, compared to a profit of NOK 623 million in 2010 and a loss of NOK 2,501 million in 2009.

     The Company’s total taxes for 2011 was an expense of NOK 11,682 million (which includes NOK 295 million in taxes payable and a change in deferred taxes of NOK 11,387 million), compared to an expense of NOK 175 million in 2010 and an income of NOK 699 million in 2009. The effective tax rate applied to pre-tax profit/(loss) was 28 percent for all three years.

     As a result of the previously discussed line items, total comprehensive income for the year 2011 showed a profit of NOK 30,039 million, compared to a profit of NOK 448 million in 2010 and a loss of NOK 1,801 million in 2009.

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     Profit excluding unrealized gains and losses on financial instruments (see the table below), which is a non-GAAP/IFRS financial measure, amounted to NOK 945 million in 2011, NOK 859 million in 2010and NOK 1,041 million in 2009. The increase from 2010 to 2011 was mainly due to higher net interest income, caused by higher margins on both lending and liquidity placements and the absence in 2011 of the preference share dividend expense accounted for in 2010. The reduction from 2009 to 2010 was mainly due to lower net interest income, a reduction in net realized gains/losses in the second and fourth quarter of 2010 related to termination of swap agreements and 2009’s recognized gains related to Icelandic banks. The main reason for the lower net interest income in 2010 was the accrual for Preference Share Dividends to the Government of NOK 126 million as part of the borrowing agreement from 2008. For 2009, the expected recovery rate on the Icelandic bank exposure increased, leading to an unrealized gain of NOK 91 million (at exchange rates applicable at December 31, 2009). These unrealized gains have then enhanced the calculated non-GAAP/IFRS profit for the period excluding unrealized gains/(losses) on financial instruments at fair value. The Company’s management considers profit excluding unrealized gains and losses on financial instruments to be an important measure because it provides better insight into the Company’s underlying business operations without the volatility caused by fair value fluctuations.

Reconciliation of total comprehensive income to the non-GAAP/IFRS profit for the period excluding unrealized gains/(losses)

  Year ended December 31,
(NOK millions) 2011   2010   2009  
Total comprehensive income 30,039   448   (1,801 )
Losses/(profit) for the year from discontinued operations, net of taxes 0   0   (1 )
Net unrealized losses/(gains) on financial instruments at fair value (1) (40,515 )  554   3,858  
Realized losses hedged by the Portfolio Hedge Agreement 94   0   0  
Unrealized gains/(losses) related to Icelandic bank exposure 14   17   91  
Tax-effect (2) 11,314   (160 ) 1,106  
Profit for the period excluding unrealized gains/(losses) on financial instruments at fair value 945   859   1,041  
Return on equity based on profit for the period excluding unrealized gains/(losses) on financial            
   instruments at fair value 17.2 % 17.7 % 24.2 %

 

(1)      For further details, see note 5 to our audited consolidated financial statements in Item 18.
   
(2)      28% of the unrealized items above.

     On March 1, 2012, the Board proposed no dividend related to the fiscal year 2011, compared to a dividend of NOK 500 million in 2010 and a dividend of NOK 700 million in 2009.

     Disbursements of new export-related loans from Eksportfinans amounted to NOK 33.7 billion in 2011, compared to NOK 33.7 billion in 2010 and NOK 28.1 billion in 2009. Eksportfinans’ total outstanding export-related loans increased to NOK 111.3 billion at December 31, 2011 from NOK 99.8 billion at December 31, 2010 and NOK 81.4 billion in 2009. Several factors contributed to the continuing high level of export lending in 2011. Eksportfinans remained an attractive choice by providing favorable financing offers on competitive market terms, which is reflected in the increase in the loan disbursements. The demand for Eksportfinans’ government supported export credit was particularly high in 2009 and decreased in 2010 and 2011 due to the development of floating versus fixed rates of interest. In addition, the overall market situation for Eksportfinans’ main customer groups was still good in 2011. Less competition and lending capacity by commercial banks also contributed to the high level of new loan disbursements.

     On June 24, 2009, Kommunekreditt Norge AS was sold to KLP. At the same time, NOK 11 billion of loans from Kommunekreditt to Norwegian municipalities were sold to Eksportfinans ASA at market value. Eksportfinans ASA expects to hold this portfolio of municipal loans to maturity. As part of the sale, Eksportfinans also provided financing to KLP Kreditt AS (formerly Kommunekreditt Norge AS) through a loan of NOK 34.4 billion, secured by Kommunekreditt’s loans that were outstanding as of Closing. This loan was contractually set to be repaid in eight equal, quarterly amounts, with the last installment paid in September of 2011 as per the contract. Eksportfinans’ total involvement in local government lending totaled NOK 10.4 billion at year-end 2011, compared to NOK 23.5 billion in 2010 and 40.8 billion at December 31, 2009.

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     Average balance sheet and net interest income

  2011     2010     2009
(unaudited) Average
balance
(NOK
millions) 		Interest
(NOK
millions)		 Average
rate
%		     Average
Balance
(NOK
millions) 		Interest
(NOK
millions)		 Average
rate
%		     Average
Balance
(NOK
millions) 		Interest
(NOK
millions)		 Average
rate
%
Cash, bank deposit, repo with credit                                
   institution 9,713 70 0.72 %     11,794 67 0.56 %     8,480 104 1.23 %
Municipal and county loans 16,187 487 3.01 %     33,287 872 2.62 %     48,468 1,389 2.87 %
Export-related loans 106,926 4,163 3.89 %     92,234 3,968 4.30 %     81,223 3,795 4.67 %
Debt securities 63,738 864 1.36 %     78,285 869 1.11 %     88,857 1,852 2.08 %
Cash collateral 4,824 18 0.36 %     4,648 10 0.22 %     9,175 27 0.29 %
Other related income   26           31           46    
Total interest earnings assets 201,388 5,628 2.78 %     220,248 5,817 2.63 %     236,203 7,213 3.03 %
Commercial paper 10,022 23 0.23 %     17,068 49 0.29 %     32,367 405 1.25 %
Bond debt net of reacquired debt 175,444 3,985 2.27 %     189,652 4,145 2.19 %     193,965 5,237 2.70 %
Subordinated debt and capital                                
   contribution securities 1,427 13 0.95 %     1,822 17 0.93 %     1,899 35 1.86 %
Cash collateral 8,228 18 0.22 %     5,930 13 0.22 %            
Other debt 329 13 4.08 %     324 17 5.27 %     3,301 23 0.70 %
Other related expenses   26           157           43    
Total interest bearing liabilities 195,450 4,078 2.07 %     214,796 4,398 2.04 %     231,532 11,187 2.46 %
Net interest earnings (*)   1,550           1,419           1,470    
Net yield on interest-earning assets (**)     0.71 %         0.59 %         0.57 %
   
(*)      Difference between total interest earned and total interest expense.
   
(**)      Net interest earnings divided by total interest-earning assets.

     Apart from the Icelandic bank exposure, there are no non-accruing loans. For further details, see note 29.4 to our audited consolidated financial statements in Item 18.

     The average balances shown in the table are daily averages.

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     Changes in net interest income — volume and rate analysis

     The following table breaks down changes in net interest income between changes in volume and changes in interest rates for the periods 2011, 2010 and 2009. Volume and rate variances have been calculated based on the movement in the average balances and the change in the interest rates on average interest earning assets and average interest bearing liabilities.

(NOK millions) 2011/2010 Change due to
increase/(decrease) in:		 2010/2009 Change due to
increase/(decrease) in:
  Total
change		 Volume Rate     Total
change		   Volume Rate
Interest receivable                        
Cash, bank deposits and reverse repos                        
   with credit institutions 3   (12)   15   (38 ) 41   (79 )
Municipal and county loans (385 ) (448 ) 63   (516 ) (435 ) (81 )
Export-related loans 195   632   (437 ) 173   514   (341 )
Debt securities (4 ) (161 ) 157   (983 ) (220 ) (763 )
Cash collateral 7   —   7   (16 ) (13 ) (3 )
Other related income (5 ) (5 ) —   (16 ) (16 ) —  
Total interest receivable (1) (188 ) (490 )  302   (1,395 ) (514 ) (881 )
Interest payable                        
Commercial paper (26 ) (21 ) (5 ) (356 ) (191 ) (156 )
Bond debt net of reacquired debt (160 ) (310 ) 150   (1,092 ) (116 ) (976 )
Subordinated debt and capital                        
   contribution securities (3 ) (3 ) —   (18 ) (1 ) (17 )
Cash Collateral 5   5   —   13   0   13  
Other debt (4 ) —   (4 )  (6 ) (21 ) 15 )
Other related expenses (132 ) (132 ) —   116   116   —  
Total interest payable (1) (319 ) (393 ) 74   (1,344 ) (427 ) (917 )
Movement in net interest income                        
(Decrease)/increase in interest receivable (188 ) (490 ) 302   (1,395 ) (514 ) (881 )
Decrease/(increase) in interest payable 319   393   (74 )  1,344   427   917  
Total change in net interest income 131   (97 ) 228   (51 ) (87 ) 36  
   
(1)      The volume and rate variances on total interest receivable and total interest payable are calculated on the total amounts, which does not add up to the total of each group of balance sheet item. This is due to the different rate of growth in volume on individual balance sheet item and the total volume.

     The Company had loan commitments at December 31.2011 totaling approximately NOK 2.2 billion, NOK 21 billion at December 31, 2010 and NOK 31 billion at December 31, 2009. Commitments for government-supported loans represented approximately 38% and 41% of total commitments outstanding as of December 31, 2011 and 2010, respectively, while commercial loans represented 62% and 57% as of the same dates. Loan commitments at December 31, 2011 were significantly lower than the preceding two years due to the fact that most of the loan commitments have been transferred to the Government following its decision to assume administration of the government-supported export credit scheme in November 2011. For further details, see Item 4.B. “Business Overview — LOANS — Export Lending — Loan Commitments”.

     Increases or decreases in loan commitments and disbursements from year to year may not necessarily be indicative of trends in credit demand. It has been the Company’s experience that disbursements related to contract financing occur in installments over a period of several years, in contrast to the other types of financing, which are generally disbursed in a single amount. Loan commitments and disbursements related to contract financing are also affected by the timing of the signing of the underlying commercial contract and the delivery schedule agreed. The drawdown period for contract financing can be as long as five to seven years. Other types of lending are normally disbursed during the same calendar year that the loan application is filed.

     Total loan disbursements were NOK 33,685 million during 2011, compared with 33,654 million in 2010 and NOK 73,371 million in 2009. The high amount of new lending from Eksportfinans in 2009 reflects the one-time inclusion of the loan to Kommunekreditt, now KLP Kreditt AS, and the Retained Municipal Portfolio, related to the sale of Kommunekreditt. Disbursements of export related loans amounted to NOK 33,685 million in 2011 compared with NOK 33,654 million in 2010 and 28,110 million in 2009. In 2009, Eksportfinans sold Kommunekreditt, lending it NOK 34.4 billion, an amount equivalent to

40
  

Eksportfinans’ outstanding funding of the activities of Kommunekreditt at Closing. Loan disbursements for municipal and county transactions were NOK 8,047 million in 2008. No additional loan disbursements have been made for municipal and county transactions since the sale of Kommunekreditt. Loan disbursements for export transactions in 2011, 2010 and 2009 also included loans acquired from shareholders amounting to NOK 3,644 million and NOK 2,867 million and NOK 1,263 million, respectively. These loans were principally U.S. dollar and Norwegian kroner-denominated loans to the shipping and offshore oil and gas sectors. Loan disbursements for loans acquired from shareholders fluctuate from year to year depending on the volume of eligible loans and the banks funding requirements.

     Export-related loans accounted for NOK 111.3 billion, or 91.3% of total loans outstanding at December 31, 2011, as compared with NOK 99.8 billion, or 81.0% of total loans outstanding in 2010, and NOK 81.3 billion, or 67% of total loans outstanding in 2009.

     Export transactions

     The demand for loans from Eksportfinans was primarily driven by general macro-economic factors and the competitiveness of the loans offered. Key macro-economic factors included the level of interest rates and global demand for goods and services provided by Norwegian industry. We believe that the competitiveness of the Company’s loans reflected our relatively low cost of funds, low operating costs and favorable credit ratings, as well as the terms of the program we administer on behalf of the Government. Eksportfinans experienced a continued high level of demand for new loans in 2011. In 2011, 19% of the total export-related loans disbursed were government-supported loans (8% in 2010 and 51% in 2009), while 81% were commercial loans (44% in 2010 and 9% in 2009). As a consequence of falling interest rates during 2011, more borrowers chose to draw the loan on commercial terms with floating interest rate.

     In 2011, of the total loan disbursements of export transactions, ship financing represented 29% of the disbursements (47% in 2010 and 46% in 2009), capital goods represented 41% in 2011, 27% in 2010 and 54% 2009. No new loans were given to international and export-related activities during 2009. In 2010 the Company re-entered the market for loans to international and export-related activities. Loan to international and export-related activities represented 31% of new disbursements in 2011 compared to 26% in 2010. For further details, see Item 4.B. “Business Overview — LOANS — Analysis of Loan — Composition of Loans”.

     As of December 31, 2011, loans for ship financing represented 40% of total export transaction loans outstanding (45% as of December 31, 2010 and 45% as of December 31, 2009). Loans for capital goods as of December 31, 2011 comprised 30.5% of total export transaction loans outstanding (32% as of December 31, 2010 and 34% as of December 31, 2009). Loans for additional export-related and international activities include loans for the international expansion of Norwegian industry and for domestic investments in Norway. Loans for additional export-related and international activities represented 29% of total outstanding export transaction loans in 2011, (22% as of December 31, 2010 and 20% as of December 31, 2009). For further details, see Item 4.B. “Business Overview — LOANS — Analysis of Loans — Composition of Loans”.

     Municipal and County Transactions

     Since the sale of Kommunekreditt in 2009, no loan disbursements have been made for municipal and county lending. For further details of the sale of Kommunekreditt, see Item 4.B. “Business Overview — Loans — Municipal Lending — Sale of Kommunekreditt”. At December 31, 2011, the Retained Municipal Portfolio amounted to NOK 10.5 billion.

     Critical Accounting Policies

     The United States Securities and Exchange Commission (SEC) has provided guidance for the disclosure of critical accounting policies. The SEC defines critical accounting policies as those that require application of management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods.

     The Company makes estimates and assumptions that affect the reported amounts of assets and liabilities. Estimates and judgments are continually evaluated and based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Our accounting policies and critical estimates and judgments are described in notes 2 and 3 to our audited consolidated financial statements in Item 18. Set forth below is a discussion of our only critical accounting policies.

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     Fair value of financial instruments

     The Company has elected the fair value option for most financial assets and liabilities. The Company generally goes through the following process to establish fair value for each financial instrument:

-First, the Company seeks to identify current quoted prices in active markets.
-If there are no current quoted prices, the Company seeks to identify recent transactions for the same instrument.
-If there are no quoted prices for the same instrument, the Company seeks to identify quoted prices for another instrument judged to be substantially the same.
-If there are no recently quoted prices for the financial instrument or similar instruments, the Company seeks to identify appropriate market-quoted rates (e.g. yield curves, volatilities and currency rates) to be used as inputs into a valuation technique.
-In certain instances, it is necessary for the Company to use unobservable inputs into the valuation technique. These inputs are to the fullest extent possible based on other observable prices or rates identified during the above mentioned steps.

     The fair value of the majority of the Company’s financial instruments is calculated using a valuation technique. This is partly because the loans disbursed are not traded in active markets, but also because the trading volume of those securities that are traded in secondary markets has decreased significantly.

     The methodology used for estimating the fair value using a valuation model is to calculate the expected cash flows under the terms of each specific contract, and then discount these back to present values. The expected cash flows for each contract are either determined directly by reference to actual cash flows implicit in observable market prices, or through modeling cash flows by using appropriate financial market pricing models. The valuation technique makes maximum use of market inputs, and relies as little as possible on entity-specific inputs. These techniques use observable market prices and rates as inputs, including interest rate yield curves for substantially the full term of the asset or liability, equity and commodity prices, option volatilities and currency rates. In some instances, the input to the valuation technique is determined using a regression analysis utilizing observable market data. In certain cases, the valuation techniques incorporate unobservable inputs. The fair value measurement generally incorporates appropriate credit spreads obtained from the market.

     For export lending, credit spreads are based on initial spreads at the time of loan origination. The initial spread is usually not adjusted because these loans are fully guaranteed by a bank or the Guarantee Institute. As discussed under Item 3.D. “Key Information — Risk Factors”, Eksportfinans relies on credit ratings. As ratings are longer term through the cycle assessments they by definition cannot assess day to day credit risk in an adequate manner. Consequently, the Company relies on other market signals in day to day business. The Company believes it would be reasonable to assume, in the absence of evidence to the contrary, that no changes have taken place in the spread that existed at the date the loan was made. The Company does make reasonable efforts to determine whether there is evidence that there has been such a change in spread, including monitoring of credit ratings of guarantors and analysis of the development of initial margins over time. The spreads applied to fair value measurement of export loans are unobservable in the market. The method that the Company has deemed the most correct one in absence of suitable market spreads has produced variation in credit spreads of 2 basis points on average for the guaranteed portfolio over the history for which the Company has data for. As per year-end 2011 the guaranteed portfolio constitutes 66 percent of the loan portfolio.

 

     Plain borrowings are priced based on credit spreads obtained in the market. Our structured borrowings were until the Government's decision in November priced based on our prices from new issues. Following the substantial ratings downgrades, which effectively stopped new issuances by the Company, the Company has used quotes from Eksportfinans traded debt for corresponding maturities and currencies both for structured and plain funding. The credit spreads for the combined borrowing portfolio have varied less than 26 basis points during a month 95% of the time over the past five years. Such credit spread volatility in the funding portfolio as of year end 2011 going forward would result in a month on month gain/loss of less than NOK 1,900 million (NOK 1,520 million as of December 31, 2010) with 95% probability. The increase mainly comes from increased credit spread volatility since the multi-notch downgrade of Eksportfinans, not the spread sensitivity of the funding portfolios. A one basis point increase in credit spreads will give an estimated gain of NOK 76 million as of December 31, 2011 (NOK 52 million as of December 31, 2010). Based on five years of credit spread history, the estimated profit/loss over one year is less than NOK 6,200 million with a 95% probability. This high number is also a result of the substantial ratings downgrades that have caused increased volatility in the credit spreads of the Company's own debt. We do not expect volatility to return to the levels that existed prior to the Government's decision any time soon.

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     Fair value of commercial paper debt (CP) is established using a valuation model technique based on discounted cash flows, incorporating appropriate interest rate curves. Interest rate curves are obtained from market sources and credit spreads are based on initial margin relative to LIBOR at the time of borrowing. As the maturity of the CP is so short that the credit spread sensitivity per basis point is only 0.001% of the portfolio, no credit spread corrections are performed. Increasing the spreads applied in fair value measurement by 10 basis points would decrease the value of CP by approximately NOK 0.7 million as of December 31, 2011 (NOK 0.4 million as of December 31, 2010).

     For further details on sensitivity analysis for fair value measurement using unobservable inputs, see note 4 to our audited consolidated financial statements in Item 18.

     The use of valuation techniques is subject to the Company’s internal control and approval procedures.

     The Company does not have securities backed by pools of U.S. mortgages and therefore has not used traded indexes of U.S. mortgages pools such as ABX or CMBX to price securities.

     For further details on fair value measurement techniques and assumptions, see note 4 to our audited consolidated financial statements in Item 18.

     Pension commitments

     For a description of the key economic and actuarial assumptions related to pension commitments, see note 3.2 to our audited consolidated financial statements in Item 18. For further information related to pension commitments, see notes 2.12 and 8 to our audited consolidated financial statements in Item 18.

     Accounting developments

     For a description of the basis of preparation and the latest development in the accounting standards, see note 2.1 to our audited consolidated financial statements in Item 18.

     B. LIQUIDITY AND CAPITAL RESOURCES

We have shown a strong financial performance in the financial year of 2011 and are solid with a core capital adequacy ratio of 16.1 per cent at the end of 2011. The Board puts emphasis in maintaining the Company's solidity and therefore decided not to propose a dividend for 2011.

We believe we are well positioned to preserve value and continue operations for the years to come. In addition to comfortable liquidity reserves and good solidity, we have a good anticipated balance between assets and liabilities.

     General

      Until the Government decision in November 2011, the Company primarily financed its operations through equity capital and through borrowings in the international money and capital markets. In 2011 the Company successfully issued three benchmark transactions, one CHF, one USD and one JPY transaction. Eksportfinans continued to successfully fund itself in the medium-term notes markets in Asia, Europe and the USA.

      New funding in 2011 amounted to NOK 51.6 billion through 380 individual trades compared to NOK 72.2 billion through 721 individual trades in 2010 and NOK 69.3 billion and 1,023 trades in 2009.

     After the Government's decision triggering the substantial downgrades in the Company's credit ratings, the Company has limited funding abilities and the prime focus for the liquidity reserve portfolio is to preserve sufficient liquidity .Our asset and liability balance is frequently assessed and stressed against adverse market scenarios in combination with our current funding cessation. We believe that the asset-liability gap is currently good and is expected to stay positive despite a continued absence of funding.

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     Commercial paper borrowings

     Commercial paper borrowings in 2011 were primarily made through the Company’s U.S. and euro commercial paper programs. As of December 31, 2011, the Company’s commercial paper programs allowed for maximum borrowings of approximately USD 12 billion (approximately NOK 70 billion), and the combined average amount outstanding under those programs for the year was USD 1.7 billion (NOK 10 billion). Commercial paper borrowings (related to short-term commercial paper programs) outstanding as of December 31, 2011, 2010 and 2009 were NOK 5.8 billion, NOK 3.3 billion and NOK 19.1 billion, respectively.

     Bond borrowings

     In June 2006 Eksportfinans introduced eFunding, a proprietary web-based platform for the issuance and documentation of structured bond transactions. eFunding enables arranger banks to price and arrange bonds issued in the Company’s name 24 hours a day, seven days a week, therefore providing investors with the ability to lock in their preferred market conditions outside Oslo business hours.

     The online eFunding service ceased operation on November 18, 2011. There were 34 licensed eFunding dealers at the time that operations ceased, including all lead arranger banks under the EMTN program. There have been 61.255 price quotes since launch, of which around half were enquiries outside Eksportfinans’ working hours. The percentage of all pricing activities under Eksportfinans’ EMTN program conducted online via the eFunding platform was around 65% of the total number of price quotes/mandates issued in 2011, slightly lower than 2010.

     Senior funding

     In 2011, the Company raised the equivalent of NOK 51.6 billion in bonds (including structured and non-structured notes) in various currencies, compared to NOK 72.2 billion in 2010 and NOK 69.3 billion in 2009. The Company made these bond borrowings through domestic and international issuances of debt securities in public offerings and private placements. The choice of market, currency and structure of the Company’s debt issuances depended, to a large extent, on which type of issuance results in the lowest overall cost of funds, taking into account necessary hedging transactions as well as the Company’s limits on diversification and mix of plain vanilla versus structured funding. The Company’s total bond debt at December 31, 2011, 2010 and 2009 was NOK 135,727 million, NOK 183,095 million and NOK 178,526 million, respectively.

     Eksportfinans’ EMTN program facilitates borrowings in a variety of currencies and with different repayment structures, with any maturity as may be agreed between the Company and the relevant purchaser, and as indicated in the applicable final terms. The current size of the EMTN program is USD 40 billion and at December 31, 2011 USD 18,645 million was outstanding under this program compared to USD 20,829 million at December 31, 2010 and USD 22,632 million at December 31, 2009.

     A U.S. medium-term note program was established in June 2004, under which USD 12,883 million was outstanding as of December 31, 2011, compared to USD 11,053 million at December 31, 2010 and USD 10,286 million at December 31, 2009.

     In the Australian market, the Company has an AUD 2,000 million medium-term note program. As of December 31, 2010, no notes were outstanding under this program.

     The Company is registered as a borrower in the domestic Japanese market through a securities registration statement providing for a primary and secondary shelf. As of December 31, 2011, JPY 529,393 million in uridashi offerings was outstanding. In 2011, Eksportfinans issued its second Samurai bond transaction which is a bond issued by a foreign issuer into domestic Japanese investors. This type of bond issue is governed by Japanese law and issued off Eksportfinans’ primary Japanese shelf. As a consequence JPY 30 billion was drawn down off the primary shelf in 2011.

     The following table shows the composition of the Company’s senior bond debt and Commercial Paper debt measured at fair value as at December 31, 2011, 2010 and 2009:

NOK millions

Composition of Bond Debt & Commercial Paper Debt
Structure Type December 31, 2011 December 31, 2010 December 31, 2009
Non-Structured 89,111 98,856 114,413
Foreign Exchange Linked 10,046 26,160   25,857
Equity Linked 28,409 43,606   39,996
Commodity Linked   2,538   2,342     3,399
Other 11,385 15,437   13,970

 

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     The following information provides further information as to the average amounts outstanding and related interest rates applicable to senior bond debt and commercial paper debt:

NOK millions

Bond Debt & Commercial Paper Debt
Period Average amount outstanding Maximum amount outstanding Actual amount outstanding at
December 31.		 Average interest
rate
2011 180,067 194,078 141,489 2.10%
2010 205,568 216,261 186,402 2.47%
2009 216,706 246,369 197,634 2.97%

      Subordinated Loan Capital / Core Capital

     In December 1995, the Company issued JPY 15 billion of 20-year subordinated debt through a private placement in Japan. This debt is categorized as supplementary capital (lower tier II) according to Norwegian capital adequacy regulations.

     In February 2003, Eksportfinans issued GBP 50 million Non-cumulative Undated Step-Up Capital Contribution Securities (the Capital Contribution Securities). Interest is payable on the securities, subject to certain conditions, annually in arrears at a rate of 5.918% with respect to the period from and including the issue date to, but excluding, February 19, 2013. Thereafter, interest on the securities will be payable quarterly in arrears at a rate of 2.32% above three-month LIBOR. The securities may be redeemed at the option of Eksportfinans in whole on February 19, 2013 or on any interest payment date thereafter or in the event of certain tax or regulatory changes affecting Eksportfinans, in each case subject to prior approval from the Norwegian Banking Insurance and Securities Commission. The securities are listed on the Luxembourg Stock Exchange. This debt may amount to 15% of core capital according to Norwegian capital adequacy regulations. Any additional amount is defined as additional capital.

     Repo Facility Agreements

     Eksportfinans currently has two Credit Line (Repo) Agreements. One is a committed facility with a syndicate of major owner banks consisting of Danske Bank A/S, DNB Bank ASA and Nordea Bank A/S with a maximum facility amount of USD 2 billion backing the ordinary course of business. This agreement is annually renewable by mutual agreement. No amounts have been drawn under this agreement. The other agreement is a non-committed repo agreement with DNB Bank ASA with no fixed amount but under which EUR 600 million has been drawn. This agreement has no termination date, but the drawn amount will be repaid on February 26, 2015 at the latest. For further details, see Item 7.B. “Related Party Transactions — Repo Facility Agreements”. Eksportfinans has no access to the Repo Facility Agreement made available by the Central Bank in Norway to Norwegian banks.

     Liquidity Portfolio

     We have a significant portfolio of securities, consisting of the Liquidity Reserve Portfolio and the PHA Portfolio, each as further described below. Together, these securities are also referred to as the “Liquidity Portfolio”. The Liquidity Portfolio is held and managed in order to provide liquidity. The securities consist mostly of investment-grade debt and debt-related securities, mainly senior bank notes and bonds, highly rated covered and asset-backed securities and some bonds issued by unrated Norwegian savings banks.

     Liquidity Reserve Portfolio. The Liquidity Reserve Portfolio was established in the first half of 2008 after the entry into the Portfolio Hedge Agreement and had a market value of approximately NOK 29 billion as of December 31, 2011 (NOK 32 billion as of December 31, 2010). The portfolio consists of senior bonds issued by banks with short maturities and an average rating of AA. The primary purpose of the Liquidity Reserve Portfolio is to provide a liquidity buffer in scenarios where funding cannot be secured according to plan. It can also be used as a buffer for fluctuations in the cash flow profile, due to either unexpected prepayment on the asset side or liabilities maturing early due to structured funding calls/triggers being activated. The Company invests in money market instruments, such as commercial paper, certificates of deposit, repurchase agreements and bank deposits, and in longer-term securities such as bonds and covered bonds. . The issuers of securities or deposit-taking institutions accepted by Eksportfinans for the purpose of such investments are chosen according to the same credit criteria as guarantors for loans. For further details, see Item 4.B. “Business Overview — LOANS — Export Lending — Credit Support, Credit Monitoring and Assessment”.

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     PHA Portfolio. The underlying securities of the PHA Portfolio had a market value of approximately NOK 23 billion as of December 31, 2011 (approximately NOK 36 billion as of December 31, 2010) and consists of approximately 53% senior bonds from banks, agencies and treasuries with an average rating of A-. The remaining 47% of the portfolio consists of asset backed securities (ABS) with an average rating of AA, the third highest rating. ABS’s are securities that are based on pools of assets such as mortgage loans or student loans, or collateralized cash flows from a specified pool of underlying assets. The issuer is usually a special purpose vehicle that has purchased the underlying assets from an originator of the assets. In most cases, the ABS transactions are divided into tranches of varying seniority. The Company may engage in repurchase and reverse repurchase transactions as well as buy and sell/sell and buy back transactions (“Repo Transactions”) in respect of securities in the portfolio. Eksportfinans may sell securities but is obliged to pay a pro rata amount to each guarantor that equals face value of each sold security. For further details, see Item 7.B. “Related Party Transactions — The Portfolio Hedge Agreement”.

     The Company maintains these substantial liquidity reserves in the form of financial investments based on its funding and on repayments of loans with shorter maturity than the underlying funding. Management believes that this funding match helps to ensure that the Company, to a large extent, has sufficient funds to cover loan approvals given for future disbursements, particularly given the ability to repo certain portions of the portfolio. Consequently, management believes the Company maintains a satisfactory liquidity position in funds of varying maturities.

     From an accounting perspective, the Liquidity Portfolio can be divided into the “Trading portfolio” and “Other securities at fair value through profit and loss” as specified in the table below. The Trading portfolio consists of securities which are traded on a regulated market and which have been acquired for trading and yield-enhancement purposes.

 

    As of December 31,
(NOK millions)   2011 2010 2009
Liquidity Reserve Portfolio Trading portfolio      
  Money market instruments — 585 —
  Senior bank notes and bonds 11,109 16,973 11,730
  Treasury Bills 7,079 8,633 11,016
  Asset Backed securities — — —
  Covered Bonds 10,299 3,269 —
  Other securities 48 2,496 1,183
  Total trading portfolio 28,535 31,956 23,929
  Other securities at fair value through profit and loss      
  Money market instruments — — —
  Senior bank notes and bonds — — —
  Treasury Bills — — —
  Asset Backed securities — — —
  Covered Bonds — — —
  Other securities — — —
  Total other securities at fair value through profit and loss 0 0 0
  Total Liquidity Reserve Portfolio 28,535 31,956 23,929
PHA Portfolio Trading portfolio      
  Money market instruments — — —
  Senior bank notes and bonds 465 452 468
  Treasury Bills — — —
  Asset Backed securities 10,954 16,582 21,734
  Covered Bonds — — —
  Other securities — — —
  Total trading portfolio 11,418 17,033 22,202
  Other securities at fair value through profit and loss — — —
  Money market instruments — — —
  Senior bank notes and bonds 11,751 18,677 29,063
  Treasury Bills 204 254 896
  Asset Backed securities — — —
  Covered Bonds — — —
  Other securities — — —
  Total other securities at fair value through profit and loss 11,955 18,931 29,959
  Total PHA Portfolio 23,374 35,964 52,161
  Total Liquidity Portfolio 51,908 67,921 76,090
 

     The securities in the Liquidity Portfolio are measured at fair value. Fair value is established as described in note 4 to our audited consolidated financial statements in Item 18. Credit spread sensitivity is described in note 28.7 to our audited consolidated financial statements in Item 18.

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     The following table sets forth with respect to the Liquidity Portfolio the maturities of the note debt (including subordinated debt and Capital Contribution Securities, and after deducting the carrying amount of debt securities repurchased by Eksportfinans), loans and long-term investments as of December 31, 2011, and the cumulative liquidity (as measured by short-term liquidity as of December 31, 2011, plus the difference between the amounts of maturing loans/investments and the amounts of maturing bond debt) based on bond debt/long-term investments and loans outstanding at such date. The amounts are based on estimated maturities.

Year   Long-Term
Debt Maturing (4)		   Loan Receivables
Maturing		   Long-Term
Investments
Maturing (PHA
Portfolio) (5)		   Cumulative Liquidity
      (NOK millions)    
Short-term liquidity at December 31, 2011 (1)               88,041
2012   38,873   25,779   10,144   85,091
2013 (2)   40,610   24,346   4,998   73,825
2014   24,357   16,901   3,022   69,391
2015 (3)   22,919   19,737   1,289   67,498
2016   20,690   15,243   1,435   63,486
2017   9,349   5,309   1,506   60,952
2018   1,910   4,032   551   63,625
2019   2,635   4,193   559   65,742
2020   979   2,695   316   67,774
2021   4,526   1,193   251   64,692
Thereafter   34,794   3,459   1,182   34,539
Total   201,642   122,887   25,253    

 

(1) Short-term liquidity is comprised of the sum of our Liquidity Reserve Portfolio, deposits, commercial paper funding, cash collateral, derivatives and mark-to-market adjustments.
   
(2)      Includes the GBP 50 million Capital Contribution Securities, which are redeemable from February 19, 2013.
   
(3)      Includes the JPY 15 billion subordinated debt issue maturing in 2015. This debt is categorized as supplementary capital (lower tier II) according to the Norwegian capital adequacy regulations.
   
(4)      Net of our repurchases of own debt securities. The column includes single- and multi-callable issues. These issues have been categorized by expected maturity.
   
(5)      Represents principal outstanding amount and accrued interest of investments in the PHA Portfolio

          Capital Adequacy

     Capital adequacy is calculated in accordance with regulations promulgated by the Banking, Insurance and Securities Commission of Norway. See also Item 4.B. “Business Overview — Supervision and Regulation”. Under these regulations, the capital adequacy requirement is 8%. As of December 31, 2011, Eksportfinans’ capital adequacy ratio was 19.4%, compared with 17.6% on December 31, 2010 and 13.3% on December 31, 2009. The core capital adequacy ratio was 16.1% at December 31, 2011, compared to 12.7% at December 31, 2010 and 9.7% at December 31, 2009.

     Dividends are determined with the aim of ensuring an adequate level of growth and profitability for Eksportfinans as well as a satisfactory return for its shareholders. On April 8, 2010, the General Assembly and the Council of Representatives declared dividends of NOK 700 million for 2009. On April 7, 2011, the General Assembly and the Council of Representatives declared a dividend of NOK 500 million related to the fiscal year 2010. The Board has decided not to propose a dividend related to the fiscal year 2011.

     During the past year, Eksportfinans has complied with all its externally imposed capital requirements.

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     The tables below give details of the Company’s risk capital, risk-weighted balance sheet and off-balance sheet items at December 31, 2011, 2010 and 2009:

Risk capital

  Year ended December 31,
(NOK millions and as percentage of risk-weighted assets and off-balance sheet 2011     2010     2009
Share capital 2,771     2,771     2,771    
Share premium reserve 177     177     177    
Reserve for unrealized gains 71     71     403    
Other equity 31,675     2,137     2,057    
Total equity 34,694     5,156     5,408    
Declared dividends —     500     700    
Capital contribution securities 464     453     466    
Deductions 30,379     1,038     1,358    
Additions 7     6     4    
Total core capital: 4,786 16.1 % 4,077 12.7 % 3,819 9.7 %
Subordinated debt 928     1,519     1,372    
Capital contribution securities not included in core capital —     —     —    
Deductions —     —     —    
Additions 46     46     46    
Additional capital: 975 4.9 % 1,565 4.9 % 1,418 3.6 %
Total risk capital 5,761 19.4 % 5,642 17.6 % 5,237 13.3 %
     

Risk-weighted balance sheet and off-balance sheet items

  Year ended December 31,
(NOK millions) 2011     2010     2009
  Book
value   		 Weighted
value   		   Book
value 		Weighted
value 		  Book
value 		Weighted
value
Loans due from credit institutions 40,340   8,068   43,014   8,603   64,126   12,825  
Loans due from customers 96,541   10,054   85,095   9,008   66,677   8,152  
Securities 51,908   6,286   67,921   8,885   76,090   11,581  
of which held for trading 39,953   4,013   49,244   5,228   46,131   5,752  
Financial derivatives 19,446   2,354   15,403   2,344   14,344   2,599  
Other assets 5,693   171   4,116   210   4,018   807  
Total assets on balance 213,929   26,933   215,549   29,049   225,254   35,964  
Off-balance sheet items     304       358       465  
Operational risk     2,424       2,577       2,689  
Foreign currency exchange risk     0       0       162  
Total risk-weighted assets     29,661       31,984       39,280  
     
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     C. RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES, ETC.

     Eksportfinans has developed a platform called “eFunding” for a straight-through process of funding transactions with the goal to automate the process and reduce administrative resources and operational risks. See “Item 5.B. — Liquidity and Capital Resources — Bond borrowings”.

     D. TREND INFORMATION

     Lending

     From 2006 through 2008, there was an increase in the total number and volume of loan applications received by the Company. This increase has been due, among other causes, to the high price of oil, which led to an increase in the demand for offshore supply vessels and equipment for the oil and gas sector, favorable terms for the government supported financing scheme and the current need for liquidity in the loan market. Loan applications dropped during 2009 but the volume for 2010 and 2011 is in line with the volume of loan applications for 2008. Going forward, new export lending will be made by the new state entity except for legally binding loan commitments.

     Funding

     Following the Government’s decision to establish a new state owned entity to manage the export financing scheme on November 18, 2011, the Company currently does not see a need to use its capital markets funding programs, but plans to keep the programs available should this change. Up until November 18, 2011, Eksportfinans remained an active global issuer with a continued emphasis on Japan and the United States. The Company also had good access to both private placement flows and public markets in spite of the continued market uncertainty caused by the sovereign debt crisis in peripheral Europe.

      E. OFF BALANCE SHEET ARRANGEMENTS

     Except as disclosed under Item 5.F. “Contractual Obligations and Contingent Commitments”, the Company has not entered into any transactions, arrangements or other relationships with unconsolidated entities or other persons that have or are reasonably likely to have a current or future material effect on liquidity or the availability of or requirements for capital resources. The Company invests in asset backed securities issued by other entities, however these investments do not provide exposure to the majority of the benefits and therefore to the risks incident to the activities of the entities. Eksportfinans has relationships with variable interest entities in the form of fully guaranteed lending to certain special purpose entities. Given the fully guaranteed nature of this lending, management does not consider consolidation of these entities to be reasonably possible.

     F. CONTRACTUAL OBLIGATIONS AND COMMITMENTS

     The table below gives details of the contractual long-term obligations and commercial commitments of the Company as of December 31, 2011.

(NOK millions)   Payments due by period      
Contractual obligations Total Up to and
including
1 year		 From 1 year
up to and
including
3 years		 From 3 years
up to and
including
5 years		 After
5 years
Bond debt 207,433   109,722   50,743   32,161   14,807  
Operating leases 29,485   7,592   15,024   6,375   494  
Other liabilities 10,876   10,464   10   31   372  
Total 247,794   127,777   65,777   38,567   15,673  
 

 

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(NOK millions) Amount of commitment expiration per period 
Other commercial commitments Total Up to and
including
1 year 		From 1 year
up to and
including
3 years		 From 3 years
up to and
including
5 years		 After
5 years
Commercial loan commitments (1) 3,086 3,086 0 0 0
Financial guarantees 1,422 1,422 0 0 0
Total 4,508 4,508 0 0 0

 

(1)      Based on signed loan agreements.

     Information on the nature of the Company’s operating lease commitments is provided in note 6 to our audited consolidated financial statements in Item 18.

     Our commercial commitments are explained in note 31.3 to our audited consolidated financial statements in Item 18.

Item 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

     A. DIRECTORS AND SENIOR MANAGEMENT

     The directors and the principal executive officers of Eksportfinans as of December 31, 2011 were:

Name   Title
Geir Bergvoll   Chairman of the Board and Director
Carl Erik Steen   Vice Chairman of the Board and Director
Tone Lunde Bakker   Director
Live Haukvik Aker   Director
Tor Østbø   Director elected by the employees
Bodil P. Hollingsæter   Director
Marianne Heien Blystad   Director
Christian Berg   Director
Mikael Mogensen   Alternate Director elected by the employees
Gisele Marchand   President and Chief Executive Officer
Christian Grøm   Executive Vice President, Risk Management
Carine Lindman (1)   Executive Vice President & General Counsel
Geir Ove Olsen   Executive Vice President, Financial Control
Elise Lindbæk   Executive Vice President, Staff
Olav Einar Rygg   Executive Vice President, Lending
Oliver Siem   Executive Vice President, Capital Markets
Ivar Slengesol   Executive Vice President, Business Development
   
(1)Ms. Carine Lindman resigned from her position effective February 1, 2012. Mr. Jens Feiring, former Executive Vice President & General Counsel, reassumed the position.

     Mr. Geir Bergvoll became Chairman of the Board in 2008, and is head of the M&A Division of DNB Bank ASA. He has 25 years of diversified management experience in the Norwegian banking sector.

     Ms. Tone Lunde Bakker became a member of the Board of Directors in 2009 and is Executive Vice President - Corporate & Institutional Banking at Danske Bank Norway. She holds directorships with Krogsveen AS, Oslo.

     Mr. Carl Erik Steen became Vice Chairman of the Board in 2008 and was the head of the Shipping, Oil Services and International Division at Nordea Bank Norge ASA until February 2011 when he retired. He has 25 years of management experience in international banking. Mr Steen holds directorships with RS Platou AS, Eitzen Chemical AS, Wilh. Wilhelmsen Holding ASA and AS Bemacs.

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     Ms. Bodil Palma Hollingsæter became a member of the Board of Directors in 2004. She is a Regional Director for Nord-Møre at Sparebanken Møre until February 29, 2012. From March 1, 2012 she takes up the position as regional director for Innovation Norway. Ms. Hollingsæter holds directorships with Møre Eiendomsmegling and Molde Næringsforum.

     Ms. Live Haukvik Aker became a member of the Board of Directors in 2004. She was a Management Consultant at Considium AS until February 29, 2012. From March 1, 2012 she takes up the position as CFO at Komplett ASA. She has previously been President and CEO of Goodtech ASA, CFO at Tandberg Data ASA and Grenland Group. She holds directorship with Borgestad AS, Grenland Football AS, Stiftelsen Handelshøyskolen BI, Gera Technology AS and Sparebank1 Buskerud-Vestfold.

     Mr. Tor Østbø was elected by the employees to become a member of the Board of Directors in 2005. His term expires in 2013. He is a Senior Vice President of Eksportfinans ASA, where he has been employed since 1982.

     Mr. Mikael Mogensen was elected by the employees to become an alternate member of the Board of Directors in 2009 and his term expires in 2013. He joined Eksportfinans in June 2007 as Senior Vice President and is Head of Investments and Liquidity Management.

     Mr. Christian Berg became a member of the Board of Directors in 2011. He was President and CEO of Hafslund ASA until January 6, 2012. Mr Berg joined Hafslund in 1998, having previously worked at Price Waterhouse and as General Manager of the investment company Brothers AS. Mr Berg holds directorships with AS Hamang Papirfabrikk and Brothers AS.

     Ms. Marianne Heien Blystad became a member of the Board of Directors in 2007 and is an Attorney at Law of the law firm Ro Sommernes DA. In addition, Ms Heien Blystad has experience from corporate banking, shipping and offshore. She holds directorships with Opera Software ASA, Sørenga Utvikling AS, Edda Utvikling AS and Songa Shipping.

     Ms. Gisele Marchand joined the Company in 2008 as President and CEO. She had previously been CEO of the Government Pension Fund and the Batesgroup A/S, and held several top positions with DNB Bank ASA. Mrs. Marchand holds directorships with Norske Skog ASA, Oslo Børs Holding ASA, Fornebu Utvikling ASA, Gjensidige Forsikring ASA and Giek Kredittforsikring AS.

     Ms. Carine Lindman joined Eksportfinans in September 2011 as Executive Vice President and Director of the Legal Department. She is a lawyer and previously worked at Aker Solutions ASA, the Norwegian FSA (Finanstilsynet), and the law firm Wiersholm. Ms. Lindman resigned from her position effective from February 1, 2012.

     Mr. Jens O. Feiring joined Eksportfinans in 1974 as Legal Advisor. Since 1981, he served as an Executive Vice President and Director of the Legal department until September 2011, when he retired. Following Ms. Lindman's resignation, Mr. Feiring accepted to reassume the position as Executive Vice President, General Counsel and Director of Legal and Compliance.

     Mr. Christian Grøm joined Eksportfinans in 2009 as Executive Vice President and Director of Risk Management. He came from the position as Senior Vice President within risk management at DNB Bank ASA.

     Ms. Elise Lindbæk joined Eksportfinans in 1991 and is Executive Vice President and Director of Staff since 2008. She has worked within export lending, treasury, funding and communications at Eksportfinans prior to taking up her current position. Mrs. Lindbæk is secretary to the Board of Directors since 2005.

     Mr. Geir Ove Olsen joined Eksportfinans in 2008 as Executive Vice President, Financial Control. He came from the position of CFO in Toyota Kreditbank GmbH, Norway, and has previous working experience from Dyno Industrier ASA, Sentralskattekontoret for storbedrifter (“Inland Revenue Service — Major Corporations”) and Puget Sound Bank in Seattle, United States.

     Mr. Olav Einar Rygg joined Eksportfinans in 1988. From 1993, he has been Executive Vice President and Director of Lending. He has previous work experience from ABB, Den norske Hypotekforening, Christiania Bank (now Nordea) and the Norwegian Army.

     Mr. Oliver Siem is Executive Vice President and Director of Capital Markets since 2009. He joined the Finance Department at Eksportfinans in 1998. He has previous work experience from The Norwegian Trade Council, The Ministry of Foreign Affairs and Norges Kommunalbank.

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     Mr. Ivar Slengesol joined Eksportfinans in 2010 as Executive Vice President and Director of Business Development. He came from the position as CEO of the offshore wind company OceanWind and has a diversified international background.

     Eksportfinans believes there are no family relationships between any of the above officers or directors, nor are there any arrangements or understandings under which any of these officers or directors were elected to serve. Certain of Eksportfinans’ directors are also directors and/or officers of certain of Eksportfinans’ shareholders.

     Mr. Bergvoll, Ms. T. Lunde Bakker and Mr. Steen are owners’ representatives on the Board of Directors.

     B. COMPENSATION

     For further details, see note 33 to our audited consolidated financial statements in Item 18.

     The Funding Agreement entered into with the Government places certain limits on executive compensation, as discussed in Item 7.B. “Related Party Transactions”.

     C. BOARD PRACTICES

     Board of Directors

     Eksportfinans’ Board of Directors is comprised of a minimum of six and a maximum of eight elected members, including one member elected by and among the employees, appointed for a one-year term. All members, except the employees' representative, are appointed by the Council of Representatives. The Board of Directors meets at least six times a year, and all actions taken by the Board require a majority vote. The Board of Directors has the power to make all lending and borrowing decisions for Eksportfinans and has delegated such power, to a certain extent, to the President. The Board of Directors also appoints the President and CEO.

     Executive Management

     The President has responsibility for the day-to-day conduct of Eksportfinans’ business, subject to standing instructions issued by the Board of Directors and approved by the Council of Representatives. The President of Eksportfinans is empowered to grant loans of up to NOK 400 million. Credits may be approved by the President in amounts greater than NOK 400 million upon prior notification to the Board of Directors. The President has established a Management Board consisting of Executive Vice Presidents Christian Grøm, Carine Lindman (from September 2011 until February 2012), Mr. Jens Olav Feiring (until September 2011 and from February 2012), Mr. Olav Einar Rygg, Mr. Geir Ove Olsen, Ms. Elise Lindbæk, Mr. Oliver Siem, and Mr. Ivar Slengesol. The Management Board meets on a weekly basis.

     The Board of Directors appoints executive officers to serve until resignation, death or removal by the Board.

     Council of Representatives

     The senior supervisory body of Eksportfinans is the Council of Representatives, which acts in a general way as a supervisory body meeting three times a year, and appoints members of the Board of Directors and the Company’s auditors.

     The Council of Representatives has 14 members and 4 alternates. The shareholders of the Company elect four members and two alternates. One member and one alternate are appointed by and among the employees. The Council members and alternates serve for two-year terms. Their current term expires in 2012.

     Seven members of the Council of Representatives or their alternates constitute a quorum, and action by the Council requires a vote of half of the members (or alternates) present.

     As of December 31, 2011, the following persons served as members of the Council of Representatives:

     Frode Alhaug became a member of the Council of Representatives in 2003. He was elected Chairman the same year.

     Sandra Riise became a member of the Council of Representatives in 2001. In 2008 she became a Vice Chairman.

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     Petter Kapstad became a member of the Council of Representatives in 2011.

     Ottar Brage Guttelvik became a member of the Council of Representatives in 2008.

     Richard Heiberg became a member of the Council of Representatives in 2010.

     Ingelise Arntsen became a member of the Council of Representatives in 2010.

     Unni Karlsen Hongseth became a member of the Council of Representatives in 2010.

     Toril Eidesvik became an alternate member of the Council of Representatives in 2006. From April 2010 she became a member.

     Trond Tostrup became a member of the Council of Representatives in 2005.

     Jørn Pedersen became an alternate member of the Council of Representatives in 2001. In March 2006 he became a member.

     Gro Elisabeth Lundevik became a member of the Council of Representatives in 2008.

     Elisabeth Krokeide became a member of the Council of Representatives in 2001.

     Torbjørn Vik became a member of the Council of Representatives in 2010.

     Laila Johnsen became a member of the Council of Representatives in 2010. She is elected by the employees.

        As of December 31, 2011, the following persons served as alternate members of the Council of Representatives:

     Eldbjørg Sture was elected a member in 2007. She became an alternate in April 2010.

     Marius Juul Møller became an alternative of the Council of Representatives in 2011.

     Geir Bergskaug became an alternative of the Council of Representatives in 2011.

     Peder Nordli became an alternative of the Council of Representatives in 2010. He is elected by the employees.

     Petter Ringnes and Morten Kraft resigned from the Council of Representatives in March 2011.

    Control Committee, Auditors and Audit Committee

     The Control Committee examines the accounts of the Company and reports to the Council of Representatives.

     The Control Committee consists of three members and one alternate, all of whom are appointed by the shareholders of the Company at the annual general meeting for a two-year period. One member must meet the requirements for judges in Norway and be approved by the Banking, Insurance and Securities Commission. Board members and the employees of the Company and their relatives and employees are prohibited from serving on the Control Committee. The Control Committee is elected for 2 year terms. The current term expires in 2012.

     As of December 31, 2011, the following persons served on the Control Committee:

     Petter Kapstad was elected as a Chairman from 2011. He was first elected member in 2010.

     Eldbjørg Sture, became an alternate member of the Control Committee in 2007, and was elected as a member and Vice Chairman.

     Marius Juul Møller was elected as a member of the Control Committee in 2011.

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     Ottar Brage Guttelvik became a member of the Control Committee in 2008, and was elected as an alternate in April 2010.

     Petter Ringnes resigned from the Control Committee in March 2011.

     Independent auditors audit the accounts of the Company annually. The independent auditors are state-authorized public accountants appointed by the Council of Representatives. The Council of Representatives reviews the audited accounts, and the shareholders of the Company approve the audited accounts at the annual general meeting. The auditors of the Company are at present the Independent Registered Public Accounting Firm PricewaterhouseCoopers AS.

     None of the members of the Board of Directors, Council of Representatives or Control Committee is party to any contract providing for any benefits upon termination. The President has a severance package covering salary and other remuneration for 18 months in the event that the Company terminates her employment. Each of the other executive officers has an arrangement with Eksportfinans under which such executive officer, upon a termination, will receive 15 months’ payment.

     The Board of Directors has formed an Audit Committee, which operates pursuant to a charter approved by the Board of Directors. The Audit Committee has been appointed by the Board of Directors to assist the Board in monitoring:

·the integrity of the Company’s financial statements,
·the independent auditor’s qualifications and independence,
·the performance of the Company’s internal audit function and independent auditors and
·the compliance by the Company with legal and regulatory requirements.

     As of December 31, 2011, the Audit Committee consisted of Live Haukvik Aker, Bodil P. Hollingsæter and Tone Lunde Bakker. Ms. Live Haukvik Aker has acted as the financial expert, independent of management, and Chair of the Audit Committee since April 21, 2010.

     The Audit Committee has reviewed and discussed the audited consolidated financial statements with management. The Audit Committee has received the disclosure and letter from the independent accountants required by applicable requirements of the U.S. Public Company Accounting Oversight Board regarding the independent accountants’ communications with the Audit Committee concerning independence, and has discussed with the independent accountants the independent accountants’ independence. Based on the review and discussions referred to above, the Audit Committee recommended to the Board of Directors that the audited consolidated financial statements be included in this annual report on Form 20-F for filing with the SEC.

     Remuneration

     At the annual general meeting in April 2011, the shareholders determined the compensation for the Council of Representatives, the Control Committee and the independent auditor based on recommendations by the Nomination Committee. The Council of Representatives determined the compensation for the Board of Directors.

     The Board of Directors determines the compensation for the chief executive officer. The Board of Directors also has the authority to decide on the compensation for the other executive officers. The Board makes these decisions based on recommendations by the Compensation Committee (See Item 16G CORPORATE GOVERNANCE –Compensation Committee).

     The chief executive officer determines the compensation of the Company’s other employees, within economic limits set by the Board of Directors based on recommendations from the Compensation Committee.

     Credit Committee

     In 2011, the Board established a separate Credit Committee whose purpose is to assess and make recommendations to the Board with regards to the approval of loan applications, and credit risk issues related to borrowers and guarantors. Currently, the Chairman of the Board, Geir Bergvoll, is the Chair of the Credit Committee, while Board members Carl Erik Steen and Marianne Heien Blystad are members.

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     D. EMPLOYEES

     As of December 31, 2011, the Company had 98 employees, all of whom are located in Norway.

Year   Employees
2007   88
2008   96
2009   98
2010   98
2011   98


     E. SHARE OWNERSHIP

     As of the date of this annual report, no director, executive officer, member of the Council of Representatives or Control Committee owned shares in the Company. No options to purchase equity securities from the Company were outstanding as of that date.

Item 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

     A. MAJOR SHAREHOLDERS

     There is one class of shares, which are common shares. Each share in Eksportfinans represents one vote.

     As of the date of this annual report, the following shareholders owned Eksportfinans’ common share capital:

Shareholder No. of Common Shares %
DNB Bank ASA 105,557   40.00  
Nordea Bank Norge ASA 61,246   23.21  
The Norwegian State 39,587   15.00  
Danske Bank A/S 21,348   8.09  
23 other banks 36,176   13.70  
Total 263,914   100.00  

     On September 11, 2001, the Government acquired a 15% stake in Eksportfinans through a new issuance of shares. Because the Government is a shareholder in certain of the Company’s other direct shareholders, the Government’s direct and indirect shareholding is approximately 49%.

     DNB Bank ASA, Nordea Bank Norge ASA, Danske Bank A/S , and two minority shareholders holding an aggregate of 71% of the shares of Eksportfinans have entered into a shareholders’ agreement among themselves providing for mutual rights of first refusal in the event that any one or more of them desires to dispose of its shares in the Company.

     B. RELATED PARTY TRANSACTIONS

     In the normal course of business, certain shareholders (for further details, see Item 7.A. “Major Shareholders”) extend guarantees in connection with loans made by Eksportfinans. For further details, see Item 4.B. “Business Overview — LOANS — Export Lending — Credit Support, Credit Monitoring and Assessment”. This includes the Government, which directly holds 15% of our outstanding shares and also indirectly or directly guarantees some of the loans we make. For further information on the composition of guarantees, see Item 4.B. “Business Overview — LOANS — Analysis of Loans — Credit Support”. The borrowers pay commissions in consideration of such guarantees directly to the shareholders.

     The Transition Agreement with the Norwegian State

     Following the Government’s decision on November 18, 2011 to assume responsibility for the export credit scheme previously managed by Eksportfinans, the Government, represented by the Ministry for Commerce and Trade, entered into an agreement with Eksportfinans on December 21, 2011 to establish a temporary export financing arrangement until the new state entity has been created as a permanent solution (the Transition Agreement). Under the Transition Agreement, Eksportfinans will provide CIRR-loans and CIRR-qualifying loans on behalf of the Government based on the various guidelines and procedures contained in the appendices and under which the Government, and not Eksportfinans, will be the lender. Loan commitments and agreements entered into on this basis are subject to the Government’s prior written consent. The Government will adhere to the same guidelines and procedures in acting as principal under the loans and has agreed to remunerate Eksportfinans for its services under the Agreement in the amount of a fixed fee of NOK 8,600,000 per month (exclusive of VAT) for the services that are to be provided under the Agreement.

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     Failure by Eksportfinans to adhere to the guidelines and procedures will constitute a breach of the Transition Agreement, as will a failure by Eksportfinans to satisfy its obligations under the Transition Agreement. The Government can terminate the Transition Agreement upon a serious breach after giving written notice and a 30 day remedy period. Upon a demonstration of negligence, Eksportfinans may incur liability for any such breach of its performance of the Transition Agreement but its total liability is limited to the remuneration Eksportfinans has received or has the right to receive pursuant to the Transition Agreement. Under no circumstance will Eksportfinans be liable for indirect or consequential damages. Similarly, if the Government does not satisfy its obligations under the Transition Agreement, it will be in breach; however, Eksportfinans does not have the right to penalties or remedies against the Government except those stated in the Transition Agreement.

     Under the Transition Agreement, the Government has the liability and risk as the lender under loans entered into by Eksportfinans on the Government’s behalf. The Government has agreed to indemnify Eksportfinans against claims that are made against or which in any way concern Eksportfinans and against all loss, damage, costs, expenses and all liability which Eksportfinans incurs as a result of providing services under the Transition Agreement. However, the Government shall not indemnify Eksportfinans for any such losses arising from gross negligence or intent on the part of Eksportfinans. If Eksportfinans’ remuneration has fallen due and penalty interest has not been paid within 30 calendar days of the deadline, Eksportfinans can send written notice to the Government that the Transition Agreement will be terminated if settlement has not occurred within 30 days after notice has been received. In the case of other serious breaches by the Government, Eksportfinans may also terminate the Transition Agreement after giving the Government written notice and a reasonable deadline for remedying the situation, and the Government’s liability for damages will arise from general Norwegian tort law rules.

     If, after the Transition Agreement enters into force, Eksportfinans pays CIRR-loans or CIRR-qualifying loans at its own expense and there is one or more part payments by Eksportfinans for these loans before the Transition Agreement enters into force, the Government can acquire these loans based on terms equivalent to those for the Government’s acquisition of loans from Eksportfinans that occurred prior to when the Transition Agreement entered into force.

     The Transition Agreement specifies that the Government has the responsibility for establishing a new and permanent solution which shall replace the temporary arrangement established by the Transition Agreement. The Transition Agreement will expire on June 30, 2012 unless otherwise agreed in writing between the parties. Alternatively, if major changes occur in Eksportfinans’ financial conditions that significantly hinder Eksportfinans’ ability to perform its services under the Transition Agreement, Eksportfinans has the right to terminate the arrangement with 30 days written notice.

     The Agreement on Transfer of Employees to the State Entity

     On December 21, 2011 Eksportfinans entered into an agreement with The Kingdom of Norway represented by The Ministry for Trade and Industry (the Ministry and, together with Eksportfinans Parties) in which the Parties agreed to mutually cooperate in transferring the employment of select employees from Eksportfinans to the new state entity (the Employee Transfer Agreement). Eksportfinans is responsible for selecting the employees for transfer to the new state entity taking into consideration the fact that the new state entity will continue the business of arranging and extending CIRR-qualifying loans after July 1, 2012 and that Eksportfinans will continue to manage CIRR-qualifying loans disbursed prior to November 18, 2011. It was agreed that approximately between 32 to 45 employees would have the right to be transferred to the new state entity. Eksportfinans has initially selected 29 employees who agreed to be transferred to the new state entity as of July 1, 2012.

     Sale and Transfer of Loans

     During the period from November 18, 2011 and December 21, 2011 Eksportfinans entered into loan agreements for CIRR-qualifying loans and/or continued part disbursements for CIRR-qualifying loans for which it has previous commitments to do so. It was agreed that the Kingdom of Norway, represented by the Ministry for Trade and Industry (the Ministry), should purchase and Eksportfinans should sell and transfer these loans to the Ministry whereby the Ministry would become the lender until the same loans could be transferred to the new state entity. The consideration to Eksportfinans for the sale of these loans was the outstanding principal of each loan together with accrued by not paid interest.

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     The 108 Agreement

     Under the 108 Agreement, the Government guarantees Eksportfinans a fixed profit margin between revenues on loans and costs on borrowings covered by the agreement. This is achieved by fixing reference rates on all borrowing and lending covered by the agreement. For further details, see discussion under Item 4.B. “Business Overview — LOANS — Export Lending — Arrangement with the Government”.

     Upon entering into the Transition Agreement, described above, the 108 Agreement has been terminated with respect to new commitments but remains in force for commitments that have been made for loans before the Transition Agreement entered into force.

     The Portfolio Hedge Agreement

     Due to the instability in the international credit markets and the unrealized losses incurred in 2007 and in the first quarter 2008, in March 2008, Eksportfinans entered into the Portfolio Hedge Agreement with most of its owner banks for the purpose of stopping further value decrease of its Liquidity Portfolio. Eksportfinans’ shareholders unanimously approved the Portfolio Hedge Agreement on April 3, 2008.

     Pursuant to the Portfolio Hedge Agreement, all of the securities in the portfolio held as of February 29, 2008, i.e., the PHA Portfolio, were marked-to-market. The difference between the market value and the nominal value of the securities was calculated to NOK 1,642 million (market value lower than nominal value) at that time. The PHA Portfolio will be valued annually on the same date from February 28, 2011. On each annual valuation date after this, the PHA Portfolio will be marked-to-market. If the market value on an annual valuation date is less than the value of the immediately preceding valuation date, then the shareholders participating in the Portfolio Hedge Agreement will pay to Eksportfinans an amount equal to the difference. If the market value is higher than the market value on the immediately preceding valuation date, then Eksportfinans will pay the difference to the participating shareholders. The valuation on the first valuation date (February 28, 2011) resulted in a payment from the participating shareholders to Eksportfinans of NOK 710 million. The second valuation date (February 29, 2012) resulted in a payment from Eksportfinans to the participating shareholders of NOK 108 million.

     The total commitment payable to Eksportfinans by the shareholders under the agreement is NOK 5 billion. Any payment made by the participating shareholders under the agreement will be deducted from the committed amount. Any amount paid by Eksportfinans will have no effect on the total committed amount. As of year end 2011, NOK 963 million of the commitment has been used and NOK 4,037 million remains available.

     The final valuation date is the date being the earlier of either the last maturity date of the securities in the PHA Portfolio or the date on which all securities have either been redeemed, repaid or disposed of or where a loss has been declared following the issuer’s insolvency.

     Pursuant to the agreement, Eksportfinans pays a monthly NOK 5 million fee to the parties to the agreement. This is in addition to any possible annual payments resulting from the calculation of the difference between market value and nominal value of the portfolio to the participating shareholders on any valuation date (described above). There is no limit on the total amount that may become payable by Eksportfinans as a result of the annual valuation calculations.

     As contemplated in the agreement, in addition to the original signatories, all of Eksportfinans’ shareholders have been given the opportunity to participate in the agreement and share in the risks and rewards on a pro rata basis. That is, the aggregate commitment of NOK 5 billion in total remains the same, but is now shared by those shareholders who have agreed to participate. Shareholders representing approximately 99.5% of the share capital have agreed to participate, including the Government.

     Repo Facility Agreements

Committed Repo Facility Agreement

     Eksportfinans’ major owner banks DNB Bank ASA, Nordea Bank AB and Danske Bank A/S have extended a committed credit line for repo purposes to Eksportfinans to provide what management considers to be sufficient liquidity buffers for the Company. The facility was entered into in June 2008 and has a 12 month maturity with the possibility of extension. The facility was last extended in June 2011 until June 2012 and permits borrowings of up to USD 2 billion. Eksportfinans has not yet utilized this credit facility.

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     Eligible assets for this agreement are defined according to the standards in the Global Master Repurchase Agreement, i.e. securities and financial instruments, other than equities and Net Paying Securities.

Non-committed Repo Facility Agreement

     On February 22, 2012 Eksportfinans entered into a Global Master Repurchase Agreement with DNB Bank ASA, in which DNB Bank ASA is the Buyer and Eksportfinans ASA is the Seller. Under this framework agreement, Eksportfinans can transact in an unlimited amount of eligible securities with DNB Bank ASA as the counterparty, but it is not committed to do so. The Agreement has no expiration date. To date, EUR 600 million has been drawn with a Repurchase Date of February 26, 2015 at the latest and with respect to the drawn amount, Eksportfinans has the option to terminate the Agreement in whole on demand on February 27, 2013 and on specified termination dates thereafter.

     Funding Agreement with the Norwegian State

     Due to the international credit crisis, Eksportfinans announced in the last quarter of 2008 that it was unable to commit to loans under the 108 Agreement with the Government. Following such announcement, Eksportfinans entered into an agreement with the Norwegian State that gave Eksportfinans the opportunity to obtain funding from the Government through 2010 for financing of export projects that qualified under the OECD Consensus Agreement for export financing. The funding from the Government could have a maturity of up to 5 years. Parliament allocated in its budget an amount of NOK 20 billion for 2010.

     The agreement required the issuance of one preference share to the Government, at a nominal value of NOK 10,500. The share constituted a separate preference share that granted the right to a yearly dividend of 22.5% of the Company’s profit for the year, within the calculated base of regulatory limited dividend. According to the agreement, the base excluded the reversals of loan losses incurred before January 1, 2009, and profit/(loss) from Kommunekreditt Norge AS. For 2010 there was an accrual of NOK 126 million in preference share dividends. The preference share and the preference share dividends were classified in our financial statements as financial liabilities, and the dividends are accordingly classified as financial expenses.

     The agreement required that Eksportfinans redeem the preference share at nominal value as soon as Eksportfinans has presented its annual accounts and disbursed the dividends for the preference share for the accounting year in which all loans issued by the State in accordance with this agreement have been fully repaid. As no borrowings were made under this agreement, this took place at the General Meeting held on April 7, 2011.

     Disbursements, including dividends, on shares other than the preference share, were contingent upon consent from the State as long as Eksportfinans has loans issued by the State under this agreement. However, Eksportfinans could freely make allocations or disburse dividends to the extent this stems from sale of and/or dividend/group contribution from Kommunekreditt AS and companies in the same group as Eksportfinans.

     Until December 31, 2010, wages and other benefits to senior executive employees in Eksportfinans could not be increased. During this period, senior executive employees could not accumulate or receive bonuses, except for bonuses accumulated before November 1, 2008 in accordance with agreements entered into before this date. In addition, while any loans are outstanding under the agreement, wages, other benefits and any bonus schemes to senior executive employees after December 31, 2010 must be approved in advance by the Government.

     The agreement was approved by the Norwegian Parliament in December 2008 and was further approved by the European Free trade Association Surveillance Authority (ESA) and the Eksportfinans General Meeting in 2009. The agreement entered into force and effect January 31, 2009 and the facility extended under the agreement expired unused on December 31, 2010. The agreement was terminated upon the Company’s redemption of the preference share in April 2011.

     Loans

     As of December 31, 2011 no loans were outstanding to any company of which Eksportfinans’ board members, members of the Control Committee or chairman of the Council of Representatives is a board member. Bank deposits are not defined as loans.

     As of December 31, 2011, the Company had NOK 58 million in loans outstanding to employees, primarily mortgage loans. Such loan facilities are available to all employees. No loans have been given to Directors of the Company. No new loans have been made to Executive Officers of the Company since July 30, 2002.

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    Other Transactions with Shareholder Banks

     Eksportfinans from time to time also entered into agreements to acquire loans from shareholders and some other banks active in the Norwegian market for export financing. Pursuant to these agreements, loans are fully and irrevocably purchased from the selling banks under Norwegian law. The purchases of these loans are based on normal commercial terms and the loans acquired are of the type extended by Eksportfinans in the normal course of its business. The Company places an initial deposit with the selling bank, which is used as consideration for these purchases. Each such loan purchased is supported by a guarantee provided by the selling bank. In consideration for the guarantee the Company pays the selling bank for the guarantee over the life of such loans by way of settlements under a swap transaction, under which the difference between the interest received on the loan and the interest receivable from the selling bank with respect to the deposit amount is paid to the selling bank. The net effect of these transactions is that Eksportfinans receives a specified, individually negotiated return comparable to that received on its other commercial loans. In 2011, 2010 and 2009, Eksportfinans acquired loans from its shareholders amounting to NOK 3,644 million, NOK 2,867 million and NOK 1,263 million respectively.

     In some instances, Eksportfinans would lend to a shareholder bank (or to another bank) which then provides project finance lending on to a borrower. The purpose of these transactions was to finance the underlying borrower project in the shareholder bank’s loan portfolio. The project in question must meet the same requirements as all other lending provided by Eksportfinans. In such cases the shareholder bank would act as the borrower and bear the repayment risk directly, instead of issuing a payment guarantee.

     From time to time Eksportfinans’ shareholders have asked, and Eksportfinans has agreed, to issue guarantees on the shareholder’s behalf to third parties. In return the shareholders have offered Eksportfinans full and irrevocable on-demand contra-guarantees, indemnifying Eksportfinans for any liability that may arise under the Eksportfinans guarantee. The request for a guarantee was due to the need for a guarantee given by a highly-rated financial institution, such as Eksportfinans. Issuing guarantees on behalf of Eksportfinans’ shareholders is permitted by the Articles of Association. Eksportfinans issues financial guarantees to support the Norwegian export industry. For guarantees with a total notional amount of NOK 1,088 million, Eksportfinans has recourse to such shareholders with full payment indemnification. The commercial effect is that the selling bank retains the risk premium associated with the credit in return for issuing the guarantee, while Eksportfinans earns a margin comparable to that received on its other commercial loans.

     In addition, in the normal course of business, Eksportfinans deposits funds and engages in other transactions with its shareholder banks on normal commercial terms. As of December 31, 2011, we had ordinary course banking deposits with, and held short-term liquid securities of, our shareholders totaling NOK 3,486 million. These transactions were recorded on market terms.

     Total outstanding transactions with related parties on the last three year’s balance sheet dates are disclosed in note 32 to our audited consolidated financial statements in Item 18.

     In connection with Eksportfinans’ lending activity, as of December 31, 2011, our shareholders had provided guarantees for an amount of NOK 99,092 million (of which GIEK constitutes NOK 44,000 million). The borrower and the guarantor agree and settle amongst themselves the guarantee commission for loans of this kind.

     The transactions with related parties described above were made in the ordinary course of business, were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated parties, and did not involve more than the normal risk of collectibility or present other unfavorable features.

     C. INTERESTS OF EXPERTS AND COUNSEL

     Not applicable.

Item 8. FINANCIAL INFORMATION

     A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION

     For a description of the Company’s accounting principles and basis of preparation, see note 2 to our audited consolidated financial statements in Item 18. Our audited consolidated financial statements, which were prepared in accordance with the International Financial Reporting Standards as issued by the IASB, form part of this Form 20-F. For further details, see Item 18.

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     Save as otherwise disclosed in note 35 to the audited consolidated financial statements, there are no material legal proceedings pending to which the Company is a party.

     B. SIGNIFICANT CHANGES

     For further details, see note 37 to our audited consolidated financial statements in Item 18.

Item 9. THE OFFER AND LISTING

     A. OFFER AND LISTING DETAILS

     Not applicable

     B. PLAN OF DISTRIBUTION

     Not applicable.

     C. MARKETS

     The Company’s 1.600% Yen 50,000,000,000 Notes due March 20, 2014, 5.500% USD 1,000,000,000 Notes due May 25, 2016, and 5.500% USD 1,000,000,000 Notes due June 26, 2017 are listed on the Luxembourg Stock Exchange. The Company’s 5.500% USD 1,000,000,000 Notes due June 26, 2017, 3.000% USD 1,500,000,000 Notes due November 17, 2014, USD 500,000,000 FRN due October 7, 2013, 2.000% USD 1,250,000,000 Notes due September 15, 2015, 1.875% USD 1,000,000,000 Notes due April 2, 2013, 2.375% USD 1,250,000,000 Notes due May 25, 2016, USD 500,000,000 FRN due April 5, 2013, and USD 250,000,000 FRN due April 5, 2013 are listed on the New York Stock Exchange. No other securities for which the Company has a reporting obligation pursuant to the Exchange Act are listed on any other exchange and are instead traded in the over-the-counter market.

     D. SELLING SHAREHOLDERS

     Not applicable.

     E. DILUTION

     Not applicable.

     F. EXPENSES OF THE ISSUE

     Not applicable.

Item 10. ADDITIONAL INFORMATION

     A. SHARE CAPITAL

     Not applicable.

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     B. MEMORANDUM AND ARTICLES OF ASSOCIATION

     Eksportfinans, registry number with Foretaksregisteret (the Norwegian Registry of Companies) is No. 816 521 432. The objective of Eksportfinans according to Section 2 of Eksportfinans’ Articles of Association is to conduct financing operations. The operations include financing:

§for the export industries, including but not limited to:
-the export of goods and services,
-the establishment and acquisition of manufacturing facilities and companies,
-investments in export-orientated means of production and plant,
-the establishment of foreign stocks of goods,
-domestic contracts where foreign credit is a competitive factors,
§as approved or requested by Norwegian authorities, and
§for regional and local authorities.

     The term financing operations means operations as defined in the Financial Institutions Act, which means the granting, negotiating, or furnishing of guarantees for credit or otherwise participating in the financing activity other than one’s own, with certain exceptions as provided in the Financial Institutions Act.

     Section 3-12 of the Financial Institutions Act provides that no member of the Board, Council of Representatives or Control Committee may participate in the discussions of or decision of any matter of such great importance to himself or to a person closely connected to himself that he must be considered to have a marked personal financial interest in the matter. Nor may any Board Member participate in a decision concerning a loan against, or the discounting of, any paper bearing his name. The Board of Directors does not have the power to vote on compensation paid to its members. The Council of Representatives decides the compensation of the Board of Directors. No Director is a member of or has any voting rights in the Council of Representatives.

     According to Section 7 of our Articles of Association, the Board of Directors is vested with the authority, among other things, to borrow on behalf of the Company. With the exception of certain types of loans — loans for which payment of interest is tied to payment of dividends to shareholders or results of operations in general — borrowings may be decided by simple majority. The board may delegate its power to borrow to the President.

     None of the Public Limited Liability Company Act, the Financial Institutions Act or the Articles of Association specify a mandatory retirement age. However, the practice has been that directors, members of the Council of Representatives and members of the Control Committee retire at the age of 70.

     The Articles of Association do not require that a director own any number of shares to qualify as a director. No director of Eksportfinans owns any shares.

     Each share in Eksportfinans represents one vote. There is one class of shares - common shares.

     In order to change existing shareholders’ rights, the Public Limited Liability Company Act Section 5-20 requires unanimity from all shareholders. The Articles of Association are silent regarding this matter, which means that the Public Limited Liability Companies Act applies.

     Section 12 of the Articles of Association provides that the chairman of the Council of Representatives convenes the annual general meeting. An extraordinary general meeting is held when considered necessary by the Board of Directors, Control Committee, the Council of Representatives or its chairman. At least 14 days’ notice in writing must be given for an ordinary general meeting or an extraordinary general meeting. General meetings are held at least once a year.

     Section 3 of the Articles of Association provides that only banks (with no limitation on nationality) and the Norwegian State may own shares in Eksportfinans. Section 2-2 of the Financial Institutions Act provides that no one may hold more than 10% of the share capital in a financial institution, which is also applicable to Eksportfinans. However, Eksportfinans was granted an exemption

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to this provision in 1990. Effective 1 January, 2004 the limit of ownership of 10% was lifted. Subject to approval by the Banking Insurance and Securities Commission, ownership exceeding 10% is now permitted. For further details, see Item 7.A. “Major Shareholders”.

     The Articles of Association do not have any specific provisions that would have an effect of deferring, delaying or preventing a change of control and that would operate only with respect to a merger, acquisition or corporate restructuring. As discussed above, there are provisions that define Eksportfinans’ objectives and limit who may hold Eksportfinans’ shares.

          In 2009, the Board of Directors determined that in addition to supporting the Norwegian export industry, the Company should also seek to finance projects within the renewable energy and infrastructure sectors. This would mean that the Company engage in financing projects that does not involve any exports which would conflict with the objects of the Company. Accordingly, the Board of Directors proposed to the ordinary general meeting on April 8, 2010 to amend the Articles of Association to accommodate these additional business areas. At the same time the Board of Directors proposed to amend the service period of any member of the Board of Directors from two years to one year. The two proposals were adopted unanimously by the General Meeting in 2010.

     C. MATERIAL CONTRACTS

     Eksportfinans has eight material contracts:

(i) the 108 Agreement, entered into with the Norwegian Ministry of Trade and Industry (for further details, see Item 4.B. “Business Overview — LOANS — Export Lending — Arrangement with the Norwegian Government”);

 

(ii) the Portfolio Hedge Agreement (for further details, see Item 7.B. “Related Party Transactions — The Portfolio Hedge Agreement”);

 

(iii) the NOK 2 billion committed credit line facility for repo purposes (for further details, see Item 7.B, ”Related Party Transactions – Repo Facility Agreements – Committed Repo Facility Agreement”);

 

(iv) the Global Master Repurchase Agreement with DNB Bank ASA (for further details, see Item 7.B. “Related Party Transactions — Repo Facility Agreements – Non-committed Repo Facility Agreement”);

 

(v) the Sale and Purchase Agreement with KLP dated May 7, 2009 with Kommunekreditt (for further details, see Item 4.B. “Business Overview — LOANS — Municipal Lending — Sale of Kommunekreditt”) and

 

(vi) the Excluded Portfolio Agreement between Eksportfinans ASA and Kommunekreditt Norge AS, dated May 7, 2009 (for further details, see Item 4.B. “Business Overview — LOANS — Municipal Lending — Sale of Kommunekreditt” and Exhibit 4.6).

 

(vii) the Transition Agreement with the Norwegian State (for further details, see Item 7.B. “Related Party Transactions — The Transition Agreement with the Norwegian State”); and

 

(viii) the Agreement on Transfer of Employees to the State Entity (for further details, see Item 7.B. “Related Party Transactions — The Agreement on Transfer of Employees to the State Entity”).

     D. EXCHANGE CONTROLS

     Transfers of capital to and from Norway are not subject to prior government approval except for the physical transfer of payments in currency, domestically or cross-border, a practice restricted to licensed banks. The Company has been granted status as a “regulated currency positioned” financing company, and consequently is free to make and receive payments in foreign currency, hold assets and to incur indebtedness in foreign currency.

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     E. TAXATION

     NORWEGIAN TAX CONSIDERATIONS

     The following summary describes certain Norwegian tax consequences that may be relevant for noteholders not resident in Norway for tax purposes in relation to the acquisition, ownership and disposition of debt securities issued by Eksportfinans. This summary addresses only Norwegian tax considerations for holders that are initial purchasers of the debt securities pursuant to the relevant offering and that will hold the debt securities as capital assets. It does not purport to be a comprehensive description of all the tax considerations that may be relevant to a decision to acquire the debt securities. This section is based on Norwegian law, regulations and judicial and administrative interpretations, in each case as in effect and available on the date of this annual report. All of the forgoing are subject to change, which change could under certain circumstances apply retroactively and could affect the consequences described below. Each investor should consult its own tax advisor with respect to possible Norwegian tax consequences of acquiring, owning or disposing of debt securities in their particular circumstances.

     The principal of, and premium and interest, if any, on Eksportfinans’ debt securities received by a noteholder not resident in Norway for tax purposes are not subject to Norwegian income taxes, unless the bearer or registered owner carries out a business through a permanent establishment in Norway and premium and/or interest on such securities, if any, are attributable to such business.

     Gains derived from the sale of Eksportfinans’ debt securities by a noteholder not resident for tax purposes in Norway are not subject to Norwegian income taxes or withholding taxes in Norway, unless such noteholder engages or participates in business activities which are carried out or managed in Norway and gains on such securities are attributable to such business.

     A non-Norwegian noteholder not resident in Norway for tax purposes who holds Eksportfinans’ debt securities is not subject to Norwegian tax unless such noteholder engages or participates in business activities which are carried out or managed in Norway and securities are attributable to such business.

     Norwegian inheritance or gift tax may under certain circumstances be imposed upon a transfer of Eksportfinans’ debt securities by gift or inheritance if (i) the securities are transferred from a person who is a Norwegian citizen or a resident of Norway for gift/heritance purposes, or (ii) the securities are attributable to business conducted through a permanent establishment in Norway. Under the United States-Norway estate and inheritance tax treaty, a United States citizen or domiciliary who becomes liable to pay Norwegian inheritance or gift taxes generally will be entitled to credit against his U.S. estate or gift tax liability the amount of such Norwegian taxes.

     U.S. FEDERAL INCOME TAX CONSIDERATIONS

     The following summary describes certain U.S. Federal income tax consequences that may be relevant to the acquisition, ownership and disposition of notes issued by Eksportfinans. This summary addresses only U.S. Federal income tax considerations for holders that are initial purchasers of notes pursuant to the relevant offering and that will hold the notes as capital assets. It does not purport to be a comprehensive description of all the tax considerations that may be relevant to a decision to acquire notes. In particular, this summary does not address tax considerations applicable to holders that may be subject to special tax rules including, without limitation, the following:

§financial institutions,
§insurance companies,
§dealers or traders in securities or currencies or notional principal contracts,
§tax-exempt entities,
§persons that will hold notes as part of a “hedging” or “conversion” transaction or as a position in a “straddle” or as part of a “synthetic security” or other integrated transaction for U.S. Federal income tax purposes,
§persons that have a “functional currency” other than the U.S. dollar,
§persons that own (or are deemed to own) 10% or more (by voting power or value) of Eksportfinans’ stock,
§regulated investment companies,
§real estate investment trusts, and
§partnerships, pass-through entities or persons who hold the notes through partnerships or other pass-through entities.
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     Further, this summary does not address alternative minimum tax consequences or the indirect effects on the holders of equity interests in a holder of notes. This summary also does not describe any tax consequences arising under the laws of any taxing jurisdiction other than the U.S. Federal income tax laws.

     This summary is based on the U.S. Internal Revenue Code of 1986, as amended (the Code), U.S. Treasury Regulations, and judicial and administrative interpretations, in each case as in effect and available on the date of this annual report. All of the foregoing are subject to change, which change could apply retroactively and could affect the tax consequences described below.

     You should consult your own tax advisor with respect to the U.S. Federal, estate, state, local, gift, and other tax consequences of acquiring, owning, and disposing of notes.

     For the purposes of this summary a “U.S. holder” is a beneficial owner of a note that is for U.S. Federal income tax purposes:

§a citizen or resident of the United States,
§a corporation or other entity treated as a corporation for U.S. tax purposes, created or organized in or under the laws of the U.S. or any state thereof (including the District of Columbia),
§an estate, the income of which is subject to U.S. Federal income taxation regardless of its source, or
§a trust if (1) a court within the United States is able to exercise primary supervision over its administration and (2) one or more U.S. persons have the authority to control all of the substantial decisions of such trust.

     As provided in U.S. Treasury Regulations, certain trusts in existence on August 20, 1996, that were treated as United States persons prior to that date and that maintain a valid election to continue to be treated as United States persons are also U.S. holders.

     A “non-U.S. holder” is a beneficial owner of a note that is not a U.S. holder. If a partnership holds a note, the consequences to a partner will generally depend upon the status of the partner and upon the activities of the partnership. If you are a partner of a partnership holding a note, you should consult your tax advisor regarding an investment in the notes under your particular situation.

     Tax Treatment of the Notes

     General

     Other than as set forth below under “— Notes treated as Contingent Payment Debt Instruments”, “— Notes treated as Short-term Debt Securities”, “— Notes treated as Forward Purchase Contracts”, “— Notes treated as Section 1256 Contracts” and “Notes treated as a Put Option and a Deposit”, the following discussion sets forth the general U.S. Federal income tax consequences of investing in notes.

     Payments of Interest

     Interest (including any additional amounts payable, if any) paid on a note will be taxable to a U.S. holder as ordinary interest income at the time it is received or accrued, depending on the U.S. holder’s method of accounting for U.S. Federal income tax purposes. A U.S. holder utilizing the cash method of accounting for U.S. Federal income tax purposes that receives an interest payment denominated in foreign currency will be required to include in income the U.S. dollar value of that interest payment, based on the spot exchange rate in effect on the date of receipt, regardless of whether the payment is in fact converted into U.S. dollars.

     An accrual basis U.S. holder is required to include in income the U.S. dollar value of the amount of interest accrued on a note during the accrual period. An accrual basis U.S. holder may determine the amount of the interest to be recognized in accordance with either of two methods. Under the first accrual method, the amount of interest accrued will be based on the average exchange rate in effect during the interest accrual period or, with respect to an interest accrual period that spans two taxable years, the part of the period within each taxable year. Under the second accrual method, the U.S. holder may elect to determine the amount of interest accrued on the basis of the exchange rate in effect on the last day of the accrual period or, in the case of an accrual period that spans two taxable years, the exchange rate in effect on the last day of the part of the period within each taxable year. If the last day of the accrual period is within five business days of the date the interest payment is actually received, an electing accrual basis U.S. holder may instead translate that interest payment at the exchange rate in effect on the day of actual receipt. Any election to use the second accrual method will apply to all debt instruments held by the U.S. holder at the beginning of the first taxable year to

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which the election applies or thereafter acquired by the U.S. holder and will be irrevocable without the consent of the Internal Revenue Service (IRS).

     A U.S. holder utilizing either of the foregoing two accrual methods will generally recognize ordinary income or loss with respect to accrued interest income on the date of receipt of the interest payment (including a payment attributable to accrued but unpaid interest upon the sale or retirement of a note). The amount of ordinary income or loss will equal the difference between the U.S. dollar value of the interest payment received (determined on the date the payment is received) in respect of the accrual period and the U.S. dollar value of interest income that has accrued during that accrual period (as determined under the accrual method utilized by the U.S. holder).

     Foreign currency received as interest on a note will have a tax basis equal to its U.S. dollar value on the date the interest payment is received. Gain or loss, if any, realized by a U.S. holder on a sale or other disposition of the foreign currency will be ordinary income or loss and will generally be income from sources within the U.S. for foreign tax credit limitation purposes. Interest received by a U.S. holder will be treated as foreign source income for the purposes of calculating that holder’s foreign tax credit limitation. The limitation on foreign taxes eligible for the U.S. foreign tax credit is calculated separately with respect to specific classes of income. The rules relating to foreign tax credits and the timing thereof are complex. You should consult your own tax advisor regarding the availability of a foreign tax credit in your particular situation.

     Original issue discount

     A note, other than a note with a term of one year or less (a short-term debt security), will be treated as issued at an original issue discount (OID, and a debt security issued with OID, a discount note) for U.S. Federal income tax purposes if the excess of the sum of all payments provided under the note, other than qualified stated interest payments, as defined below, over the issue price of the note is more than a de minimis amount, as defined below. Qualified stated interest is generally interest paid on a note that is unconditionally payable at least annually at a single fixed rate. The issue price of the notes will be the first price at which a substantial amount of the notes are sold to persons other than bond houses, brokers, or similar persons or organizations acting in the capacity of underwriters, placement agents, or wholesalers. Special rules for “variable rate debt securities” are described below under “Original issue discount—Variable rate debt securities”.

     In general, if the excess of the sum of all payments provided under the note other than qualified stated interest payments (the stated redemption price at maturity) over its issue price is less than 0.25% of the notes’s stated redemption price at maturity multiplied by the number of complete years from its issue date to its maturity, then such excess, if any, constitutes de minimis OID and the note is not a discount note. Unless the election described below under “Election to Treat All Interest as OID” is made, a U.S. holder of a note with de minimis OID must include such de minimis OID in income as stated principal payments on the note are made. The includable amount with respect to each such payment will equal the product of the total amount of the note’s de minimis OID and a fraction, the numerator of which is the amount of the principal payment made and the denominator of which is the stated principal amount of the note.

     A U.S. holder will be required to include OID on a discount note in income for U.S. Federal income tax purposes as it accrues, calculated on a constant yield method, before the actual receipt of cash attributable to that income, regardless of the U.S. holder’s method of accounting for U.S. Federal income tax purposes. Under the constant yield method, U.S. holders generally will be required to include in income increasingly greater amounts of OID over the life of the discount notes.

     OID for any accrual period on a discount note that is denominated in, or determined by reference to, a foreign currency will be determined in that foreign currency and then translated into U.S. dollars in the same manner as interest payments accrued by an accrual basis U.S. holder, as described under “Interest” above. Upon receipt of an amount attributable to OID in these circumstances, a U.S. holder may recognize ordinary income or loss.

     OID on a discount note will be treated as foreign source income for the purposes of calculating a U.S. holder’s foreign tax credit limitation. The limitation on foreign taxes eligible for the U.S. foreign tax credit is calculated separately with respect to specific classes of income. The rules relating to foreign tax credits and the timing thereof are complex. U.S. holders should consult their own tax advisors regarding the availability of a foreign tax credit under their particular situation.

     Acquisition premium

     A U.S. holder that purchases a note for an amount less than or equal to the sum of all amounts payable on the note after the purchase date other than payments of qualified stated interest but in excess of its adjusted issue price and that does not make the

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election described below under “Election to treat all interest as OID” will have acquisition premium. Investors should consult their own tax advisors regarding the U.S. Federal income tax implications of acquisition premium.

     Market discount

     A note, other than a short-term debt security, will be treated as purchased at a market discount (a market discount note) if the note’s stated redemption price at maturity or, in the case of a discount note, the note’s “revised issue price”, exceeds the amount for which the U.S. holder purchased the note by at least 0.25% of the note’s stated redemption price at maturity or revised issue price, respectively, multiplied by the number of complete years to the note’s maturity. If such excess is not sufficient to cause the note to be a market discount note, then such excess constitutes de minimis market discount and the note is not subject to the rules discussed in the following paragraphs. For these purposes, the revised issue price of a note generally equals its issue price, increased by the amount of any OID that has accrued on the note.

     Any gain recognized on the maturity or disposition of a market discount note will be treated as ordinary income to the extent that such gain does not exceed the accrued market discount on that note. Alternatively, a U.S. holder of a market discount note may elect to include market discount in income currently over the life of the note. Such an election shall apply to all debt instruments with market discount acquired by the electing U.S. holder on or after the first day of the first taxable year to which the election applies. This election may not be revoked without the consent of the IRS.

     Market discount on a market discount note will accrue on a straight-line basis unless the U.S. holder elects to accrue such market discount on a constant yield method. Such an election shall apply only to the note with respect to which it is made and may not be revoked. A U.S. holder of a market discount note that does not elect to include market discount in income currently generally will be required to defer deductions for interest on borrowings allocable to that market discount note in an amount not exceeding the accrued market discount on that market discount note until the maturity or disposition of that market discount note.

     Election to treat all interest as OID

     A U.S. holder may elect to include in gross income all interest that accrues on a note using the constant yield method under the heading “Original issue discount”, with the modifications described below. For the purposes of this election, interest includes stated interest, OID, de minimis OID, market discount, de minimis market discount and unstated interest, as adjusted by any amortizable bond premium or acquisition premium.

     In applying the constant yield method to a note with respect to which this election has been made, the issue price of the note will equal its cost to the electing U.S. holder, the issue date of the note will be the date of its acquisition by the electing U.S. holder, and no payments on the note will be treated as payments of qualified stated interest. This election will generally apply only to the note with respect to which it is made and may not be revoked without the consent of the IRS. If this election is made with respect to a note with amortizable bond premium, then the electing U.S. holder will be deemed to have elected to apply amortizable bond premium against interest with respect to all debt instruments with amortizable bond premium (other than debt instruments the interest on which is excludible from gross income) held by the electing U.S. holder as of the beginning of the taxable year in which the note with respect to which the election is made is acquired or thereafter acquired. The deemed election with respect to amortizable bond premium may not be revoked without the consent of the IRS.

     If the election to apply the constant yield method to all interest on a note is made with respect to a market discount note, the electing U.S. holder will be treated as having made the election discussed above under “Original issue discount—Market discount” to include market discount in income currently over the life of all debt instruments held or thereafter acquired by such U.S. holder.

     Variable rate debt securities

     Certain notes issued by Eksportfinans may be classified as variable rate debt securities. A note will be classified as a variable rate debt security if it:

§has an issue price that does not exceed the total non-contingent principal payments by more than the lesser of (i) the product of (x) the total non-contingent principal payments, (y) the number of complete years to maturity from the issue date and (z) 0.015, or (ii) 15% of the total non-contingent principal payments; and
§does not provide for stated interest other than stated interest compounded or paid at least annually at (i) one or more “qualified floating rates”, (ii) a single fixed rate and one or more qualified floating rates, (iii) a single “objective rate” or (iv) a single fixed rate and a single objective rate that is a “qualified inverse floating rate”.
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     A qualified floating rate or objective rate in effect at any time during the term of the instrument must be set at a “current value” of that rate. A current value of a rate is the value of the rate on any day that is no earlier than three months prior to the first day on which that value is in effect and no later than one year following that first day.

     A variable rate is a qualified floating rate if (i) variations in the value of the rate can reasonably be expected to measure contemporaneous variations in the cost of newly borrowed funds in the currency in which the debt security is denominated or (ii) it is equal to the product of such a rate and either (a) a fixed multiple that is greater than 0.65 but not more than 1.35, or (b) a fixed multiple greater than 0.65 but not more than 1.35, increased or decreased by a fixed rate. If a debt security provides for two or more qualified floating rates that (i) are within 0.25 percentage points of each other on the issue date or (ii) can reasonably be expected to have approximately the same values throughout the term of the debt security, the qualified floating rates together constitute a single qualified floating rate. A rate is not a qualified floating rate, however, if the rate is subject to certain restrictions (including caps, floors, governors, or other similar restrictions) unless such restrictions are fixed throughout the term of the debt security or are not reasonably expected as of the issue date to significantly affect the yield on the debt security.

     An objective rate is a rate, other than a qualified floating rate, that is determined using a single fixed formula and that is based on objective financial or economic information that is not within the control of or unique to the circumstances of the relevant issuer or a related party (such as dividends, profits or the value of the relevant issuer’s stock). A variable rate is not an objective rate, however, if it is reasonably expected that the average value of the rate during the first half of the debt security’s term will be either significantly less than or significantly greater than the average value of the rate during the final half of the debt security’s term. An objective rate is a qualified inverse floating rate if (i) the rate is equal to a fixed rate minus a qualified floating rate, and (ii) the variations in the rate can reasonably be expected to inversely reflect contemporaneous variations in the qualified floating rate.

     If interest on a debt security is stated at a fixed rate for an initial period of one year or less followed by either a qualified floating rate or an objective rate for a subsequent period and (i) the fixed rate and the qualified floating rate or objective rate have values on the issue date of the debt security that do not differ by more than 0.25 percentage points or (ii) the value of the qualified floating rate or objective rate is intended to approximate the fixed rate, the fixed rate and the qualified floating rate or the objective rate constitute a single qualified floating rate or objective rate.

     In general, if a variable rate debt security provides for stated interest at a single qualified floating rate or objective rate, all stated interest on the debt security is qualified stated interest and the amount of OID, if any, is determined under the rules applicable to fixed rate debt instruments by using, in the case of a qualified floating rate or qualified inverse floating rate, the value as of the issue date of the qualified floating rate or qualified inverse floating rate, or, in the case of any other objective rate, a fixed rate that reflects the yield reasonably expected for the debt security.

     If a variable rate debt security does not provide for stated interest at a single qualified floating rate or a single objective rate and also does not provide for interest payable at a fixed rate (other than at a single fixed rate for an initial period), the amount of interest and OID accruals on the debt security are generally determined by: (i) determining a fixed rate substitute for each variable rate provided under the variable rate debt security (generally, the value of each variable rate as of the issue date or, in the case of an objective rate that is not a qualified inverse floating rate, a rate that reflects the reasonably expected yield on the debt security), (ii) constructing the equivalent fixed rate debt instrument (using the fixed rate substitutes described above), (iii) determining the amount of qualified stated interest and OID with respect to the equivalent fixed rate debt instrument, and (iv) making the appropriate adjustments for actual variable rates during the applicable accrual period.

     If a variable rate debt security provides for stated interest either at one or more qualified floating rates or at a qualified inverse floating rate, and in addition provides for stated interest at a single fixed rate (other than at a single fixed rate for an initial period), the amount of interest and OID accruals are determined as in the immediately preceding paragraph with the modification that the variable rate debt security is treated, for the purposes of the first three steps of the determination, as if it provided for a qualified floating rate (or a qualified inverse floating rate, as the case may be) rather than the fixed rate. The qualified floating rate (or qualified inverse floating rate) replacing the fixed rate must be such that the fair market value of the variable rate debt security as of the issue date would be approximately the same as the fair market value of an otherwise identical debt instrument that provides for the qualified floating rate (or qualified inverse floating rate) rather than the fixed rate.

     Sale, Exchange or Retirement of the Notes

     A U.S. holder’s tax basis in a note will generally equal its “U.S. dollar cost”. The U.S. dollar cost of a note purchased with a foreign currency will generally be the U.S. dollar value of the purchase price on the date of purchase or, in the case of a note traded on an established securities market (as defined in the appropriate U.S. Treasury Regulations) that is purchased by a cash basis U.S. holder (or an accrual basis U.S. holder that so elects), on the settlement date for the purchase.

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     A U.S. holder will generally recognize gain or loss on the sale, exchange or retirement of a note equal to the difference between the amount realized on the sale, exchange or retirement and the tax basis of the note. The amount realized on the sale, exchange or retirement of a note for an amount of foreign currency will be the U.S. dollar value of that amount on:

§the date the payment is received in the case of a cash basis U.S. holder,
§the date of disposition in the case of an accrual basis U.S. holder, or
§in the case of a note traded on an established securities market (as defined in the applicable U.S. Treasury Regulations), that is sold by a cash basis U.S. holder (or an accrual basis U.S. holder that so elects), on the settlement date for the sale.

     Gain or loss recognized by a U.S. holder on the sale, exchange or retirement of a note that is attributable to changes in currency exchange rates will be ordinary income or loss and will constitute principal exchange gain or loss. Principal exchange gain or loss will equal the difference between the U.S. dollar value of the U.S. holder’s purchase price of the note in foreign currency determined on the date of the sale, exchange or retirement, and the U.S. dollar value of the U.S. holder’s purchase price of the note in foreign currency determined on the date the U.S. holder acquired the note. The foregoing principal exchange gain or loss will be recognized only to the extent of the total gain or loss realized by the U.S. holder on the sale, exchange or retirement of the note, and will generally be treated as from sources within the United States for U.S. foreign tax credit limitation purposes.

     Any gain or loss recognized by a U.S. holder in excess of principal exchange gain or loss recognized on the sale, exchange or retirement of a note will generally be U.S. source capital gain or loss. You should consult your own tax advisor with respect to the treatment of capital gains (which may be taxed at lower rates than ordinary income for taxpayers who are individuals, trusts or estates that hold the notes for more than one year) and capital losses (the deductibility of which is subject to limitations).

     A U.S. holder will have a tax basis in any foreign currency received on the sale, exchange or retirement of a note equal to the U.S. dollar value of the foreign currency at the time of the sale, exchange or retirement. Gain or loss, if any, realized by a U.S. holder on a sale or other disposition of that foreign currency will be ordinary income or loss and will generally be income from sources within the United States for foreign tax credit limitation purposes.

     Notes treated as Contingent Payment Debt Instruments

     If a note is treated as a contingent payment debt instrument (a CPDI), the U.S. Treasury Regulations governing the treatment of a CPDI (CPDI Regulations) would cause the timing and character of income, gain or loss reported on a CPDI to differ substantially from the timing and character of income, gain or loss reported on a non-contingent payment debt instrument under general principles of current U.S. Federal income tax law. The CPDI Regulations generally require a U.S. holder of such an instrument to apply the “non-contingent bond method” which, as generally described below, requires a U.S. holder to include future contingent and non-contingent interest payments in income as such interest accrues based upon a projected payment schedule regardless of the U.S. holder’s method of tax accounting and whether such U.S. holder has received any interest payments in that year. In general, any gain recognized on the sale, exchange, or retirement of a CPDI will be treated as ordinary income and all or a portion of any loss realized could be treated as ordinary loss as opposed to capital loss (depending upon the circumstances).

     Under the non-contingent bond method, for each accrual period prior to and including the maturity date of the notes, the amount of interest that accrues, as OID, equals the product of (a) the “adjusted issue price” and (b) the “comparable yield” (adjusted for the length of the accrual period). This amount is rateably allocated to each day in the accrual period and included as ordinary interest income by a U.S. holder for each day in the accrual period on which the U.S. holder holds the notes. The “adjusted issue price” for purposes of the non-contingent bond method is equal to the issue price of the notes, increased by the interest previously accrued on such notes and decreased by the amount of any Projected Payments (as defined below) previously made on such notes. The “issue price” of the notes is the first price at which a substantial amount of the note are sold to persons other than bond houses, brokers, or similar persons or organizations acting in the capacity of underwriters, placement agents, or wholesalers. The “comparable yield” is the annual yield that Eksportfinans would pay, as of the issue date, on a fixed rate debt instrument with no contingent payment but with terms and conditions otherwise comparable to those of the notes.

     Amounts treated as interest under the foregoing contingent payment obligation rules are treated as OID for all U.S. Federal income tax purposes. Also under the non-contingent bond method of the CPDI Regulations, Eksportfinans would be required, solely for U.S. Federal income tax purposes, to provide the comparable yield and a schedule (Schedule) of the projected amounts of payments (Projected Payments) on the notes. The Schedule must produce the comparable yield.

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     The comparable yield and the Schedule are used to determine accruals of interest for tax purposes only and are not assurances or predictions with respect to the actual yield of, or payment to be made in respect of, a note. The comparable yield and the Schedule do not necessarily represent expectations of Eksportfinans regarding such yield, and the amount and timing of such payment.

     If during any taxable year the sum of any actual payments (including the fair market value of any property received in that year) with respect to notes for that taxable year (including, in the case of the taxable year which includes the maturity date of the notes, the amount of cash received at maturity) exceeds the total amount of Projected Payments for that taxable year, the difference will produce a “net positive adjustment”, which will be treated as additional interest for the taxable year. If the actual amount received in a taxable year is less than the amount of Projected Payments for that taxable year, the difference will produce a “net negative adjustment”, which will (a) reduce the U.S. holder’s interest income for that taxable year and (b) to the extent of any excess after application of (a), give rise to an ordinary loss to the extent of the U.S. holder’s interest income on the notes during the prior taxable years (reduced to the extent such interest was offset by prior net negative adjustments). In addition, in general terms, U.S. holders will have gain or loss at the maturity equal to the difference between the amount actually received and the projected final payment. Any such gain (and any gain on the sale of the note) will be ordinary income. Any loss will be ordinary loss to the extent of the interest previously included in income by the U.S. holder with respect to the notes and, thereafter, capital loss. Limitations apply to limit the ability to offset ordinary income with capital losses.

     Special rules apply to the purchase of CPDIs at a discount or premium and prospective investors acquiring notes with such discount or premium should consult with their own tax advisors regarding such discount or premium. The application of the CPDI Regulations to the notes treated as contingent payment debt instruments is complex. You should consult with your own tax advisor regarding the applicability and consequences of the CPDI Regulations with respect to notes of Eksportfinans.

     Notes treated as Short-term Debt Securities

     Short-term debt securities will be treated as having been issued with OID. In general, an individual or other cash method U.S. holder is not required to accrue such OID unless the U.S. holder elects to do so. If such an election is not made, any gain recognized by the U.S. holder on the sale, exchange or maturity of the short-term debt security will be ordinary income to the extent of the OID accrued on a straight-line basis, or upon election under the constant yield method (based on daily compounding), through the date of sale or maturity, and a portion of the deductions otherwise allowable to the U.S. holder for interest on borrowings allocable to the short-term debt security will be deferred until a corresponding amount of income is realized. U.S. holders who report income for U.S. Federal income tax purposes under the accrual method are required to accrue OID on a short-term debt security on a straight-line basis unless an election is made to accrue the OID under a constant yield method (based on daily compounding).

     Notes treated as Forward Purchase Contracts

     General

     Eksportfinans intends to treat certain of its notes as forward contracts to purchase the underlying asset to which they relate for U.S. Federal income tax purposes. The remainder of this discussion under “— Notes treated as Forward Purchase Contracts” assumes that these notes will be so treated. Eksportfinans will take the position that at the time of issuance of these notes the U.S. holder deposits irrevocably with Eksportfinans a fixed amount of cash equal to the purchase price of the notes to assure the fulfillment of such U.S. holder’s purchase obligation, which deposit will be non-interest bearing and will be unconditionally and irrevocably applied on the stated maturity date of the relevant notes to satisfy that obligation. The cash proceeds that Eksportfinans will receive from the offering of such notes will not be segregated during the term of such note, but instead will be commingled with other assets of Eksportfinans.

     Coupon Payments

     Amounts denominated as coupon payments, if any, that are payable with respect to some of the notes treated as forward purchase contracts for U.S. Federal income tax purposes will be characterized as ordinary income, includible annually in a U.S. holder’s income in accordance with such holder’s method of accounting. Coupon payments received by a U.S. holder will be treated as foreign source income for the purposes of calculating its foreign tax credit limitation. The limitation on foreign taxes eligible for U.S. foreign tax credit is calculated separately with respect to specific classes of income. The rules relating to foreign tax credits and the timing thereof are complex. You should consult your own tax advisor regarding the availability of a foreign tax credit under your particular situation.

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     Sale, Exchange, Redemption or Other Disposition of the Notes

     Generally, a U.S. holder’s initial tax basis in notes treated as forward purchase contracts will be the price at which such U.S. holder purchased the notes. Upon the sale, exchange, redemption or other taxable disposition of the notes, a U.S. holder will generally recognize gain or loss equal to the difference between the proceeds received (other than any amounts attributable to accrued but unpaid interest, which will be taxable as ordinary income, as described above) and its adjusted tax basis in the notes. The gain or loss generally will be capital gain or loss. The deductibility of capital losses is subject to limitations.

     Possible Application of Section 1260 of the Code

     If the underlying asset to which a note relates is of the type enumerated under Section 1260 of the Code, (including, among others, shares of exchange traded funds and other regulated investment companies, real estate investment trusts, partnerships, and passive foreign investment companies) there is a substantial risk that an investment in the notes will be treated as a “constructive ownership transaction”. Although the matter is not clear, if an investment in the notes is treated as a “constructive ownership transaction”, all or a portion of any long-term capital gain recognized by a U.S. holder in respect of a note could be recharacterized as ordinary income (the Recharacterized Gain). In addition, an interest charge would also apply to any deemed underpayment of tax in respect of any Recharacterized Gain to the extent such gain would have resulted in gross income inclusion for the U.S. holder in taxable years prior to the taxable year of the sale, exchange or settlement of the notes (assuming such income accrued at a constant rate equal to the applicable federal rate as of the date of sale, exchange or settlement of the notes).

     If an investment in a note is treated as a “constructive ownership transaction”, it is unclear to what extent any long-term capital gain of a U.S. holder in respect of the notes will be recharacterized as ordinary income. The amount of the Recharacterized Gain (if any) that would be recharacterized as ordinary income in respect of the notes will generally equal the excess of (i) any long-term capital gain recognized by the U.S. holder in respect of the notes over (ii) the “net underlying long-term capital gain” (as defined in Section 1260 of the Code) such U.S. holder would have had if such U.S. holder had acquired the underlying asset at fair market value on the issue date of the notes and sold the underlying asset on the date of sale, exchange or settlement of the notes at fair market value (which would reflect the percentage increase in the value of the underlying asset over the term of the notes).

     Physical Settlement in Redemption of Notes

     To the extent the terms of notes provide for a physical settlement of the notes in shares and the conditions for physical settlement have been met under the terms of the notes, a U.S. holder will not recognize any gain or loss in respect of the notes (other than in respect of any cash received in lieu of any fractional shares). A U.S. holder will have an adjusted basis in any shares received equal to the purchase price of such notes less any basis attributable to fractional shares, as determined below. A U.S. holder’s holding period for any of the shares received will start on the day after the delivery of such shares.

     In the event Eksportfinans delivers cash in lieu of fractional shares, a U.S. holder will generally recognize short-term capital gain or loss in an amount equal to the difference between the amount of cash received in respect of the fractional shares and its basis in such shares determined by allocating the U.S. holder’s aggregate adjusted basis in the shares between the amount of cash received and the relative fair market value of the shares actually received.

     Possible Alternative Treatment of Notes

     There can be no assurance that the IRS will accept, or that a court will uphold, this characterization. The documentation of such notes as debt suggests that the IRS might seek to treat such notes as either short-term debt or CPDIs. If the IRS were successful in treating the Notes as CPDIs, then, among other matters,

·a U.S. holder would be required to accrue original issue discount on the note at a yield comparable to the yield at which Eksportfinans would issue similar non-contingent bonds, determined at the time of issuance of the note, even though the U.S. holder may not receive any coupon payments on the note; and
·on the sale, exchange, maturity, redemption or other taxable disposition of such a note, a U.S. holder would recognize ordinary income, or ordinary loss to the extent of its aggregate prior accruals of original issue discount and capital loss thereafter, rather than capital gain or loss.

     Even if the CPDI Regulations do not apply to such notes, it is possible that the IRS could seek to characterize the notes in a manner that results in tax consequences to U.S. holders different from those described above. Under an alternative characterization of the notes, it is possible, for example, that such notes could be treated as an investment unit consisting of a deposit paying interest

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at a rate Eksportfinans would pay on non-exchangeable senior notes maturing at the same time as the notes, plus a cash-settlement forward contract, in which case the U.S. holder would be required to accrue interest on the notes.

     The IRS and U.S. Treasury Department (Treasury) issued proposed regulations that require the accrual of income on a current basis with respect to contingent payments made under certain notional principal contracts. The preamble to the regulations states that the “wait and see” method of accounting does not properly reflect the economic accrual of income on such contracts, and requires current accrual of income with respect to some contracts already in existence. While the proposed regulations do not apply to prepaid forward contracts, the preamble to the proposed regulations expresses the view that similar timing issues exist in the case of prepaid forward contracts. If the IRS publishes future guidance requiring current economic accrual with respect to contingent payments on prepaid forward contracts, it is possible that a U.S. holder could be required to accrue income over the term of the notes.

     Possible New Administrative Guidance and/or Legislation

     From time to time, there may be legislative proposals or interpretive guidance addressing the tax treatment of financial instruments such as the notes. We cannot predict the likelihood of any such legislation or guidance being adopted, or the ultimate impact on the notes. For example, on December 7, 2007, the IRS released a notice stating that it and Treasury are actively considering the proper U.S. Federal income tax treatment of instruments such as the notes, including whether the holders should be required to accrue ordinary income on a current basis and whether gain or loss should be ordinary or capital, and they are seeking comments on the subject. It is not possible to determine what guidance they will ultimately issue, if any. It is possible, however, that under such guidance, holders of the notes will ultimately be required to accrue income currently and this could be applied on a retroactive basis. The IRS and Treasury are also considering other relevant issues, including whether foreign holders of such instruments should be subject to withholding tax on any deemed income accruals, and whether the special “constructive ownership rules” of Section 1260 of the Code might be applied to such instruments. Except to the extent otherwise provided by law, Eksportfinans intends to treat the notes for U.S. Federal income tax purposes in accordance with the treatment set forth above unless and until such time as the IRS and Treasury issue guidance providing that some other treatment is more appropriate.

     In addition, one member of the House of Representatives introduced a bill on December 19, 2007, that, if enacted, would have required holders of notes purchased after the bill was enacted to accrue interest income over the term of the notes even if there will be no interest payments over the term of the notes. It is not possible to predict whether a similar bill will be re-introduced or enacted in the future and whether any such bill would affect the tax treatment of the notes.

     Notes treated as Section 1256 Contracts

     If a note is treated as a “Section 1256 Contract” under the Code, a U.S. holder of a note that has not been exercised as of the end of that U.S. holder’s taxable year will be treated as if the note were sold for its fair market value on the last business day of the U.S. holder’s taxable year (marked-to-market). A U.S. holder of a note will thus be required to recognize taxable gain or loss on an annual basis, determined as described below under “— Sale, Exchange or Exercise of Notes,” and include that taxable gain or loss in income regardless of whether that U.S. holder receives any cash in respect of that note during the taxable year. The U.S. Federal income tax consequences of the notes being marked-to-market as described herein differ materially from the U.S. Federal income tax consequences of other mark-to-market provisions of the Code. Prospective acquirers of such notes should consult their own tax advisors about the consequences of the notes being marked-to-market.

     Sale, Exchange or Exercise of Notes

     Upon sale, exchange, exercise or lapse of a note (including a deemed sale resulting from a note being marked-to-market as described above or upon automatic exercise of a note following a delisting), a U.S. holder will recognize taxable gain or loss equal to the difference between the amount realized (or deemed amount realized) and the U.S. holder’s tax basis in the notes. A U.S. holder’s tax basis in a note will equal that U.S. holder’s initial tax basis in the note (generally equal to the cost of the note), plus (or minus) any gain (or loss) required to be recognized by that U.S. holder in respect of the note in prior taxable years as a result of the note being marked-to-market, regardless of the character of that gain or loss.

     Character of Gain or Loss Recognized on Notes

     Section 1256 of the Code requires that any gain or loss on notes (including any gain or loss resulting from a deemed sale as described above) must be characterized as 60% long-term capital gain or loss and as 40% short-term capital gain or loss, regardless of a U.S. holder’s holding period in the note (the 60/40 Rule). With respect to a corporate U.S. holder, capital losses for a taxable

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year are allowed only to the extent of that corporate U.S. holder’s capital gains for that year, but may be carried back for three taxable years and carried forward for five taxable years. With respect to an individual U.S. holder, capital losses for a taxable year are allowed only to the extent of the holder’s other capital gains for the taxable year plus $3,000, but may be carried forward against future net capital gains. An individual may elect, however, to carry back net capital losses from Section 1256 contracts for three years and apply them against prior net capital gain from Section 1256 contracts. Net capital gains of individuals are, under certain circumstances, taxed at lower rates than items of ordinary income. Regardless of whether carried back or carried forward, those net capital losses will be characterized under the 60/40 Rule. Prospective acquirers of such notes should consult their own tax advisors prior to acquiring the notes about the application of the 60/40 Rule and the net capital loss carryback and carryforward rules in their particular situation.

     Tax Consequences if Notes are Delisted

     If notes are delisted and subsequently listed on an exchange that is not a “qualified board or exchange” within the meaning of Section 1256(g)(7) of the Code, the U.S. Federal income tax consequences are not certain. Because such notes would no longer, upon delisting, meet the statutory criteria for treatment as a Section 1256 Contract, it would be reasonable to treat such notes as if they were marked-to-market on the date the notes are delisted, and thereafter treated as if they were not Section 1256 Contracts. Alternatively, the IRS could treat such notes as no longer Section 1256 Contracts as of the first day of the holder’s taxable year in which the notes are delisted. In each case, for purposes of determining any gain or loss recognized after such notes are no longer Section 1256 Contracts, it is unclear whether the holder should be treated as having a holding period running from the date of such holder’s original acquisition of notes or from the date on which the notes are no longer treated as Section 1256 Contracts. The following paragraph assumes that (a) the notes are marked-to-market on the date they are delisted and (b) the holder’s holding period in its notes restarts as of the date of delisting. Prospective acquirors of notes should consult their own tax advisors as to the amount, character and timing of income for U.S. Federal income tax purposes in the event that the notes are delisted.

     If a note is marked-to-market on the date it is delisted, a U.S. holder will recognize gain or loss on that date as described above under “— Sale, Exchange or Exercise of Notes” and the character of that gain or loss would be determined as described above under “— Character of Gain or Loss Recognized on Notes”. The deemed amount realized on delisting would be the last quoted fair market value of the notes on the relevant exchange prior to delisting. A U.S. holder would then have a tax basis in the unlisted notes equal to the deemed amount realized, would begin a new holding period in the notes, and thereafter a U.S. holder will recognize gain or loss on the sale, exchange, exercise or lapse of the notes equal to the difference between the amount realized, if any, and the U.S. holder’s tax basis in the notes. Any gain or loss on an unlisted note will be long-term capital gain or loss if the U.S. holder has held the delisted note for more than one year from the date of the marking-to-market as described above. Prospective investors should consult their own tax advisors with respect to the treatment of long-term capital gains (which may be taxed at lower rates than ordinary income for certain taxpayers) and capital losses (the deductibility of which is subject to limitations).

     If notes are delisted and subsequently listed on an exchange that is a “qualified board or exchange” within the meaning of Section 1256(g)(7) of the Code, although there is no direct statutory, judicial, or administrative authority concerning the proper treatment of a listed index option that is delisted and subsequently listed on a qualified board or exchange, it is reasonable to treat the delisting and subsequent listing of such notes as not giving rise to a deemed sale or exchange of the notes. Under this treatment, a U.S. holder will not recognize gain or loss as of the date that the note is delisted and the U.S. holder’s tax basis in the note will not change. Notes that are subsequently listed on a qualified board or exchange will continue to be treated as Section 1256 Contracts and subject to the treatment described above. Prospective investors should consult their own tax advisors as to the amount, character and timing of income for U.S. Federal income tax purposes in the event that such notes are delisted and subsequently listed on a qualified board or exchange.

     Notes treated as a Put Option and a Deposit

     General

     Eksportfinans intends to treat certain of its notes as consisting of (1) a put option (the Put Option) that requires you to purchase the underlying asset or assets for an amount equal to the Deposit (as defined below) and (2) a Deposit of cash in an amount equal to the principal amount of a note (the Deposit) to secure your potential obligation to purchase the underlying asset or assets. Accordingly, under this characterization, the stated interest payments on such notes is divided into two components for U.S. Federal income tax purposes, a portion of which is treated as interest on the Deposit, and the remainder of which is attributable to your sale of the Put Option to Eksportfinans (the Put Premium).

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     Payments of Interest on Notes

     Eksportfinans intends to treat the Deposit as a debt obligation for U.S. Federal income tax purposes. If the Deposit is not a short-term obligation, then interest payable with respect to the Deposit will be taxable to you as ordinary interest income at the time it accrues or is received, in accordance with your regular method of accounting. If the Deposit is a short-term obligation, then under the applicable Treasury Regulations, the Deposit will be treated as being issued at a discount equal to the sum of the quarterly interest payments that is attributable to interest on the Deposit for U.S. Federal income tax purposes. If you are an accrual method or a cash method U.S. holder that elects to accrue the discount currently, you will be required to include the discount in income as it accrues on a straight-line basis, unless you elect to accrue the discount on a constant yield method based on daily compounding. If you are a cash method U.S. holder and you do not elect to accrue the discount, you should include the portion of the payments attributable to interest on the Deposit as income upon receipt and you will be required to defer deductions for any interest paid on indebtedness incurred to purchase or carry the notes in an amount not exceeding the accrued interest until such interest is included in income. Furthermore, if you are a cash method U.S. holder, any gain realized on the Deposit upon the sale, exchange, or retirement of the notes will be ordinary income to the extent of the discount that has accrued on a straight-line basis (or, if an election was made, according to a constant yield method based on daily compounding) but not previously included in income through the date of sale, exchange or retirement.

     Put Premium on Notes

     The Put Premium generally will not be taxable to you upon receipt. If the Put Option expires unexercised and a cash payment is made to you upon maturity of the notes, you will recognize with respect to the Put Option component of the notes, short term capital gain equal to the total Put Premium received.

     If Eksportfinans exercises the Put Option (i.e., the underlying asset or assets is/are delivered upon maturity of the notes), you will not recognize any gain or loss with respect to the Put Option other than with respect of any cash received in lieu of fractional shares. Your adjusted basis in the underlying asset or assets received will equal the Deposit, plus accrued but unpaid discount on the Deposit, less the total Put Premium received. Your holding period for any underlying asset or assets received will commence on the day after the delivery of the underlying asset or assets. To the extent you receive any cash in lieu of fractional shares, you will generally recognize short-term capital gain or loss in an amount equal to the difference between the amount of such cash received and your basis in the fractional shares, which is determined by allocating your total adjusted basis in the underlying asset or assets between the amount of cash received and the relative fair market value of the underlying asset or assets actually received.

     Sale, Exchange, Redemption or Other Disposition of Notes

     Upon the sale or exchange of such notes for cash, you will be required to apportion the amount you receive between the Deposit and the Put Option according to their respective values on the date of the sale or exchange. You will generally recognize gain or loss with respect to the Deposit in an amount equal to the difference between the amount you receive that is apportioned to the Deposit and your adjusted basis in the Deposit. Your adjusted basis in the Deposit will generally equal the principal amount of your notes, increased by the amount of any income you have recognized in connection with the Deposit and decreased by the amount of any payment received with respect to the Deposit. Such gain or loss will be short-term capital gain or loss, except to the extent attributable to accrued discount on the Deposit, which would be taxable as such as described under “Payments of Interest on the Notes” above.

     With respect to the Put Option, the amount of cash you receive upon the sale or exchange of the notes that is apportioned to the Put Option plus the total Put Premium previously received will be treated as short term capital gain. If on the date of the sale or exchange of the notes, the value of the Deposit is in excess of the amount you received upon such sale or exchange, then you will be treated as having made a payment to the purchaser equal to the amount of such excess in exchange for the purchaser’s assumption of your rights and obligations under the Put Option. In such a case, you will recognize short-term capital gain or loss equal to the difference between the total Put Premium you previously received in respect of the Put Option and the amount of the deemed payment made by you to the purchaser with respect to the assumption of the Put Option. The amount of the deemed payment will be treated as an amount received with respect to the Deposit in determining your gain or loss with respect to the Deposit.

     Possible Alternative Treatment

     There is currently no statutory, judicial or administrative authority that directly addresses the proper treatment of the notes for U.S. Federal income tax purposes. Accordingly, no assurance can be given that the IRS will agree with, or that a court will uphold, the characterization and treatment of the notes described above. If the IRS successfully asserts an alternative characterization of the notes, the timing and the character of any income with respect to the notes may differ from that described above. For example, it would be a reasonable interpretation of current law for the IRS to assert that the notes should be treated as a single debt instrument,

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in which case the notes would be subject to either the rules concerning short-term debt securities (as described above under “— Notes treated as Short-term Debt Securities”) or the Treasury Regulations governing CPDIs (as described under “— Notes treated as Contingent Payment Debt Instruments”). If the IRS were successful in treating the notes as CPDIs, then among other matters, you would be required to accrue OID on the notes at a yield comparable to the yield at which we would issue similar non-contingent bonds, determined at the time of issuance of the notes (plus ordinary income in the form of positive adjustments to reflect the payment of income in excess of such yield); and, on the sale, exchange, maturity, redemption or other taxable disposition of the notes, you would recognize ordinary income, or ordinary loss to the extent of your aggregate prior ordinary income inclusions and capital loss thereafter, rather than capital gain or loss. Accordingly, prospective investors are urged to consult their own tax advisors regarding the U.S. Federal income tax consequences of an investment in the notes.

     Possible New Administrative Guidance and/or Legislation

     From time to time, there may be legislative proposals or interpretive guidance addressing the tax treatment of financial instruments such as the notes. We cannot predict the likelihood of any such legislation or guidance being adopted, or the ultimate impact on the notes. For example, on December 7, 2007, the IRS released a notice stating that it and the Treasury are actively considering the proper federal income tax treatment of an instrument such as the notes, including whether gain or loss should be ordinary or capital, and they are seeking comments on the subject. It is not possible to determine what guidance they will ultimately issue, if any, and whether any such guidance would be applied on a retroactive basis. Treasury regulations or other forms of guidance, if any, issued after consideration of these issues could materially and adversely affect the tax consequences of your investment, possibly retroactively.

     In addition, one member of the House of Representatives introduced a bill on December 19, 2007 that, if enacted, would have required holders of instruments such as the notes purchased after the bill was enacted to accrue interest income over the term of the notes even if there will be no interest payments over the term of the notes. It is not possible to predict whether a similar bill will be re-introduced or enacted in the future and whether any such bill would affect the tax treatment of your notes.

     Since you will receive coupon payments on the notes on a current basis and by acquiring the notes you agree to treat a portion of the monthly coupon payments as ordinary income for U.S. Federal income tax purposes in accordance with your regular method of accounting, if any regulations are ultimately adopted pursuant to the notice with respect to pre-paid forward contracts and similar instruments, it is unclear whether such regulations would apply to the notes and, if so, whether such regulations would otherwise alter the tax treatment of the notes (e.g., requiring accrual of the full amount of the coupon as ordinary income and/or requiring any gain or loss to be characterized as ordinary rather than capital).

     The IRS and the Treasury are also considering other relevant issues, including whether foreign holders of such instruments should be subject to withholding tax on any deemed income accruals, and whether the special “constructive ownership rules” of Section 1260 of the Code might be applied to such instruments. Holders are urged to consult their tax advisors concerning the significance, and the potential impact, of the above considerations. Except to the extent otherwise provided by law, Eksportfinans intends to treat the notes for U.S. Federal income tax purposes in accordance with the treatment set forth in this section unless and until such time as the Treasury and the IRS issue guidance providing that some other treatment is more appropriate.

     Recently Enacted Legislation

     Under recently enacted legislation, individuals that own “specified foreign financial assets” with an aggregate value in excess of $50,000 in taxable years beginning after March 18, 2010 will generally be required to file an information report with respect to such assets with their tax returns. “Specified foreign financial assets” include any financial accounts maintained by foreign financial institutions, as well as any of the following, but only if they are not held in accounts maintained by financial institutions: (i) stocks and securities issued by non-U.S. persons, (ii) financial instruments and contracts held for investment that have non-U.S. issuers or counterparties and (iii) interests in foreign entities. U.S. holders that are individuals are urged to consult their tax advisors regarding the application of this legislation to their ownership of the notes.

     In addition, for taxable years beginning after December 31, 2012, a U.S. holder that is an individual, estate or trust will generally be subject to a 3.8% tax on the lesser of (1) the U.S. holder’s net investment income for the relevant taxable year and (2) the excess of the U.S. holder’s modified gross income for the taxable year over a certain threshold. U.S. holders that are individuals, estates or trusts are urged to consult their tax advisors regarding the applicability of this tax to their investment in the notes.

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     Taxation of Non-U.S. Holders

     Subject to the discussion of backup withholding below, a non-U.S. holder generally will not be subject to U.S. Federal income or withholding tax on any payment on a note and any gain realized on the sale, exchange or retirement of a note unless:

§that payment on the note or gain realized on the sale, exchange or retirement of the note is effectively connected with the conduct by that non-U.S. holder of a trade or business in the United States,
§in the case of any gain realized by an individual non-U.S. holder, that holder is present in the United States for 183 days or more in the taxable year of the sale or exchange and certain other conditions are met, or
§the non-U.S. holder is subject to tax pursuant to provisions of the Code applicable to certain expatriates.

     Backup Withholding and Information Reporting

     Backup withholding and information reporting requirements may apply to certain payments on the notes and proceeds of the sale, exchange or retirement of the notes to U.S. holders. Eksportfinans, its agent, a broker, or any paying agent, as the case may be, may be required to withhold tax from any payment that is subject to backup withholding, currently at a rate of 28% of such payment, if the U.S. holder fails to furnish the U.S. holder’s taxpayer identification number, to certify that such U.S. holder is not subject to backup withholding, or to otherwise comply with the applicable requirements of the backup withholding rules. The backup withholding rate may be subject to change each year. Certain U.S. holders are not subject to the backup withholding and information reporting requirements. Non-U.S. holders may be required to comply with applicable certification procedures to establish that they are not U.S. holders in order to avoid the application of such information reporting requirements and backup withholding. Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules from a payment to a U.S. holder generally may be claimed as a credit against such U.S. holder’s U.S. Federal income tax liability, provided that the required information is furnished to the IRS. You should consult your own tax advisor as to your qualification for exemption from backup withholding and the procedure for obtaining an exemption.

     Recently promulgated regulations meant to require the reporting of certain tax shelter transactions (Reportable Transactions) could be interpreted to cover transactions generally not regarded as tax shelters. Under the Regulations, under certain circumstances certain transactions may be characterized as Reportable Transactions such as, among other things, certain foreign currency transactions or a sale, exchange, retirement or other taxable disposition of notes that results in a loss that exceeds certain thresholds and other specified conditions are met. Persons considering the purchase of notes should consult with their own tax advisors to determine the tax return obligations, if any, with respect to an investment in the notes, including any requirement to file IRS Form 8886 (Reportable Transaction Statement).

     The U.S. Federal income tax discussion set forth above is included for general information only and may not be applicable depending upon the particular situation of the holder of notes. You should consult your own tax advisor with respect to the tax consequences to them of the ownership and disposition of notes, including the tax consequences under state, local, foreign and other tax laws and the possible effects of changes in Federal or other tax laws.

     F. DIVIDENDS AND PAYING AGENTS

     Not applicable.

     G. STATEMENTS BY EXPERTS

     Not applicable.

     H. DOCUMENTS ON DISPLAY

     Eksportfinans is subject to the information requirements of the Exchange Act, and files periodic reports and other information with the SEC. Eksportfinans files its annual reports on Form 20-F and furnishes its interim reports on Form 6-K.

     You may read and copy any document that Eksportfinans has filed with or furnished to the SEC at the SEC’s public reference room at 100 F Street, N.E. Washington D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room. Filings we make electronically are available to the public over the Internet at the SEC’s web site at http://www.sec.gov.

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     I. SUBSIDIARY INFORMATION

     Not applicable.

Item 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     The main objectives of Eksportfinans’ market risk management activities are to manage interest rate risk, currency risk and credit spread risk. With respect to the risk management of Eksportfinans’ government-supported loans, see Item 4.B. “Business Overview — LOANS — Export Lending — Arrangement with the Norwegian Government”. With respect to the commercial loans and the corresponding liquidity reserves and funding transactions, our policy is, to the extent practicable, to match, through the use of interest rate and currency swaps and other derivative instruments, the interest rate terms, currencies and maturities of our liabilities with those of our assets. The currency exposure and interest rate exposure is measured and managed on a portfolio basis. There can, however, be no assurance that we will be able to obtain economically efficient hedging opportunities that will enable us to implement this policy with respect to new assets and liabilities.

     The Company has funded its assets in a variety of currencies, mostly at fixed rates of interest, although also through simple fixed-to floating-rate swaps and various hybrid debt instruments. In accordance with our asset and liability risk management policy these funds have generally been swapped into floating rate funds denominated in U.S. dollars, which are invested for the short-term in instruments effectively denominated in U.S. dollars, pending their application to fund long-term assets. Certain Norwegian krone borrowings are not swapped into any other currency but are invested in instruments denominated in Norwegian kroner. We may also, according to our present policy, swap funds into floating rate euro, and invest in instruments denominated in euro.

     Funds available for long-term financing of disbursed loans are generally invested, pending disbursement, on an interim basis in short-term instruments. Eksportfinans frequently finances disbursed loans on an interim basis through the issuance of commercial paper or similar short-term debt instruments, until long-term funds are available. Eksportfinans also uses forward-rate agreements to lock in current interest rates in order to economically hedge interim financing of loans. As loans are granted in a variety of currencies, and with both fixed and floating rates of interest, Eksportfinans normally uses swaps and similar instruments, where appropriate, to convert these loans into floating rate assets, denominated in U.S. dollars, to match the terms of the underlying swapped funding.

     In connection with Eksportfinans’ structured transactions, primarily on the funding side but also to some extent with respect to its investments and warrant issuances, we may enter into options and hybrid transactions which reduce Eksportfinans’ exposure to the interest rate, currency or other market-related risks embedded in such transactions and which provide an opportunity to reduce Eksportfinans’ cost of funds, directly or indirectly. For further details, see note 12 to our audited consolidated financial statements in Item 18.

     As of December 31, 2011, 2010 and 2009, the total notional amounts of outstanding interest rate and/or currency swaps, forward foreign exchange transactions, forward rate agreements and options (excluding the 108 Agreement and Portfolio Hedge Agreement) were NOK 358,301 million, NOK 340,891 million and NOK 373,680 million, respectively. Counterparties to such swap arrangements and hedging transactions are subject to substantially the same credit criteria as those applied to guarantors of Eksportfinans’ loans. For further details, see Item 4.B. “Business Overview — LOANS — Export Lending — Credit Support, Credit Monitoring and Assessment”. As part of Eksportfinans’ risk management policy it has since 1989 chosen to outsource the internal audit function to an external auditor firm.

     Financial instruments account for the bulk of our assets and liabilities. The market risks inherent in Eksportfinans’ market risk-sensitive instruments and positions are the potential losses arising from adverse changes in foreign currency exchange rates and adverse changes in interest rates, both of which are measured and monitored. Market risk arising in the PHA Portfolio is mitigated by the Portfolio Hedge Agreement. Market risk in the Liquidity Portfolio is partially mitigated through stop-loss procedures. For further details, see Item 7.B. “Related Party Transactions — The Portfolio Hedge Agreement”; Item 11 “Credit Spread Risk” and Item 5.B. “Liquidity and Capital Resources — Liquidity Portfolio”.

     The 108 Agreement with the Norwegian Ministry regulates Eksportfinans’ financing of export contracts according to the OECD Consensus terms. Interest and exchange rate exposures related to lending, funding and investments of liquidity under this agreement are hedged with derivatives, with any residual cost or profit arising from the hedges being for the Ministry’s account. For further information on the 108 Agreement and other agreements with the State, see Item 4.B. “Business Overview — LOANS — Export Lending — Arrangement with the Norwegian Government”).

     Further information regarding financial derivatives is disclosed in note 12 to our audited consolidated financial statements in Item 18. Further information regarding risk management is disclosed in notes 27-30.

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     Foreign currency exchange risk, interest rate risk and credit spread risk are managed by a separate risk management function and reported regularly to the management board.

     Foreign Currency Exchange Risk

     As of December 31, 2011, approximately 80% (66% as of December 31, 2010 and 87% as of December 31, 2009) of the Company’s assets were denominated in foreign currencies. Foreign currency exchange risk arises from mismatches in the currencies denominating our assets and our liabilities. Each instrument is swapped into Eksportfinans’ three main currencies: euro, U.S. dollars and Norwegian kroner and net exposure in euro and U.S. dollars is further hedged by foreign exchange forward. Exposure towards a currency is measured as the net of assets and liabilities for the currency. As of December 31, 2011, Eksportfinans’ exposure to currencies other than the Norwegian kroner reflected on the face of its balance sheet and relating to off-balance sheet derivative positions were as follows:

(NOK thousands) Balance sheet
assets/(liabilities)		 Derivatives Net position*) Amount of net
position covered by
108 Agreement items
December 31, 2011                
CAD (1,243,140 ) 1,246,580   3,440   2,432  
JPY (74,040,848 ) 74,041,659   811   305  
SEK 1,979,364   (1,978,821 ) 543   0  
EUR 29,322,232   (29,299,872 ) 22,360   21,088  
DKK 4,165,719   (4,165,741 ) (22 ) 195  
USD (28,225,921 ) 28,249,099   23,178   24,058  
Other currencies (14,520,929 ) 14,523,214   2,285   4,321  
TOTAL (82,563,523 ) 82,616,118   52,595   52,399  

 

*)      Net position includes amounts covered by the 108 Agreement. For further details, see note 16 to our audited consolidated financial statements in Item 18.

     For more information, see Item 4.B. “Business Overview — LOANS — Export Lending — Arrangement with the Norwegian Government”.

     The above table does not include foreign currency commitments because the currency exposure first comes into effect at disbursement. At that time any currency/interest rate exposure will be hedged. For further information regarding Eksportfinans’ market risk, see note 29 to our audited consolidated financial statements in Item 18.

     Additionally, because Eksportfinans’ financial statements are reported in Norwegian kroner and a majority of our items are denominated in other currencies (predominantly U.S. dollars and euro). The levels of items reflected in our financial statements are subject to fluctuations as a result of changes in the U.S. dollar and euro/krone exchange rates. In particular, a substantial part of Eksportfinans’ net interest income is denominated in U.S. dollars and euro, while we pay taxes, any dividends to shareholders and administrative expenses in Norwegian kroner.

     The Board of Directors has approved the following currency risk and strategy at the present time. According to Eksportfinans’ risk policy, the Company can have an aggregate net position in each foreign currency and in all foreign currencies in total equivalent to NOK 120 million (USD 20 million). The fair value effect on Eksportfinans’ total assets and liabilities due to an adverse change of 10% in foreign currency exchange rates as of December 31, 2011 is estimated to be NOK 0.3 million before taxes. The effect per December 31, 2010 was estimated to be NOK 5.8 million. There is no breach of currency exposure limits during 2011.

     Eksportfinans believes that it is able to adjust net foreign currency positions quickly if adverse fluctuations occur by buying or selling positions or derivatives such as currency swaps.

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     Interest Rate Risk

     Interest rate risk arises from potential adverse changes in interest rates. Our guidelines with respect to interest rate risk include limits on interest rate exposure for the market-based activities of Eksportfinans.

     We measure our exposure to interest rate risk according to the basis point value method. This measurement quantifies the change in the fair value of assets and liabilities that would result from a one basis point change in interest rates. Basis point value shows the change in value of the portfolio from a 0.0001 (i.e. 1/100 of 1%) change in the underlying yield curves.

     The table below displays a summary of the change in fair values resulting from a shift in yield curves of 1 basis point. The below table shows interest rate risk of exposure with up to one year of maturity, which is a change from the parameters previously used, which measured our exposure without regard to maturity. The interest rate exposure as of December 31, 2011 is negative NOK 108,000. Since Eksportfinans swaps all fixed rate instruments to floating rate, the interest rate exposure mainly arises from interest rate fixings occurring on different dates. Interest rate maturities between the selected interest rate points are given estimated values allocated to the selected interest rate points. However, this presentation of interest rate exposure may overestimate actual exposure since it does not account for covariance between the selected interest points.

     Interest rate exposure with up to one year of maturity (from a 1 basis point shift of interest rate curves):

        Other  
(NOK thousands) NOK EUR USD currencies Total
           
As of December 31, 2011 (59) (14) (33) (2) (108)
           
Maximum through 2011 *) 54 19 2 88 (16)
Minimum through 2011 *) (121) (145) (84) (4) (175)
Average through 2011 (43) (39) (36) 12 (106)
           
As of December 31, 2010 (84) (6) (70) (7) (167)
           
Maximum through 2010 *) 4 76 12 40 (46)
Minimum through 2010 *) (135) (67) (82) (94) (293)
Average through 2010 (71) (20) (31) 1 (131)
           
As of December 31, 2009 (131) (40) 70 (191) (292)

(*)      The maximum and minimum exposure in general does not occur on the same date for different currencies.

     Administrative interest rate risk is defined as the risk inherent in non-maturing loans, where the Company maintains the right to change the interest rates on these items on a discretionary basis. Administrative interest rate risk arises when changes in market rates are not immediately reflected by changes in interest rate conditions on non-maturing assets. This is due to Eksportfinans’ discretionary fixing of interest rates on these assets. The Government makes payments to Eksportfinans sufficient to offset any interest and foreign exchange losses for transactions covered by the 108 Agreement. Positions under the 108 Agreement are therefore not included in the above presentation of exposure.

     The Company maintains a continuous assessment of market conditions in order to measure the level of exposure to interest rate changes. Eksportfinans aims to contain the level of exposure to interest rate changes. The exposure has been reduced with a shift in the composition towards the trading portfolios and by a shift towards increasing the maturity of the assets. The ongoing management of financial instruments is in accordance with Eksportfinans’ guidelines for asset and liabilities management and risk management. The management view on risk and return may at any time be reflected in a change in the overall level of exposure and in the shift in exposure from one portfolio to the other.

     Credit Spread Risk

     A potential increase in credit spreads of one percentage point would increase the net fair value of our assets and liabilities by NOK 50 million, as of December 31, 2011 (NOK 75 million for Dec 31 2010) as gains on the liability side would outweigh losses on the asset side. Credit spreads in the market is defined as market risk and not credit risk, which we define to include default probability only. Isolated for the PHA portfolio a potential increase in credit spreads of one basis point will reduce the fair value by NOK 7 million as of December 31, 2011, compared to NOK 10 million as of December 31, 2010. Annualized fluctuation of credit

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spread in the securities portfolio based on 99% confidence intervals of monthly changes through 2011 is around 50 basis points. The credit spread risk in the Liquidity Reserve Portfolio is managed through daily measurements of spread duration. According to the Company’s risk policy a change in the value of the Liquidity Reserve Portfolio by 1 basis point change in spread duration should be no more than NOK 60,000 per NOK 1 billion. The accumulated losses in the Liquidity Reserve Portfolio should not be more than 25 basis points of the value of the portfolio. These limits have not been breached since they were introduced.

     FX Basis spread risk

     The Company has earned a significant part of the annual earnings because of euros and US dollars being attractive relative to Norwegian kroner and Danish kroner. A significant part of the company’s funding is in euros and dollars while some loans and liquidity placements are in Norwegian or Danish kroner. Hence the Company has swapped significant amounts from dollars and euros over to Norwegian and Danish kroner, earning on the basis swap spread. From September 2010 the Company commenced hedging the basis risk. This included both hedging on portfolio level and for all new loans larger than NOK 500 million and with maturity longer than three years. This hedging amounted to approximately NOK 32 billion as of December 31, 2011 of which NOK 22 billion had between zero and three years remaining duration, NOK 9 billion had four to but excluding five years remaining duration and NOK 1 billion had five years or more of remaining duration.

Item 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

     Not applicable.

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PART II

Item 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

     None.

Item 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

     None.

Item 15. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

     Under the supervision and with the participation of our chief executive officer and chief financial officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2011. Based on that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective as of that date.

Management’s Report on Internal Control over Financial Reporting

     Our management is responsible for establishing and maintaining an adequate internal control structure and procedures for financial reporting. Our internal control system was designed to provide reasonable assurance to our management and our Board of Directors regarding the reliability of financial reporting and the preparation and fair presentation of published financial statements for external purposes in accordance with generally accepted accounting principles.

     Under the supervision of our management, including the chief executive officer and chief financial officer, we conducted an assessment of the effectiveness of our internal control over financial reporting based on the Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, management has concluded that our internal control over financial reporting as of December 31, 2011 was effective.

     All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurances with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may decline.

Changes in Internal Controls over Financial Reporting

     There were no changes to our internal controls over financial reporting that occurred during 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Item 16. (Reserved)

Item 16A. AUDIT COMMITTEE FINANCIAL EXPERT

     Our Board of Directors has determined that it has an “audit committee financial expert” serving on its Audit Committee. Since April 21, 2010, Ms. Live Haukvik Aker has acted as the Audit Committee financial expert, and is and was independent as defined in Section 303A.02 of the New York Stock Exchange’s corporate governance standard.

Item 16B. CODE OF ETHICS

     Eksportfinans has a code of ethics that applies to Eksportfinans’ principal executive officer, principal financial officer, principal accounting officer or controller, and persons performing similar functions. Eksportfinans has made its code of ethics publicly available on its internet website at www.eksportfinans.no.

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Item 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Fees paid to our principal accountant consist of the following for the years ended December 31:

(NOK thousands) 2011 2010
Audit fees 4,722 5,153
Audit-related fees (1) 953 1,124
Tax fees — —
All other fees 161 157
   
(1)      Audit-related fees include attestations related to funding transactions.

     The Board of Directors has developed an “Audit Committee Charter”, a “Policy for Auditor Independence” and an “Audit Committee Audit and Non-Audit Pre-Approval Policy” that concern pre-approval of an independent accountant for the performance of audit and non-audit services. All of the services described above were approved in advance by our Audit Committee.

Item 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

     Not applicable.

Item 16E. PURCHASE OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

     The Company did not repurchase any of its own outstanding equity securities in 2011.

Item 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT

     Not applicable.

Item 16G. CORPORATE GOVERNANCE

     The Company’s equity is not listed on any securities exchange, but the Company has adopted and complies with the Norwegian Code of Practice for Corporate Governance, except where noted below. The purpose of the Code of Practice is to clarify the respective roles of shareholders, board of directors and executive officers beyond the requirements of Norwegian legislation. Oslo Børs (Oslo Stock Exchange, Norway) stipulates that companies listed on Oslo Børs must annually publish a statement on the company’s principles for corporate governance in accordance with the Norwegian Code of Practice for Corporate Governance.

Composition of Board of Directors — Independence

     The majority of the members of the Board of Directors are elected by the Council of Representatives. One director is elected by and among the employees of Eksportfinans. With respect to the composition of the Board of Directors, Eksportfinans is compliant with the Code of Practice which, among other things, states that the composition of the Board of Directors should ensure that the Board can attend to the common interests of all shareholders and meet the Company’s need for expertise, capacity and diversity. Attention should be paid to ensuring that the Board can function effectively as a collegiate body. The composition of the Board should ensure that it can operate independently of any special interests. The majority of the shareholder elected members of the Board should be independent of the Company’s executive management and material business contacts. At least two of the members of the Board elected by shareholders should be independent of the Company’s main shareholder(s). The Board of Directors should not include representatives of the Company’s executive management.

Committees composed by Independent Directors

     With the exception of the Audit Committee and the Compensation Committee as described below, companies incorporated in Norway are neither required nor precluded by law to have board committees. The Code of Practice provides among other things that the Board of Directors should consider appointing board committees in order to help ensure thorough and independent preparation of matters relating to financial reporting and compensation paid to the members of the executive management. Membership of such committees should be restricted to members of the Board who are independent of the company’s executive

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management. Under Norwegian law, board committees are only responsible for preparing certain issues for the Board of Directors as a collegiate body and are not vested with sole authority over any of the Board of Directors’ responsibilities.

Audit Committee

     On June 19, 2009 a new law was passed, incorporating changes into the Financial Institutions Act, pursuant to which effective from July 1, 2009 Eksportfinans is required to have an Audit Committee under Norwegian law.

     The Board of Directors had previously in 2002 appointed an Audit Committee, the charter of which is based on the Sarbanes-Oxley Act and the U.S. Securities and Exchange Commission rulemaking to the extent not in conflict with Norwegian law, such as with respect to the appointment of auditors and approval of audit fees, which rests with our Annual General Meeting. Eksportfinans’ Audit Committee is appointed by and among the Board of Directors to assist the board in monitoring (1) the integrity of the financial statements of the company, (2) the independent auditor’s qualifications and independence, (3) the performance of the Company’s internal audit function and independent auditors and (4) the compliance by the Company with legal and regulatory requirements. The Audit Committee has delegated authority on behalf of the Board only on issues specifically specified in the charter or on other issues as the Board may specifically decide from time to time.

Nomination Committee

     There are no mandatory rules on nomination committees in Norwegian law, only recommendation under the Code of Practice. Eksportfinans has established a nomination committee according to its Articles of Association. The election of members to the Council of Representatives, the Board of Directors and the Control Committee is prepared by the Nomination Committee. The Nomination Committee has four members. Three of the members are elected for a period of two years by the General Meeting and shall be representatives of the shareholders. The chair of the Counsel of Representatives is a permanent member of the Nomination Committee and shall chair its meetings. The chair of the Board of Directors and the Chief Executive Officers is normally, but without any voting rights, called to at least one meeting before the committee makes its final resolution. The Nomination Committee shall be informed of the member and alternate member to the Council of Representatives and member to the Board of Directors who have been elected by and among the employees.

Compensation Committees

     On December 1, 2010 a new regulation was passed pursuant to which, effective from January 1, 2011, Eksportfinans is required to have a compensation committee. Accordingly Eksportfinans established a Compensation Committee as of December 16, 2010. The compensation of the CEO is fixed by the Board, based on recommendations from the Compensation Committee. The Board is the corporate body that employs the CEO. The compensation of the Board, the auditor, the Control Committee and the Council of Representatives is fixed by the shareholders at the general meeting based on recommendations by the Nomination Committee.

Corporate Governance

     There are no rules in Norwegian law that require listed companies to adopt or disclose corporate governance guidelines. However, some of the issues that the New York Stock Exchange Listed Company Manual Section 303A(9) requires listed companies to include in their corporate governance policies are under Norwegian law addressed in the annual report. This includes information on the remuneration paid to the directors, CEO and the auditor. (Remuneration means any salary, pensions and other benefits received.)

     Norwegian law does provide for rules on conflict of interest. There is a general rule which provides that a board member may not participate in making decisions which have a particular importance for himself or for any close associate that the director must be deemed to have special and prominent personal or financial interest in the matter.

82
  

PART III

Item 17. FINANCIAL STATEMENTS

     Not applicable.

Item 18. FINANCIAL STATEMENTS

     The following financial statements, the notes to those statements and the report on those statements of PricewaterhouseCoopers AS, independent registered public accounting firm, are incorporated by reference in this Item 18:

  Page
   
Report of Independent Registered Public Accounting Firm F-1
Statements of comprehensive income for the three years ended December 31, 2011, 2010 and 2009 F-2
Balance sheets at December 31, 2011 and 2010 F-3
Statements of changes in equity for the three years ended December 31, 2011, 2010 and 2009 F-4
Cash flow statements for the three years ended December 31, 2011, 2010 and 2009 F-5
Notes to financial statements F-6

Item 19. EXHIBITS

1.1 Articles of Association (English translation of Norwegian-language original)
   
2.1 Form of Indenture, dated as of February 1, 1996, between the Company and The Bank of New York (formerly United States Trust Company of New York), as Trustee (incorporated by reference to Exhibit 4.1 to the Company’s Amendment No. 2 to Form F-3 (No. 33-99538) filed with the SEC February 2, 1996)
   
4.1 Agreement Regarding Interest Equalization and Hedging for Eksportfinans’ Borrowing and Lending Commitments (the 108 Agreement) (English translation of Norwegian-language original)* (incorporated by reference to Exhibit 4.1 of the Company’s Annual Report on Form 20-F filed with the SEC March 21, 2005)
   
4.2 Portfolio Hedge Agreement entered into by Eksportfinans ASA, DNB Bank ASA, Nordea Bank AB (publ) and Danske Bank A/S (the Portfolio Hedge Agreement)* (incorporated by reference to Exhibit 4.2 of the Company’s Annual Report on Form 20-F filed with the SEC June 27, 2008)
   
4.3 Committed Credit Line (Repo) Facilities for repo purposes provided by DNB Bank ASA, Nordea Bank AB (publ) and Danske Bank A/S*
   
4.4 Agreement between the Norwegian State represented by the Ministry of Trade and Industry and Eksportfinans ASA (the Funding Agreement), dated November 26, 2008 and the related Loan Agreement between the Ministry of Trade and Industry for the Norwegian State and Eksportfinans ASA (the Loan Agreement), dated January 15, 2009* (incorporated by reference to Exhibit 4.4 of the Company’s Form 20-F filed with the SEC June 10, 2009)
   
4.5 Sale and Purchase Agreement between Eksportfinans ASA and KLP Prosjekt AS regarding Kommunekreditt Norge AS dated May 7, 2009, (incorporated by reference to Exhibit 99.9 of the Company’s Form 6-K filed with the SEC May 8, 2009)
   
4.6 Excluded Portfolio Agreement between Eksportfinans ASA and Kommunekreditt Norge AS, dated May 7, 2009* (incorporated by reference to Exhibit 4.6 of the Company’s Form 20-F filed with the SEC June 10, 2009)
   
4.7 Global Master Repurchase Agreement with DNB Bank ASA dated February 22, 2012
   
4.8 Agreement with the Norwegian Ministry of Trade and Industry setting out terms and conditions for Eksportfinans arranging export credit loans during the period from November 18, 2011 and until June 30, 2012 (the Transition Agreement with the Norwegian State) (English translation of Norwegian-language original)
83
  

 

4.9 Agreement with the Norwegian Ministry of Trade and Industry on transfer of employees from Eksportfinans to the new state entity (the Agreement on Transfer of Employees to the State Entity) (English translation of Norwegian-language original)
   
7.1 Computation of ratio of earnings to fixed charges
   
12.1 Certification of Chief Executive Officer pursuant to Rule 13a — 14(a) under the Securities Exchange Act of 1934
   
12.2 Certification of Chief Financial Officer pursuant to Rule 13a — 14(a) under the Securities Exchange Act of 1934
   
13.1 Certification by Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
   
13.2 Certification by Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
   
15.1 Consent of Independent Registered Public Accounting Firm
   
*      Confidential treatment requested and the redacted material has been separately filed with the SEC.

     The total amount of long-term debt securities of the Company authorized under any instrument does not exceed 10% of the total assets of the Company. The Company agrees to furnish copies of any or all such instruments to the SEC upon request.

84
  

SIGNATURES

     The Registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.

EKSPORTFINANS ASA

 

 

By:

 /s/ GISELE MARCHAND
  Gisele Marchand
  President and
Chief Executive Officer

Dated: March 30, 2012

85
  

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of Eksportfinans ASA:

In our opinion, the accompanying consolidated balance sheet and the related consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated cash flow statement present fairly, in all material respects, the financial position of Eksportfinans ASA and its subsidiaries (the "Company") at December 31, 2011 and 2010 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2011, in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

/s/ PricewaterhouseCoopers AS

Oslo, Norway
March 30, 2012 

F-1
 

STATEMENT OF COMPREHENSIVE INCOME

 

              NOTE 
(NOK thousands)   2011   2010   2009    
                 
Interest and related income on loans due from credit institutions   822,089   1,174,778       1,864,021    
Interest and related income on loans due from customers   3,888,102   3,729,369       3,423,755    
Interest and related income on securities   864,248   868,776       1,851,586    
Other interest and related income   53,985   43,700            73,146    
Total interest and related income   5,628,424   5,816,623   7,212,508    
                 
Interest and related expenses on commercial paper and bond debt   4,007,439   4,195,983       5,642,400    
Interest and related expenses on subordinated debt   4,030   7,492            20,562    
Interest and related expenses on capital contribution securities   9,552   9,385            14,702    
Other interest and related expenses   57,651   184,878            64,819    
Total interest and related expenses   4,078,672   4,397,738   5,742,483    
                 
NET INTEREST INCOME   1,549,752   1,418,885   1,470,025    
                 
Commissions and income related to banking services   1,031   1,515              1,576    
Commissions and expenses related to banking services   5,697   6,956              7,421    
                 
Net gains/(losses) on financial instruments at fair value   40,373,414   (603,075 )   (3,793,170 ) 5, 29.4
                 
Other income   16,087   6,822            15,440   7
                 
NET OTHER OPERATING INCOME   40,384,835   (601,694 ) (3,783,575 )  
                 
TOTAL OPERATING INCOME   41,934,587   817,191   (2,313,550 )   
                 
Salaries and other administrative expenses   181,503   157,373          151,706   9
Depreciation   20,083   23,041            20,381   14 ,15
Other expenses   12,163   14,264            15,254   10
TOTAL OPERATING EXPENSES BEFORE IMPAIRMENT CHARGES ON LOANS   213,749   194,678   187,341    
                 
Impairment charges on loans at amortized cost   0   0                  0   28.4
                 
PRE-TAX OPERATING PROFIT/(LOSS)   41,720,838   622,513   (2,500,891 )  
                 
Taxes   11,682,272   174,519        (699,091 ) 11
                 
PROFIT/(LOSS) FOR THE YEAR FROM CONTINUING OPERATIONS   30,038,566   447,994   (1,801,800 )  
                 
Profit /(loss) for the year from discontinued operations, net of taxes   0   0              1,148    
Other comprehensive income   0   0                  0    
                 
TOTAL COMPREHENSIVE INCOME   30,038,566   447,994   (1,800,652 )  
                 
Allocated to/(from) reserve for unrealized gains   29,292,698   (332,544 )                0   24
Allocated to/(from) other equity   745,868   780,538                  0   24
TOTAL ALLOCATIONS   30,038,566   447,994                  —    

 

The accompanying notes are an integral part of the financial statements.

F-2
  
BALANCE SHEET

 

            NOTE 
(NOK thousands)   Dec. 31, 2011   Dec. 31, 2010   Dec. 31, 2009  
               
ASSETS              
Cash   0   5                       4  
Loans due from credit institutions 1)   40,339,763   43,013,946       64,126,108 13
Loans due from customers 2)   96,541,221   85,095,398       66,677,131 13
Securities   51,908,412   67,920,880       76,089,636 28.5
Financial derivatives   19,446,289   15,403,160       14,343,940 12
Deferred tax assets   0   43,729                     0 11
Intangible assets   16,306   20,209              25,973 14
Property, equipment and investment property   209,605   204,712            207,820 15
Other assets   5,467,037   3,847,386         3,783,287 16
TOTAL ASSETS   213,928,633   215,549,425   225,253,899  
               
LIABILITIES              
Deposits by credit institutions   574   44,754              38,333  
Commercial paper debt   5,762,049   3,306,532       19,107,830 17
Bond debt   135,726,555   183,095,213     178,526,422 17
Financial derivatives   13,870,542   14,247,493       14,809,777 12
Taxes payable   294,765   373,598              73,355 11
Deferred tax liabilities   11,343,069   0            156,931 11
Other liabilities   10,721,609   7,174,627         5,123,890 20
Provisions   128,041   95,896              88,989 8, 19
Subordinated debt   1,039,230   1,638,650         1,501,567 21
Capital contribution securities   348,109   417,128            419,265 22
Preference share   0   11                     11 2.18
TOTAL LIABILITIES   179,234,543   210,393,902   219,846,370  
               
SHAREHOLDERS' EQUITY              
Share capital   2,771,097   2,771,097         2,771,097 23
Share premium reserve   176,597   176,586            176,586 24
Reserve for unrealized gains   29,363,249   70,551                     0 24
Other equity   2,383,147   2,137,289         2,459,846  
Total shareholders' equity   34,694,090   5,155,523   5,407,529  
               
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY   213,928,633   215,549,425   225,253,899  

 

1)Of NOK 40,339,763 thousand at December 31, 2011, NOK 39,950,616 thousand is measured at fair value through profit or loss and NOK 389,147 thousand is measured at amortized cost. Of NOK 43,013,946 thousand at December 31, 2010, NOK 29,810,571 thousand is measured at fair value through profit or loss and NOK 13.203.375 thousand is measured at amortized cost.
2)Of NOK 96,541,221 thousand at December 31, 2011, NOK 61,358,301 thousand is measured at fair value through profit or loss and NOK 35,182,920 thousand is measured at amortized cost. Of NOK 85,095,398 thousand at December 31, 2010, NOK 49,204,511 thousand is measured at fair value through profit or loss and NOK 35,890,887 thousand is measured at amortized cost.

 

 

The accompanying notes are an integral part of the financial statements.





 

Geir Bergvoll

Chair person

 

 

 

 

 

  

 

Carl Erik Steen

Deputy chair person

  

 

Live Haukvik Aker

 

Tone Lunde Bakker

 

 

 

 

 

 

  

 

Bodil Hollingsæter

  

 

Marianne Heien Blystad

 

Christian Berg

 

 

  

 

Tor Østbø

  

 

Gisèle Marchand

President and CEO

F-3
  

STATEMENT OF CHANGES IN EQUITY

 

(NOK thousands)   Share
capital 1)		   Share
premium
reserve 1)		   Reserve
unrealized
gains 1)		   Other
 equity		   Total
 equity		  
                       
EQUITY AS AT JANUARY 1, 2010   2,771,097   176,586   403,095   2,056,751   5,407,529  
                       
Total comprehensive income for the period   0   0   (332,544 ) 780,538   447,994  
Dividends paid   0   0   0   (700,000 ) (700,000 )
EQUITY AS AT DECEMBER 31, 2010   2,771,097   176,586   70,551   2,137,289   5,155,523  
                       
                       
EQUITY AS AT JANUARY 1, 2011   2,771,097   176,586   70,551   2,137,289   5,155,523  
                       
Total comprehensive income for the period   0   0   29,292,698   745,869   30,038,566  
Dividends paid   0   0   0   (500,000 ) (500,000 )
Increase in share premium reserve as a result of repayment of preference share 2)   0   11   0   (11 ) 0  
EQUITY AS AT DECEMBER 31, 2011   2,771,097   176,597   29,363,249   2,383,147   34,694,090  

 

1)Restricted equity that cannot be paid out to the the owners without a resolution to reduce the share capital in accordance with the Public Limited Companies Act under Norwegian law. For further information, see note 24.
2)See note 2.16 and 23 for details.

 

The accompanying notes are an integral part of the financial statements.

F-4
  
CASH FLOW STATEMENT

 

            NOTE 
(NOK thousands)   2011   2010   2009    
                 
Pre-tax operating profit/(loss) from continuing operations   41,720,838   622,513         (2,500,891 )   
                 
Provided by operating activities:                
Accrual of contribution from the Norwegian government   (322,402 ) (787,062 )           (382,396 )   
Unrealized losses/(gains) on financial instruments at fair value   (40,515,032 ) 553,900          3,857,530   5
Realized losses on financial instruments
at fair value through profit and loss [non-cash items]		   26,941   26,354                       0    
Depreciation   20,083   23,041               20,381   14, 15
                 
Disbursement on loans 1)   (33,685,138 ) (33,654,226 )      (73,371,699 )   
Principal collected on loans 2)   35,421,882   32,415,841        83,820,416    
Purchase of financial investments (trading)   (43,516,381 ) (43,400,727 )      (37,729,976 )   
Proceeds from sale or redemption of financial investments (trading)   51,682,977   38,748,102        45,473,027    
Contribution paid by the Norwegian government   382,396   332,274             151,666    
Taxes paid   (74,073 ) (74,132 )           (142,960 )  
                 
Changes in:                
Accrued interest receivable   224,600   1,498,011         (1,198,578 )   
Other receivables   (1,638,388 ) 401,836          6,756,411    
Accrued liabilities   2,618,827   408,071            (726,737 )   
NET CASH FLOW FROM OPERATING ACTIVITIES   12,347,130   (2,886,204 )       24,026,194    
                 
Purchase of financial investments   (5,575,080 ) (4,316,528 )           (642,017 )   
Proceeds from sale or redemption of financial investments   12,912,253   18,335,527          5,991,375    
Net cashflow from financial derivatives   92,596   7,029,855       (16,045,057 )   
Purchases of property and equipment and intangible assets   (21,893 ) (14,175 )             (11,630 )  14, 15
Proceeds from sales of property and equipment   954   0                    670    
NET CASH FLOW FROM INVESTING ACTIVITIES   7,408,830   21,034,679   (10,706,659)    
                 
Change in debt to credit institutions   (45,212 )  5,852            (230,827 )   
Proceeds from issuance of commercial paper debt   185,914,814   280,888,654      256,414,537    
Repayments of commercial paper debt   (183,536,563 )  (296,900,558 )    (265,520,194 )   
Proceeds from issuance of bond debt   51,552,042   72,231,121        69,338,668    
Principal payments on bond debt   (63,287,171 )  (74,253,198 )      (75,226,236 )   
Repayment of subordinated debt   (449,453 )  0                       0    
Repayment of preference share   (11 )  0                      11   2.16
Dividends paid   (500,000 )  (700,000 )                      0   2.10
NET CASH FLOW FROM FINANCING ACTIVITIES   (10,351,554 )  (18,728,129 )  (15,224,041 )   
                 
NET CHANGE IN CASH
AND CASH EQUIVALENTS FROM CONTINUING OPERATIONS		   9,404,406   (579,654 )  (1,904,506 )   
                 
Cash and cash equivalents as at beginning of period   3,932,261   4,523,484          7,326,727   26
                 
Effect of exchange rates on cash and cash equivalents   65,925   (11,569 )           (878,302 )   
Net change in cash
and cash equivalents from discontinued operations 3)		   0   0              (20,435 )   
CASH AND CASH EQUIVALENTS AT END OF PERIOD   13,402,592   3,932,261   4,523,484   26

 

1)Of NOK 73.4 billion in 2009, NOK 45.3 billion is related to funding of Kommunekreditt and other municipal-related disbursements after the sale of the subsidiary.
2)Of NOK 83.8 billion in 2009, NOK 44.5 billion is related to repayment from Kommunekreditt in relation to the sale of the subsidiary.
3)Cash flows from discontinued operations for 2009 are related to investing activities, as they represent the net cash flow effect from the sale of the subsidiary.

  

The accompanying notes are an integral part of the financial statements.

F-5
  

1 GENERAL INFORMATION

 

Eksportfinans ASA (“The Company”) provides the Norwegian export sector with long-term financing.

 

Eksportfinans ASA is a limited liability company. Eksportfinans ASA is incorporated and domiciled in Norway. The address of the head office is Dronning Mauds gate 15, P.O. Box 1601 Vika, N-0119 Oslo, Norway.

 

The fiscal year of the Company runs from January 1 to December 31.

 

These financial statements have been approved for issue by the Board of Directors on March 1, 2012.

 

2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

The principal accounting policies applied in the preparation of these financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated.

 

2.1 Basis of preparation

 

These financial statements have been prepared in line with accounting regulations and legislation in Norway. The Norwegian Accounting Act requires the Company to prepare the financial statements in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union (EU). This set of standards is not necessarily identical with IFRS as issued by the International Accounting Standards Board (IASB). Mainly, these differences are related to the timing of endorsement by the EU, but there are also material differences in specific standards (e.g. the ’carve outs‘ in IAS 39). For Eksportfinans, however, the existing differences are not relevant. Hence, there are no differences in the application of the IFRS versions, and the financial statements of Eksportfinans have been prepared in accordance with IFRS as adopted by the EU and IFRS as issued by the IASB. The Norwegian Accounting Act also requires some disclosure in addition to the disclosure required by IFRS. These are related to remuneration, and are included in these financial statements. The financial statements have been prepared under the historical cost convention, as modified by the revaluation of financial assets and liabilities held at fair value through profit and loss, and as modified by the revaluation made for certain assets when implementing IFRS.

 

New and amended standards (IFRSs) and interpretations (IFRICs) adopted by the Company in 2011

 

There are no IFRSs or IFRIC interpretations that are effective for the first time for the financial year 2011 that had a material impact on the Company.

 

New and amended standards (IFRSs) and interpretations (IFRICs) issued but not effective for the financial year beginning January 1, 2011, and not early adopted by the Company

 

IAS 19, ‘Employee benefits’ was amended in June 2011. The impact on the Company will be as follows: to eliminate the

corridor approach and recognise all actuarial gains and losses in OCI as they occur; to immediately recognise all past

service costs; and to replace interest cost and expected return on plan assets with a net interest amount that is

calculated by applying the discount rate to the net defined benefit liability (asset). The Company is yet to assess the full

impact of the amendments.

 

IFRS 9, ‘Financial instruments’, addresses the classification, measurement and recognition of financial assets and

financial liabilities. IFRS 9 was issued in November 2009 and October 2010. It replaces the parts of IAS 39 that relate to

the classification and measurement of financial instruments. IFRS 9 requires financial assets to be classified into two

measurement categories: those measured as at fair value and those measured at amortised cost. The determination is

made at initial recognition. The classification depends on the entity’s business model for managing its financial

instruments and the contractual cash flow characteristics of the instrument. For financial liabilities, the standard retains

most of the IAS 39 requirements. The main change is that, in cases where the fair value option is taken for financial

liabilities, the part of a fair value change due to an entity’s own credit risk is recorded in other comprehensive income

rather than the income statement, unless this creates an accounting mismatch. The Company is yet to assess IFRS 9’s full

impact and intends to adopt IFRS 9 no later than the accounting period beginning on or after January 1, 2015.

 

IFRS 10, Consolidated financial statements’ builds on existing principles by identifying the concept of control as the

determining factor in whether an entity should be included within the consolidated financial statements of the parent

company. The standard provides additional guidance to assist in the determination of control where this is difficult to

assess. The amendments are not relevant for the Company as it is no longer part of a group.

 

IFRS 12, ‘Disclosures of interests in other entities’ includes the disclosure requirements for all forms of interests in

other entities, including joint arrangements, associates, special purpose vehicles and other off balance sheet vehicles.

The amendments are not relevant for the Company as it does not have any interest in other entities.

 

IFRS 13, ‘Fair value measurement’, aims to improve consistency and reduce complexity by providing a precise

definition of fair value and a single source of fair value measurement and disclosure requirements for use across

IFRSs. The requirements, which are largely aligned between IFRSs and US GAAP, do not extend the use of fair value

accounting but provide guidance on how it should be applied where its use is already required or permitted by other

standards within IFRSs or US GAAP. The Company is yet to assess IFRS 13’s full impact and intends to adopt IFRS 13 no

later than the accounting period beginning on or after January 1, 2013.

 

There are no other IFRSs or IFRIC interpretations that are not yet effective that would be expected to have a material

impact on the Company.

F-6
  

2.2 Foreign currency translation

 

Items included in the financial statements are measured using the currency of the primary economic environment in which the Company operates, i.e. the functional currency. Norwegian kroner (NOK) serve as both the functional and presentational currency for the Company.

 

On initial recognition, foreign currency transactions are recorded applying the spot exchange rate at the date of recognition. At the balance sheet date, foreign currency monetary items are translated using the closing rate. Unrealized gains and losses on foreign currency translations are posted in the statement of comprehensive income. This is not applied for items related to the 108 Agreement with the government, as foreign currency risks are covered by the Agreement. Exchange rate differences on transactions under the Agreement are booked to a settlement account with the government on the balance sheet. See the further description of the 108 Agreement in notes 2.5.1, 2.5.3 and 12.

 

2.3 Recognition and derecognition of financial assets and liabilities

 

Securities are accounted for at settlement date. However, the change in fair value from trade date to settlement date is recorded in earnings. All other financial instruments are accounted for at the date that Eksportfinans becomes contractually obliged to the agreement. Financial instruments are derecognized when the contractual rights to receive, or the contractual obligations to pay, cash flows expire or when substantially all the risks and rewards of the instrument are transferred.

 

2.4 Revenue recognition

 

Interest income from financial instruments measured at amortized cost is recognized in the statement of comprehensive income using the effective interest method. Interest income from financial instruments measured at fair value through profit or loss is recognized in the statement of comprehensive income as it accrues.

 

All interest income and interest expense is classified to net interest income. This includes interest related to financial assets and financial liabilities measured at fair value through profit or loss.

 

Guarantees issued are recognized initially on the balance sheet at fair value. The fees that the Company receives over the life of the guarantee are amortized to income on a straight-line basis over the period of the obligation in the line item ’Commissions and income related to banking services‘.

 

2.5 Financial instruments

 

2.5.1 Financial instruments used and classification in portfolios

 

The Company’s balance sheet consists to a great extent of financial instruments. The accounting policies related to these assets and liabilities are therefore critical for an understanding of the financial statements.

 

Financial instruments are classified into the following categories:

§Financial assets or financial liabilities at fair value through profit or loss
§Loans and receivables (measured at amortized cost)
§Other financial liabilities (measured at amortized cost)

 

Financial assets or financial liabilities at fair value through profit or loss are financial instruments either classified as held for trading, or upon initial recognition designated as at fair value through profit or loss (the fair value option). Financial instruments held for trading include securities acquired principally for the purpose of being sold in the short term, and financial derivatives used to manage market risk. Financial instruments designated upon initial recognition as at fair value through profit or loss consist of lending, liquidity placements, including deposits and securities, borrowings and cash collateral related to swaps.

 

Loans and receivables measured at amortized cost consist of loans covered by an agreement with the authorities pursuant to Parliamentary Bill No. 108 (1977-78), (referred to as the 108 Agreement) and loans due from the former subsidiary Kommunekreditt, presently named KLP Kreditt AS. The 108 Agreement has been established to provide exporters of capital goods financing on terms that are in accordance with OECD (Organization for Economic Co-operation and Development) regulations related to the Consensus Agreement for export financing (the CIRR scheme). Coverage of interest and exchange rate risk for borrowing, lending and liquidity is provided under the 108 Agreement. The Company enters into derivative contracts on behalf of the 108 Agreement to reduce the market risk. See further description in note 2.5.3.

 

Other financial liabilities, measured at amortized cost, consist of debt related to the 108 Agreement.

 

2.5.2 Measurement

 

2.5.2.1 Initial measurement

 

Financial instruments are measured at fair value on the date of recognition, see note 2.3.

 

2.5.2.2 Subsequent measurement

 

Measurement at fair value through profit or loss

Fair value is the amount for which an asset could be exchanged or a liability settled between knowledgeable, willing parties in an arm’s length transaction.

 

The Company has elected the fair value option for the main portion of its financial instruments, with three exceptions. Firstly, lending, borrowing and liquidity under the government supported 108 Agreement are measured at amortized cost. Secondly, the loan to KLP Kreditt AS (formerly Kommunekreditt Norge AS) is measured at amortized cost. Thirdly, instruments for which fair value measurement is a requirement and are therefore not subject to the fair value option. The latter applies for financial assets and liabilities held for trading and all financial derivatives, which are required to be measured at fair value under present regulations.

 

The fair value option is applied when this results in the most relevant information under the options available for measurements of financial instruments and when alternative principles of measurement result in greater accounting mismatches. The most important cause of accounting

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mismatch is the requirement to measure all financial derivatives at fair value. Financial derivatives are used in economic hedges of the market risk of specific assets and liabilities. To obtain a more symmetrical measurement, the underlying economically hedged transactions, as well as transactions at floating rate that are not subject to individual hedges, have to be measured at fair value. This is obtained through the application of the fair value option for these financial instruments.

 

At the time of adoption of IFRS (January 1, 2007) management had analyzed different measurement combinations of hedge accounting, amortized cost and fair value under different market scenarios. All combinations would have led to high income volatility, and none of the analyzed combinations showed a systematically lower volatility under all market scenarios. An asymmetric measurement model gives rise to volatility that is difficult to analyze and communicate. The performed analyses indicated that applying the fair value option for the majority of its financial instruments (apart from the exceptions described above) would result in less volatility, thus the most relevant information, ex ante. The company therefore was of the opinion that the financial instruments satisfied the conditions in IAS 39 for applying the fair value option.

 

The fair values of quoted investments are based on current bid prices. If the market for a financial asset is not active (and for unlisted securities), the Company establishes fair value by using valuation techniques. These include the use of recent arm’s length transactions, reference to other instruments that are substantially the same, expected discounted cash flow analysis, and option pricing models making maximum use of market inputs and relying as little as possible on entity-specific inputs. See note 4 for a description of fair value measurement.

 

Measurement at amortized cost

Lending, borrowing and liquidity at amortized cost are measured using the effective interest method. The effective interest method provides the principles of calculating the amortized cost of a financial asset or financial liability, and of allocating the interest income or interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or, when appropriate, a shorter period to the net carrying amount of the financial asset or financial liability.

 

Impairments of financial assets

At each balance sheet date the Company assesses whether there is any objective evidence that a financial asset, or group of financial assets, measured at amortized cost is impaired. If any such evidence exists, the amount of the impairment loss is measured as the difference between the carrying amount of the financial asset and the present value of estimated future cash flows discounted at the original effective rate or the current effective rate of return for a financial asset with variable interest rate.

 

2.5.3 Presentation in the balance sheet and statement of comprehensive income

 

General

Interest accrued but not paid or received and adjustments to fair value are presented in the balance sheet in the same line item as the underlying asset or liability to which the interest relates.

 

Lending

Loans are recorded, dependent on the counterparty, either in the line item ’Loans due from credit institutions’ or in the line item ’Loans due from customers‘ in the balance sheet, regardless of measurement principles applied. The Company has acquired certain loan agreements from banks for which the bank provides a repayment guarantee, therefore retaining the credit risk of the loans. These loans are classified as loans to credit institutions under present regulations.

 

Interest income on instruments classified as lending is included in the line item ’Net interest income‘ using the effective interest method, irrespective of measurement principle. The method is described in the section on amortized cost in note 2.5.2.2. Fees are recognized as income or expense at the transaction date when applying fair value, and as interest income using the effective interest method when applying amortized cost measurement.

 

Changes in the value of loans measured at fair value are included in the line item ’Net gains/(losses) on financial instruments at fair value‘ in the statement of comprehensive income, except for interest income which is recorded in net interest income.

 

The 108 Agreement

The 108 Agreement provides coverage of interest rate and exchange rate risk for qualifying lending, borrowing and liquidity. The aim of the Agreement is to provide a fixed Norwegian krone based margin on qualifying OECD loans by compensating for re-pricing or foreign currency mismatch between the lending and the funding. The Agreement entails the debiting or crediting of settlement accounts continuously throughout the year for realized payment differences related to lending and borrowing. The net amount to be refunded by the government is included in the line item ’Other assets‘ in the balance sheet.

 

Lending, borrowing and liquidity under the Agreement are included in the relevant balance sheet items together with transactions not covered by the Agreement. Interest income and interest expenses are recorded in the statement of comprehensive income using the effective interest method based on the rates agreed upon under the Agreement. Fees are recognized as interest income using the effective interest method when applying amortized cost.

 

A decrease in the value at the balance sheet date based on objective evidence of impairment for loans valued at amortized cost is reflected in the line item ’Impairment charges on loans at amortized cost‘ in the statement of comprehensive income.

 

Under present accounting regulation, certain components of the 108 Agreement, which compensate the Company for gains and losses on certain lending and borrowing transactions covered by the Agreement due to changes in interest and foreign exchange rates, are defined as embedded financial derivatives. Separate measurement at fair value for these derivatives has the potential to result in considerable increases in the Company’s income volatility. See note 12 for specifications.

 

Securities

Interest bearing securities, consisting of commercial paper and bonds, are included in the line item ’Securities‘ in the balance sheet. The line item ’Securities‘ consists of securities covered by the Portfolio Hedge Agreement (as described below) and the Liquidity Reserve Portfolio (as described in note 30.1).

 

Interest income on securities is included in the line item ’Net interest income‘ using the effective interest method. The method is described in the section on amortized cost in note 2.5.2.2.

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Realized gains or losses from the sale of securities, and changes in fair value of securities, are included in the line item ’Net gains/(losses) on financial instruments at fair value‘ in the statement of comprehensive income.

 

Derivatives

The fair value of derivative contracts is reported in the balance sheet in separate asset and liability line items depending on the fair value of each contract. The net fair value of each derivative contract determines if it is classified as an asset or as a liability at the reporting date. The embedded derivatives in the 108 Agreement are bifurcated out from the host contract and recognized in the balance sheet as an asset or a liability depending on the net fair value of the derivatives at the reporting date.

 

Interest, and the interest effect on economical hedging instruments, is classified as interest income or expense in the statement of comprehensive income. Changes in fair value are recorded in the line item ’Net gains/(losses) on financial instruments at fair value‘. See note 29.4 for the impact of this economic hedging.

 

Portfolio Hedge Agreement

In March 2008 the Company entered into an agreement with a majority of the shareholders. The shareholders guarantee for further market value decline relative to the fair value as of end of February 2008 in the securities portfolio for an amount up to NOK 5 billion. This agreement is referred to as the Portfolio Hedge Agreement (PHA). The agreement meets the definitions of a financial derivative contract and is measured at fair value. Changes in fair value are recorded in the line item ’Net gains/(losses) on financial instruments at fair value‘ in the statement of comprehensive income. See note 12 for a description of the agreement.

 

Borrowings through the issue of securities

All borrowings are measured at fair value with the exception of borrowings under the 108 Agreement, which are measured at amortized cost. Changes in value of borrowings measured at fair value are included in the line item ‘Net gains/(losses) on financial instruments at fair value‘ in the statement of comprehensive income, except for interest expense which is recorded in net interest income.

 

Reacquired debt

Reacquired debt is deducted from the same line item in which the initial issue was recorded. The reduction is made with the carrying value. For debt not covered by the 108 Agreement, there is no effect in the statement of comprehensive income from the reacquisition, as the debt is already measured at fair value.

 

2.6 Intangible assets

 

The Company’s intangible assets include both internally generated and acquired software systems. All have finite useful lives as the economic benefit of these assets is assessed to be time-limited. Identifiable costs for internally developed software controlled by the Company are capitalized as intangible assets when it is probable that economic benefits will exceed development expenses and if it is expected to have a useful life of more than three years.

 

Direct expenses are materials and salaries to employees directly involved in the projects, and are capitalized. Expenses related to maintenance of software and IT systems are recognized in the statement of comprehensive income as they occur. Capitalized software recorded in the balance sheet is depreciated on a straight-line basis over the asset’s useful life.

 

See note 14 for further information.

 

2.7 Property and equipment

 

Property and equipment are carried at historical cost less depreciation. Cost includes expenses directly related to the acquisition of the asset. Subsequent expenses are capitalized together with the relevant asset if it is probable that future economic benefits associated with the expenses will flow to the Company. Expenses for repairs and maintenance are recognized in the statement of comprehensive income as they occur. Depreciation is made on a straight-line basis over the asset’s useful life.

 

Depreciation rates are applied to the asset’s deemed cost, as recognized at transition to IFRS, for buildings, and to the asset’s historical cost for other equipment. Land and art are not depreciated.

 

An asset is derecognized when risks and rewards are transferred to another party.

 

See note 15 for further information.

 

2.8 Investment property

 

Part of the building owned by the Company can be sold separately and is leased out to various tenants. Investment property constitutes approximately 38 percent of the property. The cost model is applied for investment property. After initial recognition investment property is thus accounted for in the same way as property classified under property and equipment, and depreciation is made on a straight-line basis over the property’s useful life.

 

See notes 7, 10 and 15 for further information related to investment property.

 

2.9 Impairment of non-financial assets

 

When there are indications that an intangible asset, a piece of property or equipment, or an investment property may be impaired, its recoverable amount is estimated for that individual asset. The recoverable amount is the higher of an asset’s fair value less cost to sell, and the asset’s value in use. If the recoverable amount is lower than the carrying amount, the carrying amount of the asset is reduced to its recoverable amount. The impairment loss is recognized in the statement of comprehensive income.

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2.10 Dividend

 

Dividend from Eksportfinans to its owners is recognized in the year in which the dividend is formally approved by the Council of Representatives, and not in the fiscal year to which the dividend is related.

 

2.11 Pension commitments

 

Pension plans

The Company has a set of employee retirement plans, consisting of both defined benefit plans and defined contribution plans, reflecting national practices and conditions. The plans are generally covered by pension schemes funded and managed through life insurance companies, determined by periodic actuarial calculations.

 

Pension schemes of the Company define an amount of pension benefit that an employee will receive on retirement, dependent on several factors, such as age, years of service and compensation.

 

The Company is required to establish an occupational pension scheme in accordance with the Norwegian law on required occupational pension (‘lov om obligatorisk tjenestepensjon‘). The Company’s pension scheme meets the requirements of that law.

 

Pension costs

The pension calculations are carried out in accordance with IAS 19.

 

The pension expenses in the statement of comprehensive income are based on assumptions determined at the start of the period while the liability is based on assumptions at the end of the period (i.e. the balance sheet date). Pension expenses are included in the line item ’Salaries and other administrative expenses‘ in the statement of comprehensive income.

 

Obligations for defined contribution pension plans are recognized as an expense as the employee renders services to the entity and the contribution payable in exchange for that service becomes due.

 

The liability recognized in the balance sheet in respect of defined benefit pensions plans is the present value of the defined benefit obligation at the balance sheet date less the fair value of the plan assets, together with adjustments for unrecognized actuarial gains or losses and past service costs.

 

The defined benefit obligation is calculated annually by independent actuaries using the projected unit credit method. The calculation is based on assumptions related to discount rate, future salary adjustments, pension and other payments from the national insurance fund, future return on plan assets and actuarial assumptions on mortality and voluntary resignation.

 

The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rates determined by reference to market yields at the balance sheet date on long term Norwegian government bonds, adjusted to differences in the payment structure and the average maturity of the pension liability.

 

Expected return on plan assets is calculated at the beginning of the period based on the discount rate, with a risk premium that reflects expected long-term investment profile of the plan assets.

 

Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions in excess of the greater of 10 percent of the value of plan assets or 10 percent of the defined benefit obligation are recognized in the statement of comprehensive income over the employees’ expected average remaining working lives.

 

Past service costs are recognized immediately in pension expenses, unless the changes to the pension plan are conditional on the employees remaining in service for a specified period of time (the vesting period). In this case, the past service costs are amortized on a straight-line basis over the vesting period.

 

Social security tax related to the pension commitments is calculated based on the net pension obligation for each pension scheme at the end of the year, before taking into account unrecorded past service cost and unrecorded actuarial gain/losses.

 

Pension liabilities are classified under the line item ‘Provisions’, and prepaid pension cost is classified under the line item ‘Other assets’ in the balance sheet.

 

See notes 3.2 and 8 for further information.

  

2.12 Income taxes

 

The tax expense in the statement of comprehensive income consists of both current payable tax and changes in deferred tax. Current payable tax is based on taxable net income for the year. Change in deferred tax is based on temporary differences between accounting profit and taxable profit.

 

Deferred taxes in the balance sheet are calculated on the basis of temporary differences. Temporary differences are differences between the recorded value of an asset or liability and the taxable value of the asset or liability. Deferred taxes are calculated based on tax rates and tax rules that are effective at the date of the balance sheet. The most significant temporary differences refer to unrealized gains and losses on financial instruments, non deductible pension expenses and depreciation of investment property and property and equipment.

 

Taxable and deductible temporary differences which are, or can be, reversed within the same period are offset. Deferred tax is recorded in the balance sheet as a liability (or asset).

 

Deferred tax assets are recorded in the balance sheet to the extent that it is probable that future taxable income will be available against which they can be utilized.

 

See note 11 for further information.

 

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2.13 Provisions

 

A provision is a liability of uncertain timing and amount that is recognized when the Company has a present legal or constructive obligation as a result of a past event and when it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation. The amount recognized is measured at the present value expected to be required to settle the obligation at the balance sheet date, taking into account risks and uncertainties surrounding the provision. The amount is only recognized if it can be estimated reliably.

 

See notes 8 and 19 for further information.

 

2.14 Leases

 

The Company acts as lessor in operating lease contracts.

 

Lease income is recognized in the statement of comprehensive income on a straight-line basis over the lease term. Assets subject to lease are recognized in the balance sheet according to the nature of those assets.

 

See note 6 and 7 for further information.


2.15 Cash equivalents

 

Cash equivalents are defined as bank deposits with maturity of less than three months from the date of acquisition. Other bank deposits are included in the line items ’Purchase of financial investments‘ and ‘Proceeds from sale or redemption of financial investments’ in the cash flow statement.

 

See note 26 for further information.


2.16 Preference share

 

On November 26, 2008, Eksportfinans entered into an agreement with the Norwegian Government. The agreement was approved by the General Assembly on January 29, 2009, and gave Eksportfinans the opportunity to obtain funding from the Government for two years for financing of export projects that qualify under the OECD Consensus Agreement for export financing (the CIRR scheme).

 

The agreement required the issuance of one preference share to the Norwegian Government, at a nominal value of NOK 10,500. The share constitutes a separate preference share that grants the right to a yearly dividend of 22.5 percent of the Company’s profit for the year, within the calculated base of regulatory limited dividend.

 

The share agreement shows basic features of a financial liability according to IFRS, and it is classified in the balance sheet as such. The liability is measured at amortized cost. The year’s incurred payment liability under the share agreement is classified as interest expense in the statement of comprehensive income in the line item ‘Other interest and related expenses’, and is recognized in the fiscal year to which it is related.

 

As the loan agreement had a duration of two years, the preference share was repaid 12 May 2011.

 

2.17 Financial guarantees

 

Financial guarantee contracts are initially recognized at fair value. After initial recognition, financial guarantee contracts are measured at the higher of the amount determined in accordance with IAS 37 and the amount initially recognized less, when appropriate, cumulative amortization recognized in accordance with IAS 18. Refer to note 30.3 for further information.

 

3 CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS

 

The preparation of financial statements in conformity with IFRS requires management to use judgment in making estimates and assumptions that affect reported amounts of assets and liabilities, the reported amounts of income and expense and the disclosure of contingent assets and liabilities. The following accounting estimates, which are based on relevant information available at the end of each period, include inherent risks and uncertainties related to judgments and assumptions made by management. We consider the following accounting estimates to be critical in applying our accounting policies due to the existence of uncertainty at the time the estimate is made, the likelihood of changes in estimates from period to period and the potential impact that these estimates can have on the financial statements.

 

Estimates and judgments are continually evaluated and based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. We believe that the applied assumptions are the most likely, although actual events may differ from these. Consequently, our estimates could prove inaccurate, and the Company may be exposed to changes to earnings that could be material.

 

3.1 Fair value of financial instruments

 

Eksportfinans uses quoted prices where available, valuation techniques and theoretical models using market information. These estimates are calibrated against economic models and any observed transaction prices. Estimated market values of derivatives under Credit Support Annexes (“CSA agreements”) are also reconciled daily with counterparties valuations (see "Note 28.2 Risk limit control and mitigation policies" for a brief description of CSA agreements). Since Eksportfinans has adopted the fair value option for the majority of its financial assets and liabilities, market changes or changes to assumptions or estimated levels can significantly impact the fair value of an instrument as reported and have a significant impact on the statement of comprehensive income. The subjectivity of these assumptions is reduced by using observable market inputs in the valuations, such as a quoted price or rate, by using multiple models for valuation purposes, and by obtaining price and rate information from multiple sources.

 

In particular the multi-notch downgrade of Eksportfinans from Moody's and Standard and Poor's in November 2011 lead to significant reductions in the market value of the Company's own debt. The Company used quoted prices of traded debt both before and after the downgrade since IFRS

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requires actual traded prices to be used if such quotes exist. The rating effect on the Company's significant liabilities overshadowed all other market fluctuations effects for 2011 and the unrealized gain for the year is several times higher than ever recorded for any year before in the history of the Company. The volatility in future results arising from more fluctuating credit spread levels given our current low rating must also be expected to be higher than historically.

 

Generally critical accounting estimates and judgment are those related to fair value measurement of financial instruments using significant unobservable inputs. Unobservable inputs are most significant for structured bond debt, the swaps used to economically hedge the structured bond debt and export loans. For structured debt and related swap contracts, the most important assumptions that impact the estimate of fair value are the spread assumptions and the models chosen for the Monte Carlo simulations performed in order to be able to project expected coupon and maturity dates. The simulations performed to project coupons and maturities are based on market data such as volatilities and correlations. However, there is in general little market data available to corroborate the simulations performed. Spread assumptions are to a large extent based on internal data.

 

Further information on fair value measurement techniques and assumptions are disclosed in note 4.

 

3.2 Pension commitments

 

The net present value of pension commitments depends on current economic and actuarial assumptions. Any change made to these assumptions affects the pension commitments amount recorded in the balance sheet and the pension expense.

 

The discount rate applied when discounting pension benefit obligations is determined by reference to market yields at the balance sheet date on long term Norwegian government bonds, adjusted to differences in the payment structure and the average maturity of the pension liability.

 

The applied discount rates are 4.5 percent and 4.0 percent for the pension cost and the pension liability respectively.

 

Estimated sensitivity of pension cost and obligation from changes in the discount rate:

(NOK millions) Gross pension cost *)   Projected benefit obligation  
Discount rate applied 4.00 % 2.60 %
Actuarial calculation 25.2   314.2  
Effect from 1 percentage point increase (3.5 ) (53.4 )
Effect from 1 percentage point decrease 4.6   69.1  

*) Gross pension cost consists of the items ‘service cost’ and ‘interest cost’ specified in note 8.

 

The type of pension fund investments and historical returns determine the expected return on pension funds. In the past, the average return on pension funds has been higher than the risk-free rate of interest, as part of the pension funds have normally been invested in securities with slightly higher risk than government bonds. The expected return has thus been estimated on the basis of the discount rate plus an addition reflecting past excess returns.

 

Other fundamental assumptions for pension commitments include future salary adjustments, pension and other payments from the national insurance fund, anticipated increase in the National Insurance basic amount (the G amount) and life expectancy.

 

See note 2.11 for accounting principles and note 8 for further information.

4 FAIR VALUE OF FINANCIAL INSTRUMENTS

 

4.1 Methodology

 

The fair values of financial instruments are determined either with reference to a price quoted in an active market for that instrument, or by using a valuation technique.

 

Prices quoted in active markets are prices readily and regularly available from exchanges, brokers, market makers and pricing vendors, and those prices represent actual and regularly occurring market transactions on an arm’s length basis.

 

An active market is one in which transactions, for the financial asset or financial liability being valued, occur with sufficient frequency and volume to provide pricing information on an ongoing basis. A market is considered to be non-active when there are few transactions, the prices are not current, price quotations vary substantially either over time or among market makers, or little information is released publicly for the financial asset or financial liability. Pricing transparency is affected by a number of different factors, such as type of financial instrument, whether the instrument is new to the market, characteristics specific to the transaction, and general market conditions.

 

The degree of judgment used in the measurement of fair value of financial instruments is generally higher with a lower level of pricing transparency, and vice versa. Financial instruments with quoted prices in active markets generally have higher transparency of prices, and less judgment is needed when determining fair value. Conversely, instruments traded in non-active markets, or that do not have quoted prices, have lower transparency of prices, and fair values are estimated through valuation models or other pricing techniques that require a higher degree of judgment.

 

The methodologies used for estimating the fair values using valuation models calculate the expected cash flows under the terms of each specific contract, and then discount these back to present values using appropriate discount curves. The expected cash flows for each contract are either determined directly by reference to actual cash flows implicit in observable market prices, or through modeling cash flows by using appropriate financial market pricing models. The valuation techniques make maximum use of market inputs, and rely as little as possible on entity-specific inputs. These techniques use observable market prices and rates as inputs, including interest rate yield curves for substantially the full term of the asset or liability, equity and commodity prices, option volatilities and currency rates. In certain cases, the valuation techniques incorporate unobservable inputs. See description of fair value measurement of each class of financial instruments below for extent of unobservable inputs used. The fair value measurement generally incorporates appropriate credit spreads obtained from the market.

 

For financial instruments a significant share of prices are obtained from the market. Although the prices generally are not binding or directly tradable, they are observable in the market. As such, the Company primarily has financial instruments for which prices are quoted in active markets, or

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financial instruments for which credit spreads or other model inputs are observable in the market, and the models used to price them are transparent. Most of the portfolios consist of financial instruments for which the fair value is calculated using valuation models or index proxies judged to be sufficiently close to the securities proxied. The Company has developed an understanding of the information used by third party pricing sources to describe the estimated prices or model inputs. The information obtained from third party pricing sources was evaluated and relied upon based on the degree of market transactions supporting the price indications and the firmness of the price indications. In these instances, management’s judgment was that this third party information was a reasonable indication of the financial instrument’s fair value.

 

In general, the Company goes through the following process to establish fair value for each financial instrument:

 

-First, the Company seeks to identify current quoted prices in an active market for the financial instrument.
-If there are no current quoted prices, the Company seeks to identify recent transactions for the same instrument.
-If there are no recently quoted prices for the same instrument, the Company seeks to identify current or recently quoted prices or transactions for another instrument that is substantially the same.
-If there are no quoted prices for essentially equal instruments, the Company seeks to identify appropriate market-quoted rates (e.g. yield curves, volatilities and currency rates) to be used as inputs into a valuation technique.
-In certain instances, it is necessary for the Company to use unobservable inputs into the valuation technique. These inputs are to the fullest extent possible based on other observable prices or rates identified during the above mentioned steps.

 

See below for a discussion on how fair value is established for each class of financial assets and liabilities:

 

 

Loans due from credit institutions or customers:

 

The fair values of loans due from credit institutions or customers are determined using a discounted cash flow model, incorporating appropriate yield curves and credit spreads obtained from the market. These debt instruments are not actively traded and consequently, these instruments do not have observable market prices subsequent to loan origination.

 

For guaranteed loans, interest rate curves are obtained from market sources, and credit spreads are based on initial spreads at the time of loan origination. The initial spread is usually not adjusted because these loans are fully guaranteed by a bank or the Norwegian Guarantee Institute for Export Credits (GIEK). Eksportfinans’ non-government guarantors are currently well rated (A- or above) Norwegian banks and international banks with solid financial position. An increase in the credit risk of the debtor will, as a result of the guarantee, in most cases not lead to more than an insignificant increase of the combined credit risk. This is reflected in market rates so for example a loan made to a debtor guaranteed by a specific bank has a considerably lower spread than a direct loan made to the same bank. Eksportfinans therefore believes it would be reasonable to assume, in the absence of evidence to the contrary, that no changes have taken place in the spread that existed at the date the loan was made. The Company does make reasonable efforts to determine whether there is evidence that there has been such a change in spread. Credit ratings of all guarantors are monitored on an ongoing basis. Spreads are adjusted upon significant changes in rating for the guarantor since origination date, as the Company considers this as evidence of widening of spreads. Further, the Company analyses the development of initial margins over time. These data show that initial margins obtained for new guaranteed loans have not been functions of time, not even during the financially turbulent times in 2007-2009. Credit spreads for guaranteed loans given by the Company, have consequently not increased with the significant general credit spread increase during the period. The spreads applied to fair value measurement of export loans are unobservable in the market. The method that the Company has deemed the most correct one in absence of suitable market spreads has produced variation in credit spreads of 2 basis points on average for the guaranteed portfolio over the history for which the Company has data for. The largest monthly change for the guaranteed loan portfolio has been 4 basis points (November 2010). This reflected more expensive pricing towards clients for newly distributed loans and not rating changes prompting spread changes on old loans. At year-end 2011 a spread widening of 1 basis point of the guaranteed loan portfolio will reduce its market value by approximately NOK 16 million (NOK 16 million as of year-end 2010) so a spread widening equal to the largest ones observed during a month so far will give unrealized losses of NOK 64 million. As per year-end the guaranteed portfolio constitutes 66 percent of the loan portfolio.

 

For direct loans to Norwegian savings banks, interest rate curves and credit spreads are based on observable market data. The credit spread curves obtained from the market are from widely published reports from market participants on indicative spreads for identical or similar loans. The spreads are published in the market shortly after month end, but do not represent offers, or solicitations of offers, to purchase or sell financial instruments. To ensure that the information can be used for fair value measurement purposes, Eksportfinans performs an assessment of the evaluations, calculations, opinions and recommendations of the publications. The spreads come partly from trading screens quoting actual trades, and partly from matrix pricing and interpolations including judgments by the distributors. Eksportfinans has assessed their interpolation methodologies, matrix pricing algorithms and models to be adequate and of sufficient quality. As of end of 2011 a credit spread widening in the direct loan portfolio of one basis point would induce an unrealized loss to the Company of NOK 6 million (NOK 7 million as per year-end 2010). Direct loans to banks account for 12 percent of the lending portfolio (15 percent as of end of 2010).

 

For remaining municipal lending after the sale of former municipality lender daughter company Kommunekreditt, interest rate curves and credit spreads are based on observable market data. The credit spreads used in the model are supported by quotes obtained from three different price providers. For loans guaranteed by municipalities, the same methodology is used as for guaranteed export lending. As of end of 2011 a credit spread widening of one basis point in the municipal lending portfolio would induce an unrealized loss to the Company of NOK 3 million (NOK 3 million as of end of 2010). Municipality loans are 6 percent of the lending portfolio as of year-end. For the combined total lending portfolio over the past two years credit spreads have changed less than 5 basis points per month in 95 percent of the time. A spread widening of 5 basis points would give an estimated loss of NOK 125 million. As of the end of 2010 a 95 percent confidence interval was 10 basis points representing NOK 230 million. The guarantees received are embedded in the loan agreements, and not separately transferable.

 

 

All credit spread adjustments of initial spreads are individually assessed for reasonableness relative to appropriate credit spread development over time, spreads for similar guarantors, and spreads on new similar loans or guarantees.

 

 

Securities:

 

Fair value of Eksportfinans’ portfolio of securities is partially established using valuation techniques and partially using prices quoted in active markets. Eksportfinans aims to maximize the use of observable inputs, and minimize the use of unobservable inputs, when estimating fair value. The

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valuation techniques used by Eksportfinans are index based models using publicly available market data as input, such as index levels, stock prices and bond credit spreads. Whenever available, the Company obtains quoted prices in active markets for fixed maturity securities at the balance sheet date. Market price data is generally obtained from exchange or dealer markets.

 

Since July 2008 the Company has used a factor model, deriving comparable spreads from the remaining liquidity of similar securities. This specifically developed index model derives comparable spreads for a security from liquidity and credit spreads of similar securities. The two factors used in the index mapping procedure are the two year spread between the Euro swap two year rate and Euro government two year rate, and the iTraxx five year senior financial index spread. Eksportfinans applied the factor model to 44 percent of the securities, representing approximately 32 percent of the securities portfolios measured at market value as of December 31, 2011 and to 45 percent of the securities, representing approximately 41 percent of the trading portfolio measured at market value as of December 31, 2010.

 

For the remaining securities not valued with the factor model, sixteen had such short time to maturity that par value was used. One security (AAA institution) is adjusted for discount margin at time of purchase, and one instrument is priced by comparing it to similar instrument (same counterparty and time to maturity). One security was priced in the Company’s main trading system due to its simplicity. Eksportfinans holds two securities originally with defaulted (now non-existent) Washington Mutual as counterparty in the guaranteed PHA portfolio. These securities were priced using recovery rates from one source, but calibrated with other quotes. For the remaining securities, Eksportfinans retrieved prices and credit spread quotes from eleven different market makers and pricing vendors.

 

The quotes may come from securities with similar attributes, from a matrix pricing methodology, or from internal valuation models utilizing different methodologies. These methodologies consider such factors as the issuer’s industry, the security’s rating and tenor, its coupon rate and type, its position in the capital structure of the issuer, yield curves, credit curves, prepayment rates and other relevant factors. Among the eleven different quote providers, the two major price providers (Bloomberg & TASS) covered 60 percent (62 percent as of December 31. 2010). Eksportfinans has established various controls to ensure the reasonableness of received quotes such as reconciling with other securities of similar currency, maturity, country or issuer and reconciling with actual trade data from Bloomberg. The Company also investigates large variations amongst different price providers. For all quoted prices the median quote was used.


Financial derivatives:

 

Currency and interest rate swaps are valued using a valuation model technique incorporating appropriate credit spreads obtained from the market, as well as other observable market inputs, such as interest rate levels and market volatilities. Structured swaps mirroring the embedded derivatives in structured debt issues are modeled as described for structured bond debt. All swaps are governed by ISDA agreements with cash collateral annexes, and movement of cash collateral will offset credit spread changes. Non-performance risk is included in the fair value of the financial derivative portfolio assets and liabilities. Both Eksportfinans and the counterparty’s credit risk at the trading time of a swap will be reflected in the initial terms and conditions. The Company only does derivatives with highly rated counterparties. The Credit Support Annexes (CSAs) enables calls for collateral for both parties based on rating dependent parameters such as threshold and minimum independent amounts. The Company’s valuation of swaps using mid levels captures the perceived credit spread for both Eksportfinans and the swap counterparties.

 

Structured bond debt:

 

Structured bond debt consists of bond issues where the coupon rate, currency, maturity date and notional amount may vary with market conditions. For instance, the maturity will vary as a significant part of the structured bond debt has call and trigger features depending on the passage of time and/or market levels.

 

Eksportfinans’ structured issues currently consist of eight main structure types:

 

-The coupon is paid in a different currency than the currency for which the coupon is calculated and the bond might have Bermudian options embedded. Bonds with this coupon type are priced using a Hull-White one-factor model if there is only one currency and an N-currency model coupled with a Black and Scholes model in cases of several currencies.

 

-The coupon is based on the minimum of two FX’s (JPY/USD and AUD/JPY for a majority of our issues). We use Black and Scholes to model the foreign exchange rates and a Hull-White one factor model to treat the interest rate curves.

 

-Fixed rate securities with Bermudan options. These are modeled using Black and Scholes framework.

 

-The coupon has digital attributes. For example if the FX rate is above a given strike level, the coupon paid will be high, if the FX is below the strike, the coupon paid will be low. These coupon structures are modeled by an N-currency model.

 

-The coupon is inversely linked to the London Interbank Offer Rate (LIBOR). The coupon structure is normally of the type “FixedRate-multiplier x Libor”. Here we use a Hull-White model for the interest rate and if the issue contains more than one currency, we use the N-factor model.

 

-The coupon depends on the difference between two interest rates, for example ’2 year swap minus 10 year swap‘. This difference is multiplied with a factor, and both one and two currencies can be involved. For one-currency issues a Hull-White model is used for the two interest rates. For two-currency issues a Black and Scholes model put together with an N-currency model is used.

 

-The coupon is based on the performance of single equities, equity baskets or indexes. These issues are priced based on a Black and Scholes model if the underlying is in the same currency as the notional. The implied volatility derived from suitable traded options is used as volatility input and expected future dividends are based on market expectations. If the underlying is in a different currency than the notional we use a quanto-model to factor in the currency effect.

 

-The coupon is paid only if the issuer calls the issue. For such structures (like callable zeros) the call option is normally Bermudian and contains only one currency. Eksportfinans price it using a Hull-White one-factor model.

 

Structured bond debt (and their corresponding swaps, see section on financial derivatives above) are mostly valued using Company’s valuation system based on different, well known valuation models, such as Black and Scholes and Hull-White, as appropriate for the different types of

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structures. All models use observable market data. Market data such as volatilities, correlations, and spreads for constant maturity swaps are imported (unadjusted) directly from widely used information systems like Reuters and Bloomberg. All models are calibrated to produce the transaction price at day one and consequently there is no day one profits calculated using Eksportfinans’ methodology. Which model and which structure setup is determined by the redemption structure, the number of FX, equities or indices constituting the underlying and whether the coupon is accumulated or not as time passes.

 

The market data used are observable market input. This input is used to project both cash flows and maturity dates of the structured debt. This is to a large degree done by Monte Carlo simulations.

 

The fair values established using the valuation models above are further supported by two sources of information. The values are assessed for reasonableness against values for the same instruments received from the counterparty in the transaction. Eksportfinans buys back structured debt from time to time, and the fair values established are assessed for reasonableness against buy back transaction prices for similar debt.

 

Changes in credit spread are considered in the valuation of structured bond debt. There is no market for trading in Eksportfinans’ structured debt. Since the multi-notch downgrade of Eksportfinans in November the Company does not anticipate issuing new debt. Prior to the downgrade the most current issue spread for corresponding issues was used to value the structured bonds. After the downgrade there are no new issues of structured debt and instead the Company uses spreads on unstructured debt for the outstanding structured issues. The basis point sensitivity of the structured bond portfolio is 48 million so increasing the spreads applied in fair value measurement by 10 basis points, would decrease the value of structured bond debt by approximately NOK 480 million as of December 31, 2011, down from NOK 720 million as of December 31, 2010 mainly due to a shorter expected maturity of the portfolio than one year ago.

 

Other bond debt:

 

Fair value of other bond debt is established using a valuation model technique based on discounted cash flows, incorporating appropriate interest rate curves and credit spreads obtained from the market. The credit spreads are derived from current spreads on Eksportfinans’ USD benchmarks quoted by Bloomberg. Only spreads supported by actual trades close to year-end are used. Quoted spreads are also used for benchmark issues that are not quoted on Bloomberg. From the spread quotes obtained, a yield curve is derived by using a linear interpolation methodology. These are similar instruments, and the quoted prices cover the range of maturities in the benchmark debt portfolio.

 

In order to assess the reasonableness of the quotes used, spreads are also benchmarked against broker quotes obtained from four different dealers in Eksportfinans’ benchmark program.

 

Commercial paper debt:

 

Fair value of commercial paper debt (CP) is established using a valuation model technique based on discounted cash flows, incorporating appropriate interest rate curves. Interest rate curves are obtained from market sources and credit spreads are based on initial margin relative to LIBOR at the time of borrowing. Eksportfinans outstanding CP balance as of year-end 2011 and through the year had so short maturity and/or was so low that credit spread adjustments would be immaterial hence were not done. Increasing the spreads applied in fair value measurement by 10 basis points would decrease the value of CP by approximately NOK 0.7 million as of December 31, 2011, up from NOK 0.6 million as of December 31, 2010.

 

Subordinated debt and capital contribution securities:

 

Fair value of subordinated bond debt and capital contribution securities are established using a valuation model technique based on discounted cash flows, incorporating appropriate interest rate curves and credit spreads obtained from market participants. The credit spreads are obtained from the arranger banks for the capital contribution securities. For the subordinated debt we use the same credit spreads as quoted for our traded unstructured debt of same maturity and currency. Quotes come either as credit spreads relative to USD swap rates or the Gilt curve, or as a quoted fair value price. For quotes received in the form of credit spreads, appropriate net present value calculations derive the fair value of the security, using the quoted credit spread relative to the corresponding curve. The Company considers the spread and price quotes obtained as unobservable input to the valuation. Increasing the spreads applied in fair value measurement by 10 basis points, would decrease the value of subordinated debt by approx NOK 0.5 million and capital contribution securities by approximately NOK 5 million as of December 31, 2011 compared to NOK 1 million and NOK 6 million respectively as of December 31, 2010.

 

4.2 Fair value hierarchy

 

IFRS 7 specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources that is visible to other parties in the market; unobservable inputs reflect the Company’s market assumptions, specific methodologies and model choices. These two types of input have created a hierarchy that gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). The three levels of the fair value hierarchy are described below:

 

Level 1:

Securities for which unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. 


Level 2:

Securities with inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices) are classified as level 2.

 

Level 3:

Securities with inputs that are both significant to fair value and unobservable.

 

This hierarchy requires the use of observable market data when available. The Company considers relevant and observable market prices in its valuations where possible.

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The assessments of which level each transaction falls into is a dynamic process.

Cash is classified as level 1 as currency rates are quoted frequently and trading volume sufficiently high to enable the Company to trade even large volumes or observable market prices.

 

Loans and receivables that do not trade frequently or in sufficient volumes to be classified in level 1 but where nothing but observable market data (such as interest rate levels and published spread indices) and well known discounting methods are used are classified as level 2. Loans and receivables where credit spreads at a reporting date is a function of initial over the counter negotiated spreads and subjective adjustments to input such as rating changes are classified as level 3.

 

Securities consist of bonds in our liquidity portfolios which are classified as level 2 as they are valued using index mappings or adjusted market prices such as median of several quotes not necessarily public obtainable.

 

Financial derivatives are either normal interest rate- or currency swaps classified in level 2 as standard discounting of observable input is used in the valuation, or structured swaps classified as level 3 where unobservable inputs such as correlations and volatilities are used in model valuations.

 

The below tables set forth Eksportfinans trading assets and liabilities and other financial assets and liabilities accounted for at fair value under the fair value option. Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

 

Financial assets measured at fair value through profit or loss:

 

December 31, 2011            
(NOK thousands)     Level 1 Level 2 Level 3 Total
Cash       0 0 0 0
Loans due from credit institutions   1,899,308 36,716,203 1,335,105 39,950,616
Loans due from customers   0 4,937,422 56,420,879 61,358,301
Securities     0 51,908,412 0 51,908,412
Financial derivatives     0 13,188,079 6,258,210 19,446,289
Other assets     0 4,612,500 0 4,612,500
Total fair value as at December 31, 2011 1,899,308 111,362,616 64,014,194 177,276,118

 

December 31, 2010            
(NOK thousands)     Level 1 Level 2 Level 3 Total
Cash       5 0 0 5
Loans due from credit institutions   0 27,859,583 1,950,988 29,810,571
Loans due from customers   0 5,026,182 44,178,329 49,204,511
Securities     0 67,920,880 0 67,920,880
Financial derivatives     0 8,283,325 7,119,835 15,403,160
Other assets     0 2,952,537 0 2,952,537
Total fair value as at December 31, 2010 5 112,042,507 53,249,152 165,291,664

  

As for financial liabilities at year-end deposits and commercial paper are valued using public market data and standard discounted cash flow techniques and hence classified as level 2. Unstructured bond debt such as benchmark issues are valued through a combination of discounting cash flows and using quoted credit spreads for similar securities and thus classified as level 2. Structured bond debt use unobservable inputs and model valuation and is classified as level 3. Financial derivatives on the liability side are both level 2 and 3, see discussion above for financial derivative assets. Other liabilities are specified in note 20 and are valued using discounting techniques and observable market data. Subordinated debt and capital contribution services are valued using discounted cashflow methods but with credit spread adjustments obtained from arranger banks only. These are indicative spreads and not publicly available hence the valuation technique uses unobservable inputs.

  

Financial liabilities measured at fair value through profit or loss:

 

December 31, 2011              
(NOK thousands)     Level 1 Level 2 Level 3 Total  
Deposits by credit institutions   0 574 0 574  
Commercial paper debt   0 5,762,049 0 5,762,049  
Unstructured bond debt   0 45,463,708 0 45,463,708  
Structured bond debt     0 0 54,053,305 54,053,305  
Financial derivatives      0 2,639,873 11,230,669 13,870,542  
Other liabilities     709,553 9,804,756 0 10,514,309  
Subordinated debt     0 0 1,039,230 1,039,230  
Capital contribution securities   0 0 348,109 348,109  
Total fair value as at December 31, 2011 709,553 63,670,960 66,671,313 131,051,826  
                 

 

F-16
  

 

December 31, 2010                
(NOK thousands)     Level 1 Level 2 Level 3 Total  
Deposits by credit institutions   0 44,754 0 44,754  
Commercial paper debt   0 3,306,532 0 3,306,532  
Unstructured bond debt   0 57,397,917 0 57,397,917  
Structured bond debt     0 0 88,843,817 88,843,817  
Financial derivatives      0 4,000,066 10,247,427 14,247,493  
Other liabilities     0 6,685,427 0 6,685,427  
Subordinated debt     0 0 1,638,650 1,638,650  
Capital contribution securities   0 0 417,128 417,128  
Total fair value as at December 31, 2010 0 71,434,696 101,147,022 172,581,718  

 

The movements of level 3 assets and liabilities during 2011 are shown as follows:

 

Financial assets measured at fair value through profit or loss based on level 3 inputs:

 

(NOK thousands) Loans and
receivables due
from credit
institutions		   Loans and
receivables due
from customers		   Financial derivatives   Total  
Opening balance January 1, 2011 1,950,988   44,178,329   7,119,835   53,249,152  
Total gains or losses *) 23,698   531,413   2,527,446   3,082,557  
Issues 21,329   22,020,967   0   22,042,295  
Settlements (660,910 ) (10,309,830 ) (3,389,071 )  (14,359,811 )
Transfers into level 3 0   0   0   0  
Transfers out of level 3 0   0   0   0  
Closing balance December 31, 2011 1,335,105   56,420,879   6,258,210   64,014,194  
Total gains or losses *) for
the period in profit or loss for assets
held at the end of the reporting period		 (68,812 ) 62,087   (1,710,022 ) (1,716,747 )
                 
Opening balance January 1, 2010 2,204,797   22,136,707   4,303,882   28,645,386  
Total gains or losses *) 436,497   230,782   4,626,551   5,293,831  
Issues 15,078   28,423,639   0   28,438,717  
Settlements (705,384 ) (6,612,799 ) (1,810,598 ) (9,128,781 )
Transfers into level 3 0   0   0   0  
Transfers out of level 3 0   0   0   0  
Closing balance December 31, 2010 1,950,988   44,178,329   7,119,835   53,249,152  
Total gains or losses *) for
the period in profit or loss for assets
held at the end of the reporting period		 (73,536 ) 9,288   (455,470 ) (519,718 )
                 

*) Presented under the line item ‘Net gains/(losses) on financial instruments at fair value’ in the statement of comprehensive income.

 

Financial liabilities measured at fair value through profit or loss based on level 3 inputs:

 

(NOK thousands) Bond debt   Financial derivatives    Subordinated debt   Capital contribution securities   Total  
Opening balance January 1, 2011 88,843,817   10,247,427   1,638,650   417,128   101,147,022  
Total gains or losses *) (29,404,379 ) 5,127,041   (186,544 )  (69,019 ) (24,532,901 ) 
Issues 41,845,264   0   0   0   41,845,264  
Settlements (47,231,397 ) (4,143,799 ) (412,876 ) 0   (51,788,072 )
Transfers into Level 3 0   0   0   0   0  
Transfers out of Level 3 0   0   0   0   0  
Closing balance December 31, 2011 54,053,305   11,230,669   1,039,230   348,109   66,671,313  
Total gains or losses *) for
the period in profit or loss for liabilities outstanding
at the end of the reporting period		 48,861,223   (20,645,321)   123,557   139,817   28,479,276  
                     

 

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(NOK thousands) Bond debt   Financial derivatives    Subordinated debt   Capital contribution securities   Total  
Opening balance January 1, 2010 84,252,808   11,066,857   1,501,567   419,265   97,240,497  
Total gains or losses *) 555,091   1,450,924   137,083   (2,137 ) 2,140,961  
Issues 45,985,071   0   0   0   45,985,071  
Settlements (41,949,153 )  (2,270,354 ) 0   0   (44,219,507 )
Transfers into Level 3 0   0   0   0   0  
Transfers out of Level 3 0   0   0   0   0  
Closing balance December 31, 2010 88,843,817   10,247,427   1,638,650   417,128   101,147,022  
Total gains or losses *) for
the period in profit or loss for liabilities outstanding
at the end of the reporting period		 20,586,654   (19,335,968 ) (117,928 )  59,502   1,192,260  
                     

*) Presented under the line item ‘Net gains/(losses) on financial instruments at fair value’ in the statement of comprehensive income.

 

4.3 Measurement categories

 

The classes of financial instrument fall into the following measurement categories (carrying amounts in NOK thousands):

 

  2011 2010  
FINANCIAL ASSETS FVO1) HFT2) L&R3) TOTAL FVO1) HFT2) L&R3) TOTAL  
Cash 0 0 0 0 5 0 0 5  
Loans due from credit institutions 39,950,616 0 389,147 40,339,763 29,810,571 0 13,203,375 43,013,946  
Loans due from customers 61,358,301 0 35,182,920 96,541,221 49,204,511 0 35,890,887 85,095,398  
Securities 11,955,114 39,953,298 0 51,908,412 18,931,194 48,989,686 0 67,920,880  
Financial derivatives 0 19,446,289 0 19,446,289 0 15,403,160 0 15,403,160  
Other assets 4,612,500   854,537 5,467,037 2,952,537 0 894,849 3,847,386  
TOTAL 117,876,531 59,399,587 36,426,604 213,702,722 100,898,818 64,392,846 49,989,111 215,280,775  
                   
FINANCIAL LIABILITIES FVO1) HFT2) OLB4) TOTAL FVO1) HFT2) OLB4) TOTAL  
Deposits by credit institutions 574 0 0 574 44,754 0 0 44,754  
Commercial paper debt 5,762,049 0 0 5,762,049 3,306,532 0 0 3,306,532  
Non-Structured bond debt 83,348,667 0 0 83,348,667 95,549,894 0 0 95,549,894  
Structured bond debt 16,168,346 0 36,209,542 52,377,888 50,691,840 0 36,853,479 87,545,319  
Financial derivatives 0 13,870,542 0 13,870,542 0 14,247,493 0 14,247,493  
Other liabilities 10,514,309 0 207,300 10,721,609 6,685,427 0 489,200 7,174,627  
Subordinated debt 1,039,230 0 0 1,039,230 1,638,650 0 0 1,638,650  
Capital contribution securities 348,109 0 0 348,109 417,128 0 0 417,128  
Preference share 0 0 0 0 0 0 11 11  
TOTAL 117,181,284 13,870,542 36,416,842 167,468,668 158,334,225 14,247,493 37,342,690 209,924,408  
                   

 

1) FVO: Financial instrument at fair value through profit or loss - designated at initial recognition (fair value option)

2) HFT: Financial instrument at fair value through profit or loss - held for trading

3) L&R: Financial instrument at amortized cost - loans and receivables

4) OLB: Financial instrument at amortized cost - other liabilities

 

4.4 Fair value of financial assets and liabilities

 

The following table presents the financial assets and liabilities, with the fair value and carrying value (book value) of each class of financial instrument:

    December 31, 2011   December 31, 2010
(NOK thousands)   Fair value   Carrying value   Fair value   Carrying value
ASSETS                
Cash   0   0   5   5
Loans due from credit institutions   40,333,637   40,339,763   43,048,321   43,013,946
Loans due from customers   103,031,274   96,541,221   90,589,272   85,095,398
Securities   51,908,412   51,908,412   67,920,880   67,920,880
Financial derivatives   19,446,289   19,446,289   15,403,160   15,403,160
Other assets   5,467,037   5,467,037   3,847,386   3,847,386
                 
LIABILITIES                
Deposits by credit institutions   574   574   44,754   44,754
Commercial paper debt   5,762,049   5,762,049   3,306,532   3,306,532
Non-structured bond debt   83,348,667   83,348,667   95,549,894   95,549,894
Structured bond debt   57,056,633   52,377,888   91,505,953   87,545,319
Financial derivatives   13,870,542   13,870,542   14,247,493   14,247,493
Other liabilities   10,736,227   10,721,609   7,189,159   7,174,627
Subordinated debt   1,039,230   1,039,230   1,638,650   1,638,650
Capital contribution securities   348,109   348,109   417,128   417,128
Preference share   0   0   11   11
                 

 

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5 NET GAINS/(LOSSES) ON FINANCIAL INSTRUMENTS AT FAIR VALUE

Net realized and unrealized gains/(losses) on financial instruments at fair value:

 

(NOK thousands) 2011   2010   2009  
Securities 1) (118,972 )  18,029   1,776  
Financial derivatives (92,475 )  (138,798 )  (65,765 ) 
Other financial instruments at fair value 69,828   71,594   128,349  
Net realized gains/(losses) (141,619 )  (49,175 )  64,360  
             
Loans due from credit institutions (30,938 )  (40,829 )  (71,414 ) 
Loans due from customers 66,367   (27,794)   (4,014)  
Securities 2) (208,279 )  183,311   1,553,715  
Financial derivatives 3) (2,353,497 )  (3,672,205 )  (9,916,308 ) 
Commercial paper debt 4) 1,258   782   76,365  
Bond debt 4) 42,730,919   2,997,493   4,516,472  
Subordinated debt and capital contribution securities 4) 321,800   (1,042)   71,094  
Other financial instruments at fair value (12,597 )  6,384   (83,440 ) 
Net unrealized gains/(losses) 40,515,033   (553,900 ) (3,857,530 )
             
NET REALIZED AND UNREALIZED GAINS/(LOSSES) 40,373,414   (603,075 ) (3,793,170 )

 

1)Net realized gains/(losses) on securities:

(NOK thousands) 2011   2010 2009
Securities held for trading (18,828 ) 14,009 1,588
Securities designated as at fair value at initial recognition (100,144 ) 4,020 188
TOTAL (118,972 ) 18,029 1,776

2)Net unrealized gains/(losses) on securities:

(NOK thousands) 2011   2010 2009
Securities held for trading (360,115 ) 30,306 776,960
Securities designated as at fair value at initial recognition 151,836   153,005 776,755
TOTAL (208,279 )  183,311 1,553,715

 

3)The Portfolio Hedge Agreement entered into in March 2008, further described in note 12 of this report, is included with a gain of NOK 57 million in 2011 and a loss of NOK 202 million in 2010.

4)In 2011, Eksportfinans had an unrealized gain of NOK 43,054 million (NOK 2,997 million in 2010) on its own debt.  

 

See note 29.4 for a presentation of the above tables through the eyes of management.

 

6 LEASES

 

Eksportfinans ASA leases parts of its office building to unrelated parties under operating lease contracts, with lease terms generally between five and ten years. The future minimum lease payments receivable under non-cancelable operating leases in the aggregate and for each of the following periods is shown in the table below:

 

(NOK thousands)   Dec. 31, 2011   Dec. 31, 2010  
Up to and including one year   7,592   6,824  
From 1 year up to and including 3 years   15,024   12,164  
From 3 years up to and including 5 years   6,375   10,187  
After 5 years   494   0  
TOTAL PAYMENTS RECEIVABLE   29,485   29,175  

 

7 OTHER INCOME

(NOK thousands) 2011 2010 2009
Rental income 1,532 1,496 1,481
Rental income investment property 5,780 5,326 5,267
Services to The Norwegian State, the Ministry of Trade and Industry *) 8,600 0 2,100
Other income /(expenses)  175 0 6,592
TOTAL 16,087 6,822 15,440

 

*) The income from The Norwegian State, the Ministry of Trade and Industry relates to management services on the 108 scheme for December 2011.

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8 EMPLOYEE RETIREMENT PLAN

 

Eksportfinans has until 2011 had a defined benefit occupational scheme for all employees in the form of a pension scheme. As of 31 December 2011 this defined benefit occupational scheme was closed and replaced by a defined contribution plan.

 

The Company has also had a contractual pension agreement (CPA) scheme that has entitled staff to benefits from the age of 62 until they are eligible for a National Insurance pension upon reaching the age of 67. The terminated CPA scheme has been replaced by a new multi-employer scheme entering into force as of January 1, 2011. This plan is considered to be a multi-employer defined benefit plan, but is accounted for as a defined contribution plan until reliable and sufficient information is available for the Company to recognize its proportional share of pension cost, pension liabilities and pension assets. The Company’s liability is therefore not recognized as a liability as of December 31, 2011. The liability related to the former CPA scheme was recognized as such, and has been recognized as income (curtailment) in 2011, apart from the part of the liability that is related to former employees that are now retired under the scheme.

 

The actuarial calculations are based on the following assumptions:

EXPENSES       COMMITMENTS
2011   2010   (Percent)   Dec. 31, 2011   Dec. 31, 2010
4.00   4.50   Discount rate   2.60   4.00
5.40   5.70   Expected return on plan assets   4.10   5.40
4.00   4.50   Future salary increases   3.50   4.00
3.75   4.25   Future basic amount increase   3.25   3.75
2.25   2.25   Future pension increases   2.25   2.25
N/A   N/A   Expected CPA acceptance   N/A   N/A
K2005 adj.   K2005 adj.   Demographic assumption about mortality rate *)   K2005 adj.   K2005 adj.

*) Statistical assumptions about mortality, as officially calculated in 2005.

 

The pension expenses consist of the following components:

(NOK thousands)   2011   2010   2009  
Current service cost   16,869   14,568   13,844  
Interest cost   8,360   7,772   5,664  
Expected return on plan assets   (6,488)   (6,086 ) (5,398 )
Curtailment   (8,104 ) (3,954 ) 0  
Amortization of past service cost   211   3,810   211  
Amortization of actuarial (gains)/losses   4,898   341   410  
Social security tax   2,652   2,309   2,003  
TOTAL PENSION EXPENSES   18,398   18,760   16,734  

 

The amounts in the balance sheet are determined as follows:

s

(NOK thousands)   Dec. 31, 2011   Dec. 31, 2010  
           
Present value of funded obligations   247,871   177,290  
Fair value of plan assets   129,655   116,513  
Underfunded/(funded) status of funded obligations   118,216   60,777  
           
Present value of unfunded obligations   66,287   44,887  
Underfunded/(funded) status of all obligations   184,503   105,664  
           
Unrecorded past service cost   (404 ) (615 )
Unrecorded actuarial (gains)/losses   (101,618 ) (28,190 )
NET PENSION LIABILITY   82,481   76,859  
           
Pension liabilities in the balance sheet   83,517   77,932  
Prepaid pension cost in the balance sheet   1,036   1,073  
NET PENSION LIABILITY   82,481   76,859  
Social security tax included   13,241   13,139  

F-20
  

The movement in the defined benefit obligation over the year is as follows:


(NOK thousands)   2011   2010   2009  
Beginning of year   222,177   188,473   181,906  
Defined obligation of discontinued operations   0   0   (23,381 )
Current service cost, excluding social security taxes   16,869   14,568   13,844  
Interest cost   8,360   7,772   5,664  
Past service cost   0   2,101   0  
Actuarial losses/(gains)   78,161   16,795   12,913  
Social security tax   1,074   677   692  
Benefits paid   (4,378 ) (4,255 ) (3,165 )
Curtailments   (8,104 ) (3,954 ) 0  
OBLIGATION AT END OF YEAR   314,159   222,177   188,473  

 

The contributions expected to be paid to the Company’s pension schemes in 2012 is NOK 7 million.

 

The movement in the fair value of plan assets of the year is as follows:

 

(NOK thousands)   2011   2010   2009  
Beginning of year   116,513   101,535   108,712
Plan assets of discontinued operations   0   0   (13,339 )
Expected return on plan assets   6,488   6,086   5,398  
Actuarial gains/(losses)   (166 ) 1,573   (5,367 )
Employer contributions   9,215   9,474   7,409  
Benefits paid   (2,395 ) (2,155 ) (1,278 )
ASSETS AT END OF YEAR   129,655   116,513   101,535  

 

Plan assets are invested as follows (according to regulatory guidelines established for life insurance companies):

 

(Percent)   Dec. 31, 2011   Dec. 31, 2010
Equity securities   20   19
Debt securities   59   62
Property   18   18
Other assets   3   1
TOTAL PLAN ASSETS   100   100
         
(Percent)   2011   2010
Actual return on plan assets   3.5   6.0

 

Historical development of the pension liabilities:

 

(NOK thousands) 2011   2010   2009   2008   2007  
                     
Present value of defined benefit obligations 314,159   222,177   188,473   158,525   138,454  
Fair value of plan assets 129,655   116,513   101,535   95,373   99,969  
Pension plan deficit/(surplus) 184,504   105,664   86,938   63,152   38,485  
                     
Unrecorded actuarial (gains)/losses and past service cost (102,023 ) (28,805 ) (15,633 ) 2,026   11,714  
                     
NET RECORDED PENSION LIABILITY/(ASSET) 82,481   76,859   71,305   65,178   50,199  
                     
Actuarial losses/(gains) for the year related to obligations 78,161   16,795   12,913   606   (61,761 )
Actuarial gains/(losses) for the year related to assets 166   1,573   (5,367 ) (9,133 ) (42,258 )

 

*) Eksportfinans’ formerly wholly owned subsidiary Kommunekreditt was sold in the first half of 2009.

 

9 SALARIES AND OTHER ADMINISTRATIVE EXPENSES

 

(NOK thousands) 2011 2010 2009
Salaries, pension expenses and social security 137,043 116,892 109,017
Administrative expenses 44,460 40,481 42,689
TOTAL 181,503 157,373 151,706

 

F-21
  

10 OTHER EXPENSES

 

(NOK thousands) 2011 2010 2009
Building service 4,998 5,171 4,716
Building service investment property 659 1,054 599
Other expenses  6,506 8,039 9,939
TOTAL 12,163 14,264 15,254

 

11 INCOME TAXES

 

Taxes payable:

 

(NOK thousands)   2011   2010   2009  
               
Pre-tax operating
profit/(loss) from continuing operations		   41,720,838   622,513   (2,500,891 )
Permanent differences   1,366   982   4,135  
Change in temporary differences   (40,667,134 ) 716,641   2,754,992  
Taxable income   1,055,070   1,340,136   258,236  
               
Current taxes   295,510   375,238   72,306  
Change in last year’s tax provision   0   (60 ) 0  
Change in deferred taxes   11,386,762   (200,659 ) (771,398 )
Total income taxes in income statement   11,682,272   174,519   (699,092 )
               
Current taxes in statement of income   295,510   375,238   72,306  
Withholding tax already paid   (745 ) (864 ) (777 )
Taxes payable in from discontinued operations   0   0   1,826  
Taxes prepaid   0   (776 ) 0  
Taxes payable in balance sheet   294,765   373,598   73,355  

 

Deferred taxes / deferred tax assets:

 

(NOK thousands)   2011   2010   2009  
               
Deferred tax/(deferred tax assets) beginning of year   (43,729 ) 156,931   931,220  
Deferred tax/(deferred tax assets) related to discontinued operations   0   0   (2,892 )
               
Depreciation of revaluation of property   (5,179 ) (3,470 ) (3,470 )
Mark-to-market adjustments financial instruments   40,517,470   (559,098 ) (3,552,178 )
Realization of interest swaps according to tax rules   155,538   (145,801 ) 807,248  
Excess book value over tax depreciation   4,927   (2,718 ) (465 )
Employee retirement plan   (5,622 ) (5,554 ) (6,128 )
Change in tax-increasing temporary differences   40,667,135   (716,640 ) (2,754,992 )
Applied tax rate   28%   28%   28%  
Tax on changes in temporary differences   11,386,798   (200,659 ) (771,398 )
               
Deferred tax/(deferred tax assets) end of year   11,343,069   (43,729)   156,931  

 

Temporary differences:

(NOK thousands)   Dec. 31, 2011   Dec. 31, 2010   Dec. 31, 2009  
               
Revaluation of property   123,131   128,309   131,780  
Mark-to-market adjustments financial instruments   39,674,625   (842,846 ) (283,748 )
Realization of interest swaps according to tax rules   816,984   661,446   807,248  
Excess book value over tax depreciation   (21,299 ) (26,226 ) (23,509 )
Employee retirement plan   (82,481 ) (76,859 ) (71,305 )
Total tax-increasing temporary differences   40,510,960   (156,176 ) 560,466  
               
Tax on temporary differences   11,343,069   (43,729 ) 156,931  

 

F-22
  

Reconciliation of income taxes:

(NOK thousands)   2011   2010   2009  
               
Pre-tax operating profit/(loss)
from continuing operations		   41,720,838   622,513   (2,500,891 )
Tax calculated at a 28 % nominal tax rate   11,681,835   174,304   (700,249 )
               
Income not subject to tax   0   0   (200 )
Expenses not deductible for tax purposes   1,366   982   4,335  
Other items   0   (214 ) 0  
Reconciliation items   1,366   768   4,135  
               
Tax effect on reconciliation items   382   215   1,159  
Taxes / (tax income) in the income statement   11,682,217   174,519   (699,091 )
               
Effective tax rate of taxes in the income statement   28.0 %   28.0 %   28.0 %  
Tax effect from reconciliation items above   0.0 %   0.0 %   0.0 %  
Tax rate after reconciliation   28.0 %   28.0 %   28.0 %  
               
Applicable tax rate   28.0 %   28.0 %   28.0 %  

 

12 FINANCIAL DERIVATIVES

 

Financial derivatives are used in the risk management of the Company’s financial activities with the purpose of obtaining economic hedging. The risk elements of derivatives related to the issue of securities in the international capital markets (embedded derivatives) are covered through economic hedging transactions. Financial derivatives are also used to provide the Company’s borrowers with the required foreign currency, interest rate terms and financing structure, and to cover the interest and exchange rate risk related to financial investments. In addition, derivatives can be used to a limited extent in the trading portfolio.


The credit risk related to existing agreements is considered to be low, as all parties involved are major Norwegian and international financial institutions. All derivative transactions are traded under ISDA (International Swaps and Derivatives Association) agreements. For a significant part of the derivative counterparties Eksportfinans has entered into master collateral agreements represented as annexes in the ISDA agreements. These credit support annexes (CSAs) enable Eksportfinans to call for collateral if the derivative exposure exceeds set limits. A majority of the CSA agreements have daily frequency. The same strict requirements and monitoring procedures in force for loan guarantees also apply to the Company’s counterparties under agreements related to financial derivatives. The risk of non-performance is considered in the estimates of fair value of derivative assets and liabilities.


The following overview of financial derivatives shows the nominal gross amounts and the fair value of the agreements involved:

 

  Dec. 31, 2011   Dec. 31, 2010
(NOK thousands) Notional Fair value   Notional Fair value
Interest rate derivatives 143,005,467 2,874,452   150,501,216 1,629,300  
Currency rate derivatives 56,523,946 1,995,844   85,229,693 (420,786 )
Interest and currency rate derivatives 111,190,542 6,301,838   94,405,712 109,670  
Equity derivatives 44,291,142 (6,059,274 ) 50,911,293 (1,366,694 )
Portfolio Hedge Agreement 5,000,000 963,115   5,000,000 837,060  
108 derivatives 48,207,293 (96,624 ) 44,302,878 (3,129 )
Other financial derivatives 3,289,676 (403,604 ) 2,454,994 370,246  
TOTAL 411,508,066 5,575,747   432,805,787 1,155,667  
             
Financial derivatives assets   19,446,289     15,403,160  
Financial derivatives liabilities   13,870,542     14,247,493  
NET DERIVATIVES   5,575,747     1,155,667  

 

The notional is defined as the principal amount of the agreement at year-end.

 

Interest rate derivatives cover:

  • Interest rate swaps – agreements to swap the nominal interest rates payable within a certain period.
  • Forward rate agreements (FRAs) – agreements that fix the rate of interest to a nominal amount for a future period.
  • Agreements that set floating rates of interest based on the future level of interest rates. These agreements include both interest rate options (caps, collars, floors) and interest rate conditions based on agreed formulas in which the future floating rate of interest is a variable.
F-23
  

Currency rate derivatives cover:

  • Forward purchases/sales agreements – agreements to purchase or sell a certain amount of foreign currency at a future date at an agreed exchange rate in relation to another currency.
  • Short-term currency swap agreements (FX swaps) – agreements to swap given amounts of foreign currency for a defined period at a pre-determined exchange rate.

Combined interest rate and foreign currency rate derivatives cover:

  • Interest and foreign currency swaps – long-term agreements to swap both interest rates and the amount of foreign currency for a fixed period.

Interest and foreign currency swaps combined with other interest and foreign currency derivatives include the following:

-Agreements which set floating rates of interest based on the future level of interest rates. This covers both interest rate options (caps, collars, floors) and interest rate conditions based on agreed formulas in which the floating rate of interest is a variable.
-Foreign currency options – agreements that offer the right – but no obligation – to sell or buy a certain nominal amount at a pre-determined rate.
-Agreements based on a future foreign exchange rate. The terms of the agreement are set on the basis of a pre-determined agreed-upon future exchange rate level.
-Call or put options – agreements that give the right to cancel the agreement before its maturity date, or to extend the agreement.

Equity derivatives cover:

  • Interest and foreign currency swaps combined with agreements that relate to the future price level of individual stocks or stock indexes in relation to a pre-determined agreed-upon level.
  • Interest and foreign currency swaps combined with stock options – agreements that offer the right – but no obligation – to sell or purchase a defined number of shares at a pre-determined, agreed-upon price.

Portfolio hedge agreement (PHA):

  • The background for introducing a Portfolio Hedge Agreement (PHA) back in March 2008 was to mitigate the market risk in the Company’s investment portfolio. Unrealized losses in this portfolio significantly reduced the Company’s capital base. Continuing volatility in capital markets in general and risk for further deterioration of the Company’s capital base led to discussions on how to hedge the market risk in this portfolio. The Company was at the time of the opinion that the unrealized losses would reverse and that hedging in the market (e.g. through Credit Default Swaps) would be very expensive. By creating a tailor-made derivative with the majority of the owners that would offset market risk for the Company and at the same time give the owners all potential upside was seen as an optimal solution.
  • The negotiated PHA agreement indemnifies the Company’s former investment portfolio (now denoted the PHA portfolio) from losses from both market risk and credit risk. The indemnification covered further losses up to NOK 5 billion, as gains or losses from inception of the agreement and until the last security matures is at the risk of the guarantor syndicate. The NOK 5 billion limit of the guarantee is in fact a put option for the syndicate in that their potential losses are capped at NOK 5 billion while they have all the potential upside. The Company pays a monthly fee of NOK 5 million for the guarantee. The market value of the PHA agreement hence consists of three parts: the market value fluctuations of the underlying portfolio, the value of the put option, the net present value of the remaining monthly fees. The portfolio market value component of the PHA agreement offsets the changes in market value of the portfolio in the statement of financial position.
  • After considering the economic hedging impact of the PHA agreement, the Company is exposed to credit risk through the risk of potential defaults among syndicate members and both credit risk and market risk if the NOK 5 billion cap is reached. The default risk of syndicate members is monitored daily as part of the Company’s exposure monitoring. The probability of the PHA agreement reaching the cap of the indemnification is currently negligible. Since inception of the agreement this probability has had a maximum of approximately 0.5 percent in November 2008 where around NOK 2.7 billion of the NOK 5 billion was utilized. Currently, only NOK 1 billion of the cap is utilized. Furthermore, the portfolio is currently smaller due to maturities (no additional investments are done in the portfolio) further reducing the probability of reaching the cap.
  • All of the portfolios securities are classified as level 2 and modeled using an index mapping model mapping each security's spread change during a month to a combination of one liquidity index factor and one credit index factor. There is an ongoing discussion whether index mapping or external model based quotes is the best representation of fair value and through 2011 the Company believes the index mapping method gives the best estimate.

108 Agreement derivatives:

  • The 108 Agreement is a government supported arrangement to facilitate lending to companies involved in the Norwegian export industry. It provides coverage of interest rate risk and foreign exchange risk for qualifying lending, borrowing and liquidity. The aim of the Agreement is to provide a fixed Norwegian krone based margin on qualifying OECD loans by compensating for interest rates and foreign currency differences between the lending and the funding. Settlement accounts are utilized to keep track of differences between actual amounts of lending and borrowing rates and the margin stipulated by the agreement. The net amount of settlement to be refunded by the government is included in the line item ”Other assets” in the statement of financial position.
  • Certain components of the 108 Agreement which compensate the Company for gains and losses on certain lending and borrowing transactions covered by the 108 Agreement due to differences in interest rates and foreign exchange rates, meet the definition of financial derivatives in IAS 39. The following summarizes the accounting treatment for the different features of the 108 Agreement: 
-The Government subsidies provided to the Company are treated as government grants in accordance with IAS 20. Government grants are recognized in income over the periods necessary to match them with the related costs which they are intended to compensate, on a systematic basis.

-Those grants relating to the variable rate borrowing meet the definition of a derivative in accordance with IAS39. On day 1, the derivative will be recorded on the balance sheet at fair value. The corresponding entry will be posted to 'deferred revenue' in accordance with the treatment for government grants noted above. On subsequent measurements of the derivative, the changes in its fair value will be recorded in the income statement.

F-24
  

 

-Those grants relating to fixed rate borrowings and loans and denominated in NOK currency, do not meet the definition of a derivative in accordance with IAS39.
-Grants denominated in a foreign currency meet the definition of a derivative in accordance with IAS39. The foreign currency component would not be separated from the entire agreement contract. Therefore the valuation of the derivative would include the foreign currency component plus the fixed margin relating to the fixed rate loans and borrowings. Similar to the treatment described in the second bullet point above, the initial gain would be deferred and the subsequent changes in the fair value of the derivative would be recognized in the income statement.
  • The embedded derivatives in the 108 Agreement are recognized in the balance sheet as an asset or a liability depending on the net fair value of the derivatives at the reporting date.

Other financial derivatives cover:

  • Interest and foreign currency swaps combined with agreements that provide the option to receive physical securities (such as U.S. Treasury bonds) in exchange for the nominal amount of the agreement.
  • Credit linked swaps – interest rate swaps combined with agreements where both maturity date and final payments are linked to a specific credit in the form of one or several bonds.
  • Commodity derivatives – interest and foreign currency swaps combined with agreements which relate to the future price level of a commodity or commodity index in relation to a pre-determined agreed price.

The financial derivatives as described above are used in the risk management of the Company with the purpose of obtaining economic hedging. For a quantitative analysis of the impact of these economic hedging relationships, see note 29.4.

 

13 LOANS DUE FROM CREDIT INSTITUTIONS AND CUSTOMERS

 

Loans due from credit institutions:

 

(NOK thousands) Dec. 31, 2011   Dec. 31, 2010  
Cash equivalents 1) 13,402,592   3,932,256  
Other bank deposits and claims on banks 1,299,987   469,911  
Loans to other credit institutions, nominal amount 2) 26,252,031   26,289,889  
Loan to KLP Kreditt AS, nominal amount 0         12,882,049  
Accrued interest on loans              11,240                33,907  
Adjustment to fair value on loans (626,087 ) (594,066 )
 TOTAL   40,339,763   43,013,946  

 

1) Cash equivalents are defined as bank deposits with maturity of less than 3 months.

2)The Company has acquired certain loan agreements from banks for which the bank provides a repayment guarantee, therefore retaining the credit risk of the loans. Under IFRS these loans classify as loans to credit institutions.

 

Loans due from customers:

 

(NOK thousands) Dec. 31, 2011 Dec. 31, 2010
 Loans due from customers, nominal amount   95,555,076 84,239,760
 Accrued interest on loans  849,636 785,496
 Adjustment to fair value on loans  136,509 70,142
 TOTAL  96,541,221 85,095,398

 

Total loans:

 

Nominal amounts related to loans due from credit institutions and customers, respectively, from the two previous tables are included in the following analysis.

 

(NOK thousands) Dec. 31, 2011 Dec. 31, 2010
Loans due from other credit institutions 26,252,031 26,289,889
Loan to KLP Kreditt AS 0       12,882,049
Loans due from credit institutions 26,252,031 39,171,938
Loans due from customers 95,555,076 84,239,760
TOTAL NOMINAL AMOUNT 121,807,107 123,411,698

  

See note 2.5.2.2 for a description of which loans are measured at amortized cost and which are measured as at fair value through profit or loss.

 

F-25
  

Loans by categories:

 

(NOK thousands) Dec. 31, 2011 Dec. 31, 2010
 Commercial loans  87,207,744 88,094,670
 Government-supported loans  34,599,363 35,317,028
 TOTAL NOMINAL AMOUNT  121,807,107 123,411,698
     
 Ships  44,988,623 45,376,319
 Capital goods  33,991,328 31,992,041
 Export-related and international activities  *)  32,318,002 22,448,043
 Loan to KLP Kreditt AS  0       12,882,049
 Direct loans to Norwegian local government sector  5,653,306 5,718,516
 Municipal-related loans to other credit institutions  4,798,000         4,943,000
 Loans to employees  57,848 51,730
 TOTAL NOMINAL AMOUNT  121,807,107 123,411,698
     
 Amount included that is
expected to be settled after more than twelve months 		 97,962,712 98,000,552

 

*) Export-related and international activities consist of loans to the following categories of borrowers:

 

(NOK thousands) Dec. 31, 2011 Dec. 31, 2010  
Banking and finance 6,938,338 7,263,680  
Renewable energy 5,493,750 1,425,110  
Consumer goods 5,375,486 4,757,279  
Shipping and aviation 5,233,464 263,538  
Real estate management 5,062,872 5,625,487 *)
Oil and gas 2,490,787 2,935,219  
Infrastructure 1,059,523 150,275  
Environment 660,498 0  
Other categories 3,284 27,455  
TOTAL NOMINAL AMOUNT 32,318,002 22,448,043  

 

*) Infrastructure on NOK 150.275 thousands was previously included in the line Real estate management on December 31, 2010.

 

14 INTANGIBLE ASSETS

 

The Company’s intangible assets consist mainly of software systems.


  (NOK thousands)   Internally
generated		   Other
intangible
assets		   Total
               
  Book value at Jan. 1, 2010   6,476   19,497   25,973
  Additions during the year   500   3,141   3,641
  Depreciation during the year   2,157   7,248   9,405
  Book value at Dec. 31, 2010   4,819   15,390   20,209
               
  Cost at Dec. 31, 2010   14,786   79,430   94,216
  Total accumulated depreciation at Dec. 31, 2010   9,967   64,040   74,007
  Book value at Dec. 31, 2010   4,819   15,390   20,209
               
  Book value at Jan. 1, 2011   4,819   15,390   20,209
  Additions during the year   0   5,533   5,533
  Depreciation during the year   2,219   7,217   9,436
  Book value at Dec. 31, 2011   2,600   13,706   16,306
               
  Cost at Dec. 31, 2011   14,786   84,963   99,749
  Total accumulated depreciation at Dec. 31, 2011   12,186   71,257   83,443
  Book value at Dec. 31, 2011   2,600   13,706   16,306
               
  Useful life   3-7 years   3-7 years   3-7 years
  Depreciation rates   14-33 %   14-33 %   14-33 %

 

Depreciation of intangible assets is included in the line item 'Depreciation' in the statement of comprehensive income.

 

F-26
  

15 PROPERTY, EQUIPMENT AND INVESTMENT PROPERTY


  (NOK thousands)   Equipment   Buldings
and land at
own use		   Investment
property		   Total
                   
  Book value at Jan. 1, 2010   9,969   127,239   70,612   207,820
  Additions during the year   2,353   5,071   3,108   10,532
  Disposals during the year   4   0   0   4
  Impairment / (reversal of impairment)   0   0   0   0
  Depreciation during the year   3,125   6,517   3,994   13,636
  Disposals during the year: sale of subsidiary   0   0   0   0
  Book value at Dec. 31, 2010   9,193   125,793   69,726   204,712
                   
  Cost at Dec. 31, 2010   87,023   150,010   84,568   321,601
  Total accumulated depreciation at Dec. 31, 2010   77,830   24,217   14,842   116,889
  Book value at Dec. 31, 2010   9,193   125,793   69,726   204,712
                   
  Book value at Jan. 1, 2011   9,193   125,793   69,726   204,712
  Additions during the year   7,819   5,295   3,245   16,359
  Disposals during the year   756   64   0   820
  Impairment / (reversal of impairment)   0   0   0   0
  Depreciation during the year   2,945   4,775   2,926   10,646
  Book value at Dec. 31, 2011   13,311   126,249   70,045   209,605
                   
  Cost at Dec. 31, 2011   94,086   155,241   87,813   337,140
  Total accumulated depreciation at Dec. 31, 2011   80,775   28,992   17,768   127,535
  Book value at Dec. 31, 2011   13,311   126,249   70,045   209,605
                   
  Useful life   3-7 years *)   4-67 years   4-67 years    
  Depreciation rates   14-33 %   1.5-25 %   1.5-25 %    

Income and expenses related to the investment property are specified in note 7 and 10 respectively.

 

The fair value of the investment property at the balance sheet date is estimated to approximately NOK 142 million. This is based on estimates prepared by a qualified, independent value as of September 21, 2011.

 

16 OTHER ASSETS

  

  (NOK thousands) Dec. 31,2011 Dec. 31,2010
  Settlement account 108 Agreement 822,513 887,426
  Cash collateral 4,612,500 2,952,537
  Other 32,024 7,423
  TOTAL 5,467,037 3,847,386

 

17 BORROWINGS THROUGH THE ISSUE OF SECURITIES

 

After November 18, 2011 the Company anticipates that new funding in the capital markets will be limited, and that the transactions in the existing funding portfolio will be repaid on maturity.

 

Until November 18, 2011 Eksportfinans’ long term funding strategy has been to be a frequent and diversified issuer in terms of markets and investors. The Company has been funding itself through the issuance of bond debt and commercial paper in the international capital markets. Bond debt was primarily issued off the company’s Euro Medium Term Note Programme as well as its US Medium Term Note Program. Commercial paper was issued using the company’s US Commercial Paper Program as well as its Euro Commercial Paper Program.

 

The company issues public benchmark bonds (primarily in USD) as well as smaller medium term notes / private placements. Public benchmark bonds are driven by the Company and are designed to manage the company’s liquidity position in terms of size and maturity. Medium term notes / private placements are generally issued on an investor reverse enquiry basis and tend to be smaller and shorter in maturity by nature and in a number of currencies. These bonds range from being plain vanilla to having a structured coupon and / or redemption amount. The type of structure is dictated by the investor and can be issued by the Company providing it meets with internal approval and risk systems. All funding transactions are arranged by dealers from the Company’s debt issuance programs; the Company does not arrange any of its own bond issues and does not discuss terms directly with investors on specific transactions.

 

All bond debt issuance is swapped back into Libor in one of the company’s base currencies; US Dollar, Euro or Norwegian Kroner. The Company does not take market views through its bond debt issuance and hedges itself against market risk on a trade by trade basis.

F-27
  

The Company issues debt in accordance with demand on the lending side of the business and communicates an expected annual issuance size at the beginning of each calendar year. Total new funding in 2011 amounted to NOK 51.6 billion through 380 individual bond issues compared to NOK 72.2 billion and 721 issues in 2010.

Commercial paper is primarily used for bridge financing as and when required.

 

Outstanding amounts and interest rates related to bond debt and commercial paper debt:

 

  (NOK thousands) 2011 2010
  Amount outstanding at year-end 141,488,604 186,401,745
  Maximum amount oustanding 194,078,602 216,261,044
  Average amount outstanding 180,067,308 205,568,061
  Average interest rate 2.10% 2.47%

 

Structure composition of bond debt and commercial paper debt:

 

  (NOK thousands) 2011 2010
  Non-structured 89,110,716 98,856,426
  Equity linked 10,045,952 43,605,918
  Foreign exchange linked 28,408,745 26,159,771
  Commodity linked 2,538,399 2,342,445
  Other structures 11,384,792 15,437,185
  TOTAL 141,488,604 186,401,745

 

18 LOANS TO ELECTED OFFICERS

 

No loans have been provided to any elected officers, except for loans to the employees’ representatives, which are included in loans to employees in note 13.

 

To companies in which Eksportfinans’ board members, members of control committee or chairman of the council of representatives are board members, three loans totaling NOK 1,463 million have been provided as of December 31, 2011 and no loans provided as of December 31, 2010.

 

Bank deposits are not defined as loans. These loans are granted as loans at ordinary terms to customers.

 

19 PROVISIONS

 

  (NOK thousands) Dec. 31,2011 Dec. 31,2010
  Pensions 83,517 77,932
  Salaries and social security 32,575 17,964
  TOTAL 116,092 95,896

 

20 OTHER LIABILITIES

 

  (NOK thousands) Dec. 31,2011 Dec. 31,2010
   Grants to mixed credits  335,810 333,179
   Cash collateral  10,259,849 6,448,707
   Interim bank liability  0 176,634
   Other short-term liabilities *)  125,950 216,107
   TOTAL           10,721,609            7,174,627

 

*) Dividends on preference share capital is included per December 31, 2010.

 

21 SUBORDINATED DEBT

 

  (NOK thousands) Dec 31, 2011 Dec 31, 2010
  JPY 15 bilions, 4.80 %, due 2015 1,039,230 1,225,774
  USD 60 millions, 0.47 %, due 2016 0 330,301
  USD 15 millions, 0.46 %, due 2016 0 82,575
  TOTAL 1,039,230 1,638,650

 

Under swap agreements that have been arranged for the loans, the Company’s interest obligation is at a variable rate in USD. The conditions comply with the requirements of The Financial Supervisory Authority of Norway (the FSA)) for additional capital.

 

The FSA has granted the Company a permanent exemption for renewal of the two loans that were called in 2011.

 

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22 CAPITAL CONTRIBUTION SECURITIES

 

The Company’s capital contribution securities consist of one loan of GBP 50 million at 5.918 percent fixed rate per annum. Under a 10-year swap agreement that has been arranged for the loan, the Company’s interest obligation is at a variable rate.

 

The capital contribution securities are perpetuals, but the Company has a unilateral right to call the securities at February 19, 2013 and every third month thereafter, at face value. The conditions comply with the requirements of the FSA for core capital.

 

 

23 SHAREHOLDERS

 

At the end of 2011, Eksportfinans ASA had a share capital of NOK 2,771,097 thousand, divided into 263,914 authorized shares of nominal value NOK 10,500. All shares are fully paid.

 

  December 31, 2011   December 31, 2010
  Number
of shares		 Ownership
percentage		   Number
of shares		 Ownership
percentage
DNB ASA          105,557 40.00            105,557 40.00
Nordea Bank Norge ASA            61,246 23.21              61,246 23.21
The Norwegian State, the Ministry of Trade and Industry             39,587 15.00              39,588 15.00
Danske Bank A/S            21,348 8.09              21,348 8.09
Sparebanken Øst            12,787 4.84              12,787 4.84
Sparebanken Møre              3,551 1.35                3,551 1.35
Sparebanken 1 Hedmark              3,499 1.33                3,499 1.33
Sparebanken Sør              3,497 1.32                3,497 1.32
Sparebanken Sogn og Fjordane              3,478 1.31                3,478 1.31
Sparebanken Vest              2,638 1.00                2,638 1.00
SpareBank 1 SMN              1,857 0.70                1,857 0.70
Voss Veksel og Landmandsbank ASA              1,050 0.40                1,050 0.40
Fana Sparebank                 943 0.36                   943 0.36
Handelsbanken                  563 0.21                   563 0.21
Sparebanken Pluss                 529 0.20                   529 0.20
Helgeland Sparebank                 377 0.14                   377 0.14
SpareBank 1 Ringerike Hadeland                 329 0.13                   329 0.13
Sparebank 1 Søre Sunnmøre                 296 0.11                   296 0.11
SpareBank 1 Modum                 188 0.07                   188 0.07
SpareBank 1 Buskerud-Vestfold                 188 0.07                   188 0.07
SpareBank 1 Nøtterøy-Tønsberg                 174 0.06                   174 0.06
Haugesund Sparebank                   94 0.04                     94 0.04
BNP Paribas, Oslo Branch                   83 0.03                     83 0.03
SpareBank 1 Østfold Akershus *)                   38 0.02                     38 0.02
Skudenes & Aakra Sparebank                   17 0.01                     17 0.01
TOTAL 263,914                 100   263,915 100

*) On November 1, 2011 SpareBank1 Halden was merged with SpareBank 1 Østfold Akershus, including all its shares in Eksportfinans ASA.

 

In addition to 263,914 ordinary shares with a nominal value of NOK 10,500 per share, the Company issued one preference share with a nominal value of NOK 10,500. The preference share was owned by the Government and was issued in relation to an agreement with the Government on January 29, 2009. This share was classified as a financial liability in the balance sheet (see note 2.16). The preference share was repaid in accordance with the agreement in 2011. All shares, both ordinary shares and the preference share, represent one vote.

 

A shareholder agreement exists between the major and some of the minor shareholders, whereby they have given each other the priority to acquire any shares the others may sell in Eksportfinans ASA. The shareholder agreement comprises 71 percent of the shares.

 

24 RESERVES WITHIN EQUITY

 

The share premium reserve is a requirement by Norwegian legislation. Allocations to this reserve are to be made for share premium in connection with the subscription for shares.

 

The reserve for unrealized gains is a requirement by Norwegian legislation. Allocations to this reserve are to be made in the Company accounts for, with a few exceptions, positive differences between carrying value and amortized cost of financial assets and liabilities measured at fair value. Reserves are also made for the difference between fair value of buildings and land (measured at fair value at the transition to IFRS) as of January 1, 2006, and the value as of December 31, 2005 under the previous GAAP. The latter difference is reduced each year with depreciation of the revaluation amount.

 

Both reserves represent restricted equity that cannot be distributed as dividend.

 

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25 CAPITAL MANAGEMENT

 

The primary objectives of the Company’s capital management are to have a sound capital base and to ensure compliance with externally imposed capital requirements, in order to support its business and to provide returns for shareholders and benefits for other stakeholders.

 

Eksportfinans maintains an actively managed capital base to cover risks inherent in the business. The adequacy of Eksportfinans capital is monitored using, among other measures, the rules and ratios established by the Basel Committee on Banking supervision (‘BIS rules/ratios‘) and adopted by the FSA.

 

Capital adequacy is rising and currently above the internally set core capital adequacy objective of 10 percent. The Company has through the year had stable and high access to funding and has neither needed to draw on committed repo lines nor the borrowing facility entered into with the Government.

 

Dividends are determined with the aim to ensure an adequate level of growth and profitability for Eksportfinans as well as a satisfactory return for the shareholders. On March 1, 2012, the Board proposed not to pay any dividend related to the fiscal year 2011.

Through the ICAAP-process, the board has decided that the company should aim for a regulatory core capital of 10 percent. The general minimum core capital requirement, according to the Norwegian capital adequacy regulations, is 4 percent. The minimum total risk capital requirement is 8 percent. The add on up to 10 percent takes internal capital adequacy assessments of key perceived risk factors for the Company as well as future changes in regulations into account.

 

During the past year, Eksportfinans has complied with all its statutory capital requirements.

 

Risk capital:        
         
(NOK thousands and as percentage of risk-weighted assets and off-balance)      
         
  Dec. 31, 2011            Dec. 31, 2010
Share capital 2,771,097   2,771,097  
Share premium reserve 176,597   176,586  
Reserve for unrealized gains 70,551   70,551  
Other equity 31,675,845   2,137,289  
Total equity 34,694,090   5,155,523  
Declared dividends     500,000  
Capital contribution securities 464,145   453,400  
Deductions 30,378,945   1,037,678  
Additions 6,899   5,959  
Total core capital 4,786,189 16.1 % 4,077,204 12.7 %
         
Subordinated debt 928,620   1,518,510  
Capital contribution securities not included in core capital 0   0  
Deductions 0   0  
Additions 46,097   46,097  
Additional capital 974,717 3.3 % 1,564,607 4.9 %
         
Total risk capital 5,760,906 19.4 % 5,641,811 17.6 %
         


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Risk-weighted balance sheet and off-balance sheet items:      
 
(NOK thousands) Dec. 31, 2011 Dec. 31, 2010
  Book value Weighted value Book value Weighted value
Loans due from credit institutions 40,339,763 8,067,953 43,013,946 8,602,789
Loans due from customers 96,541,221 10,054,218 85,095,398 9,007,538
Securities 51,908,412 6,286,291 67,920,880 8,884,743
         of which held for trading 39,953,298 4,012,764 49,243,562 5,228,236
Financial derivatives 19,446,289 2,353,802 15,403,160 2,344,376
Other assets 5,692,948 170,728 4,116,041 209,468
Total assets on balance sheet 213,928,633 26,932,991 215,549,425 29,048,915
         
Off-balance sheet items   304,406   358,333
Operational risk   2,423,707   2,577,477
Foreign currency exchange risk   0   0
TOTAL ASSETS ON BALANCE SHEET   29,661,104   31,984,725

 

26 CASH AND CASH EQUIVALENTS

 

For the purposes of the cash flow statement, cash and cash equivalents comprise the following balances with less than three months maturity from the date of acquisition:

 

  (NOK thousands)   Dec. 31, 2011   Dec. 31, 2010
  Cash   0   5
  Balances with Norwegian banks   101,077   77,277
  Balances with foreign banks    1,797,074   1,813,258
  Bank deposits with maturity less than three months   11,504,441   2,041,721
  TOTAL CASH AND CASH EQUIVALENTS   13,402,592   3,932,261

With the exception of cash, the amounts are included in the balance sheet line item ‘Loans due from credit institutions’.

  

27 FINANCIAL RISK MANAGEMENT

 

After the Government’s announcement to assume responsibility for the state-supported export financing scheme, Eksportfinans will facilitate existing loans for the rest of their maturities and currently neither anticipates to give no new loans nor to issue new debt. In addition Eksportfinans will have a strong focus on maintaining a sufficient liquidity buffer to meet adverse asset/liability scenarios. A new state-owned and state-funded entity granting new loans will be set up by July 1, 2012.

 

Risk management structure

Eksportfinans seeks to monitor and control risk exposure through a variety of separate but complementary financial, credit, operational, compliance and legal reporting systems. In addition, a number of committees are responsible for monitoring risk exposures and have general oversight of the Company’s risk management process as described further below. The Board of Directors ("the Board") has developed guidelines for loans to the export lending industry, liquidity management, funding, interest rate exposure, currency risk exposure, liquidity risk and credit exposure for the Company.

 

Organization

The Director of Risk Management reports directly to the Company’s CEO. Risk Management has responsibility for conducting company-wide compliance such as counterparty credit quality checks and risk limit checks against guidelines, as well as risk pricing, asset and liability projections, sensitivity analysis and mark to market calculations for external reporting.

 

The team responsible for the day-to-day management of market risk is referred to as the internal bank and is located under capital markets, independent of the Risk Management Group overseeing risk. The internal bank has the operative responsibility of the main hedging activities in the market as well as controlling the liquidity by monitoring short term borrowing programs, asset liability gaps, maturity gaps, market conditions and market projections. In addition to the day to day work of the Risk Management Group the Company has four risk committees.

 

Committees overseeing risk:

 

  • The Group of Managing Directors
  • The Credit Committee
  • The Asset and Liability Committee
  • The Product Approval Committee
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28 CREDIT RISK

 

Credit risk represents the loss that Eksportfinans would incur if one or several counterparties or issuers of securities or other instruments that the Company holds, fail to perform under their contractual obligations to Eksportfinans, or upon a deterioration of credit quality of the third parties whose securities or other instruments, including over-the counter (OTC) derivatives that Eksportfinans holds.

 

Credit risk arises from lending transactions, financial investments and derivative transactions. Most export loans are fully credit enhanced, normally with guarantees from financial institutions or governments.

 

Eksportfinans relies on domicile country as well as credit ratings and analyses from the major rating agencies (Moody’s Investor Services and Standard & Poor’s) to monitor the credit quality of all guarantors and credit counterparties in the financial investments and derivatives portfolios. If a counterpart has no rating from the two international agencies, the Company uses internal ratings published by the Company’s main owner bank for some counterparties. These “shadow ratings” are well known and widely used in the market by other institutions. Reports are provided regularly to senior management and the Board. Eksportfinans does not perform extensive analyses of the creditworthiness of its borrowers, but instead relies on guarantees and other forms of support for the loans.

 

The following table presents loans by type of security/exposure:

 

(Percent) Dec. 31, 2011 Dec. 31, 2010
Government guarantees 38.4 32.2
Loans to and guarantees from Norwegian local authorities 1.7 1.7
Public sector borrowers/guarantors 40.1 33.9
Guarantees from Norwegian banks 32.8 31.1
Loans to Norwegian banks 14.8 20.3
Guarantees from foreign banks 12.3                  14.4
Other  0.0 0.3
TOTAL                100.0                100.0
     
Total nominal amount in NOK thousands (from note 13) 121,807,107 123,411,698

 

All guarantees obtained from banks to support Eksportfinans’ loans are unconditional and irrevocable, whereas guarantees from the Norwegian Guarantee Institute for Export Credits (GIEK) or insurance companies are given subject to certain conditions and limitations, as discussed below.

 

Guarantees issued by GIEK, insurance companies and banks, generally cover principal, interest and, in most cases, interest on payments past due and expenses.

 

Guarantees issued by GIEK or insurance companies cover political risks (war, internal disturbances, border closings, new legislation, moratoria or the failure by a foreign government or governmental institution to perform its obligations under the credit agreement) and/or commercial risks (the failure by the borrower to perform its obligations under the credit agreement). The terms of guarantees issued by the Guarantee Institute generally provide that claims under the guarantees are payable six months from the date of the borrower’s default.

 

GIEK’s cover of political risks is 100 percent of a loan, and its maximum cover for commercial risks is 90 percent.

 

To date, substantially all export-related loans (collateralized loans included) have been made against guarantees from Norwegian and foreign banks, guarantees issued by the Norwegian Government, GIEK and other Norwegian governmental agencies, and guarantees provided by insurance companies.

 

The portfolio of securities consists mainly of money market instruments, certificates of deposit, bank deposits, senior bank obligations and triple-A rated asset backed securities (ABSs). The Company's portfolio of derivative transactions consists of interest rate swaps and currency swaps as well as structured swaps to swap the structured market risk exposure only from structured funding to plain floating interest risk. All swaps are done with financial institutions with high credit ratings. Eksportfinans has no and has had no investments in any sub-prime securities.

 

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28.1 Credit risk measurement

 

Credit exposure is calculated based on the nominal amount of the loan guarantee or the nominal amount of the financial investment with a counterpart. Credit losses from export loans will only occur if both the borrower and the guarantor fail to fulfill contractual payments or obligations. This double line of defense is not taken into account in the day-to-day exposure measurement. For non-guaranteed loans, exposure is measured directly against the debtor’s credit limit based on the debtor’s credit rating.

 

The exposure related to derivative contracts is based on the mark-to-market value of the contracts, and is converted into a measure of credit risk in order to reflect that the counterparties might not meet their contractual obligations. The exposure is measured by calculating the net market value of all eligible transactions with the counterparty, including an add-on for each contract to take account of the potential future exposure that may arise from changes in market factors such as interest- or currency rates. The add-on for a position is an increasing function of time to maturity and market volatility in the risk factors (i.e. interest rate curve or currency volatility) of the transaction. The add-on is also a function of the exposure type. For example the add-on of an interest derivative swap will be different for a currency swap with the same maturity and notional amount.

 

Counterparty exposures are subject to an annual credit assessment. The exposure is mostly towards the OECD (Organization for Economic Co-operation and Development) area, mainly related to Norwegian and European counterparties. The largest counterparties at year-end are The Kingdom of Norway (through GIEK), and DNB Bank. The Company has also extended some payment guarantees to support the Norwegian export industry, see note 30.3.

 

28.2 Risk limit control and mitigation policies

 

Credit limits are determined on the basis of Eksportfinans’ risk capital, business strategy, as well as the counterparty’s rating, size fit into Eksportfinans business model. Maximum limits are subject to the statutory limitations for large exposures to individual clients, but the Company has obtained an exception from the Norwegian Government on existing large exposures breaching this regulation, see note 36. In addition to limits on counterparty exposure the Company also has maximum limits on country exposure, counterparty type (sovereign, non-sovereign) and type of exposure to reduce concentration risk.

 

All derivative contracts are governed by master agreements developed by the International Swaps and Derivatives Association (ISDA). These agreements assure, for example, that netting is legally enforceable. Some of these agreements also contain provisions that require the posting of collateral in order to reduce counterparty exposure. These provisions include Credit Support Annexes (CSAs) that define collateral type and amounts to be transferred or received. This effectively ensures that if derivative exposures exceed pre-agreed limits, the counterparty with the positive exposure (which is now ’too high‘) can require the counterparty to transfer collateral to a dedicated neutral account. The transferred collateral will be netted in a situation of default. Thus the CSA agreement effectively ensures that the counterparty credit exposure is capped at the agreed upon limit.

 

Eksportfinans has CSA agreements with around 50 different counterparties as of December 31, 2011 about the same as of December 31, 2010. More than 80 percent of the CSA's have daily collateral exchange. Eksportfinans accepts only cash as collateral. As of December 31, 2011, 99 percent of total number of derivative transactions and 94 percent of total derivative exposures are covered under CSA agreements.

 

The following table shows posted and received collateral from these agreements:

 

(NOK thousands) Dec. 31, 2011   Dec. 31, 2010  
Posted 4,612,500   2,952,537  
Received 10,259,848   6,448,707  
NET AMOUNT (5,647,348 ) (3,496,170 )

 

28.3 Credit risk exposure for derivatives per counterparty

 

Credit enhancements for securities exist in the form of the indemnification agreement (Portfolio Hedge Agreement – PHA) described in note 12. Credit quality of securities and loans are described in note 28.5.

 

Exposures related to payment guarantees and loan commitments are disclosed in note 30.3.

 

The collateralisation process implies a time lag between calculated market values of collateralized derivatives and transfer of collateral. Further as the transferor ultimately transfers a cash value based on their own opinion of the underlying market value there might be differences between what is received or paid and the Company's own calculations. Hence the collateral may not give a perfect hedge. The Company may be over collateralized against some counterparties and under collateralized towards others. The Company hence monitors both own- and counterparties calculated market values for derivatives against transferred cash collateral. The table below shows that the largest net credit exposure towards a single counterparty on a single measured working day taking collateral into account was approximately NOK 500 million in 2011 and NOK 547 million in 2010 respectively. As the table shows for both years this arose from the Company being under collateralized relative to our estimated market values of our derivatives.

Largest single counterparty credit exposure from derivatives after collateral:
     
NOK thousands 2011 2010
Date of max net exposure Sep 30th Nov 30th
MTM of derivatives 566,890 612,010
Posted(-) / Received(+) collateral 66,947 37,966
Net exposure              499,943             574,044
Max 10d VaR at 95% confidence level              160,647  

  

F-33
  

If a counterpart should disagree with our calculated demands or defaults future collateral transfers may cease. Eksportfinans estimates it will take a maximum of 10 days to replace a single counterparty derivative exposure such as in the Lehman case in 2008. Eksportfinans therefore also estimates a 95% significant adverse derivative evolution over ten days for each counterpart. While the net exposure line shows the actual worst recorded credit exposure the 10d VaR number shows the forecasted additional worst case given collateralization suddenly stops. The Company estimates that by 95% certainty the loss from derivative value fluctuations after a collateral exchange cease before replacement will be less than NOK 161million at year-end 2011.

28.4 Loans past due or impaired

 

Due from credit institutions:

 

  (NOK thousands)   Dec. 31, 2011   Dec. 31, 2010  
             
  Interest and principal instalment 1-30 days past due   0   0  
  Not matured principal on loans with payments
1-30 days past due		   0   0  
             
  Interest and principal instalment 31-90 days past due   0   0  
  Not matured principal on loans with payments
31-90 days past due		   0   0  
             
  Interest and principal instalment more
than 90 days past due		   497,759 *) 493,127 *)
  Not matured principal on loans with payments
more than 90 days past due		   0   0  
             
  TOTAL LOANS THAT ARE PAST DUE   497,759   493,127  
             
  Relevant collateral or guarantees received   497,759   493,127  
  Estimated impairments on loans measured at amortized cost   0   0  


*) NOK 497,759 thousand as of December 31, 2011 and NOK 493,127 thousands as of December 31, 2010 relates to direct exposure towards Icelandic banks, and are as of the balance sheet date not considered guaranteed in a satisfactory manner. The fair value of these loans recognized in the balance sheet was NOK 152,812 thousand as of December 31, 2011 and NOK 136,103 thousands as of December 2010. The change in fair value in the period is reflected in the line item ‘Net gains/losses on financial instruments at fair value‘. Apart from the fair value adjustments already recognized in the statement of comprehensive income, related to the exposure towards the Icelandic banks discussed above, the Company considers all other receivables to be secured in a satisfactory manner. For these transactions, amounting to NOK 224,025 thousands, the Norwegian Government, through the Guarantee Institute for Export Credit (GIEK), guarantees approximately 83 percent of the amounts in default. The remaining 17 percent are guaranteed by private banks, most of them operating in Norway. Claims have already been submitted in accordance with the guarantees.

 

Due from customers:


  (NOK thousands)   Dec. 31, 2011   Dec. 31, 2010  
             
  Interest and principal instalment 1-30 days past due   3,219   30,306  
  Not matured principal on loans with payments
1-30 days past due		   8,129   608,492  
             
  Interest and principal instalment 31-90 days past due   25,223   27,886  
  Not matured principal on loans with payments
31-90 days past due		   164,027   199,454  
             
  Interest and principal instalment more
than 90 days past due		   5,985   17,441  
  Not matured principal on loans with payments
more than 90 days past due		   17,442   452,549  
             
  TOTAL LOANS THAT ARE PAST DUE   224,025   1,336,128  
             
  Relevant collateral or guarantees received   224,025   1,336,128  
  Estimated impairments on loans measured at amortized cost   0   0  
             

 

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28.5 Credit quality of securities and loans

 

Credit quality of securities

 

The tables below show the credit quality of debt securities, treasury bills and equivalents by rating agency designation, based on Standard & Poor’s, or their equivalent, credit rating of the issuers:

 

  December 31, 2011
(NOK thousands) Treasury bills or
equivalent		 Trading
securities *)		 Other
securities		 Total amount Total in %
AAA 7,282,452 14,124,778 0 21,407,230 41%
AA+ to AA- 0 5,324,304 1,224,198 6,548,502 13%
A+ to A- 0 11,536,863 7,393,316 18,930,179 36%
Lower than A- 0 851,300 2,431,496 3,282,796 6%
No international rating 0 1,037,470 702,235 1,739,705 3%
TOTAL 7,282,452 32,874,715 11,751,245 51,908,412 100%
           
           
  December 31, 2010
(NOK thousands) Treasury bills or equivalent Trading securities **) Other securities Total amount Total in %
AAA 7,704,517 18,269,025 0 25,973,542 38%
AA+ to AA- 59,854 5,825,066 3,047,403 8,932,323 13%
A+ to A- 894,873 13,898,625 10,680,005 25,473,503 38%
Lower than A- 227,390 555,469 4,215,905 4,998,764 7%
No international rating 0 1,808,743 734,005 2,542,748 4%
TOTAL 8,886,634 40,356,928 18,677,318 67,920,880 100%

 

*) Trading securities is not the same as the Company’s trading portfolio, as the trading portfolio may include treasury bills or other equivalents. Other securities consist mostly of investment-grade debt and debt-related securities, mainly senior bank notes and bonds, highly rated asset-backed securities and some bonds issued by unrated Norwegian savings banks. Trading securities without international rating are issued by Norwegian savings banks. Trading securities with rating lower than A- and other securities with lower rating than A-/no international rating are all included in the PHA agreement. The issuers of securities or deposit-taking institutions are selected according to the same credit criteria as guarantors for loans.

**)Trading securities is not the same as the Company’s trading portfolio, as the trading portfolio may include treasury bills or other equivalents. Other securities consist mostly of investment-grade debt and debt-related securities, mainly senior bank notes and bonds, highly rated asset-backed securities and some bonds issued by unrated Danish and Norwegian savings banks. One single Treasury bill is rated lower than A-. This paper is guaranteed by the Irish Government (Baa1/A/BBB+) and will mature in April 2011. Trading securities without international rating are issued by Danish and Norwegian savings banks. Trading securities with rating lower than A- and other securities with lower rating than A-/no international rating are all included in the PHA agreement. The issuers of securities or deposit-taking institutions are selected according to the same credit criteria as guarantors for loans.

 

Securities that are expected to be settled after more than twelve months from the balance sheet date amount to NOK 20,502 million as of December 31, 2011 (NOK 35,357 million as of December 31, 2010).

 

F-35
  

Credit quality of loans

 

Credit quality of loans, based on credit rating of the guarantors:


  December 31, 2011
(NOK thousands) Export lending
Exposure		 Municipal
lending
Exposure		 Other *)
Exposure		 Total amount Total in %
AAA 47,565,481 2,062,364 0 49,627,845 36%
AA+ to AA- 7,384,150 2,968,452 1,739,327 12,091,929 9%
A+ to A- 51,192,163 3,929,105 11,683,901 66,805,169 49%
Lower than A- ** 1,313,284 255,901 0 1,569,185 1%
No international rating *** 5,246,831 1,482,179 57,848 6,786,858 5%
TOTAL 112,701,909 10,698,001 13,481,076 136,880,986 100%
* Includes depo and employee loans        
** Consists of NOK 950 mln HSH Nordbank (BBB), NOK 614 mln Storebrand Bank (BBB+) and exposure of NOK 5 mill from other banks
*** Of the NOK 6.786.858  with "No international rating", NOK 6.157.676 is related to Norwegian Savings Banks
 with shadow rating;  A 20 %, A-26%, BBB+ 52 %, BBB 1%    
           
  December 31, 2010
(NOK thousands) Export lending
Exposure		 Municipal
lending
Exposure		 Other *)
Exposure		 Total amount Total in %
AAA 40,851,988 14,819,220 0 55,671,208 43%
AA+ to AA- 7,677,655 2,900,000 1,856,526 12,434,181 10%
A+ to A- 45,989,317 3,316,500 2,177,297 51,483,114 40%
Lower than A- ** 357,621 250,000 0 607,621 0%
No international rating *** 5,235,301 2,257,845 420,078 7,913,225 6%
TOTAL 100,111,882 23,543,565 4,453,901 128,109,349 100%
*Includes depo and employee loans        
** Consists of  NOK 601 mln Storebrand Bank (BBB+) exposure and exposure of NOK 6,5 mill from other banks
*** Of the NOK 7.913 225  with "No international rating", NOK 6.383.858.575 is related to Norwegian Savings Banks

 

28.6 Concentration of credit risk

 

Credit risk concentration may arise from trading, investing and financing activities, and may be affected by economical, industrial or political factors. While Eksportfinans is exposed to many different counterparties and industries the firm executes a high volume of transactions with counterparties in the financial services industry, such as brokers, dealers, commercial banks and institutional clients. This results in a credit concentration with respect to the financial industry.

 

A significant part of the Company’s business consists of lending to the maritime sector, such as rig and ship building financing. Loans to this sector are fully guaranteed by banks or GIEK.

 

In the ordinary course of business, Eksportfinans may be subject to a concentration of credit risk to any particular bank guarantor or bond issuer.

 

28.7 Effects from credit spread changes

 

The amount of change, during the period and cumulatively, in the fair value that is attributable to changes in the credit risk of the financial assets and liabilities, is determined by multiplying the sensitivity of the instrument to credit spreads by the change in credit spread since inception. The credit sensitivity is calculated in the main trading system by altering discount curves by one basis point. The credit spread sensitivity is increasing in time to maturity. Credit spreads are obtained from the market, see note 4, and the instrument sensitivities are estimated based on observable market data input.

 

Loans as at fair value through profit and loss:


(NOK thousands)   Dec. 31, 2011   Dec. 31, 2010  
Maximum exposure to credit risk of loans and receivables   101,308,917   79,066,817  
Change during the period in fair value of loans and receivables attributable to changes in credit spread   259,720   (100,228 )
Accumulated change in fair value of loans and receivables attributable to changes in credit spread   (332,585 ) (592,305 )

F-36
  

Financial liabilities as at fair value through profit and loss:

 

(NOK thousands)   Dec. 31, 2011   Dec. 31, 2010  
Amount contractually required to pay at maturity   154,572,669   158,006,771  
Accrued interest   129,661   130,904  
Adjustments to fair value   (23,650,505 ) 14,444,043  
Carrying amount of the financial liabilities at fair value   131,051,825   172,581,718  
Change during the period in fair value of financial liabilities attributable to changes in credit spread    (40,805,965 ) 497,985  
Accumulated change in fair value of financial liabilities attributable to changes in credit spread    (42,054,873 ) (1,248,908 )

 

The credit spread effects are related to the fair value of the asset or liability in the balance sheet. A negative figure in the liabilities table therefore means that the credit spread effect reduces the value of the liability, consequently making a positive effect in the statement of comprehensive income.

 

29 MARKET RISK

 

Market risk is the risk of loss due to an adverse move in the market value of an asset, a liability or a derivative contract. For Eksportfinans the market value of the net positions will primarily depend on general interest rates, specific interest rates (credit spreads) and exchange rates. General interest rate risk such as a movement in the USD Libor rate is controlled daily by set limits. Specific interest rate risk, credit spread risk, is the main component of market risk. Specific interest rate risk on own debt had after the multi-notch downgrade become by far the most significant component of market risk in Company IFRS results. The PHA agreement was established to hedge the market risk in the PHA portfolio. Besides the PHA agreement the Company does not hedge credit spreads on a perfect basis however credit spread risks is on portfolio basis limited by stop loss limits and covenants on guarantor rating.

 

The 108 Agreement with the Norwegian Ministry of Trade and Industry (referred to as the Ministry) regulates Eksportfinans’ financing of export contracts according to regulations set by the OECD. Interest and exchange rate exposures related to lending, funding and investments of liquidity under this agreement are adequately economically hedged with derivatives. Any residual cost or profit arising from the non-perfect hedges will be accounted to the Ministry.

 

29.1 Market risk measurement techniques

 

Financial instruments account for the bulk of the Company’s assets and liabilities. Eksportfinans measures market risk by currency exposure and interest rate sensitivity.

 

Currency exposure towards a particular currency is measured as the net of assets and liabilities for the currency, plus the basis currency bought spot or forward with settlement in NOK minus basis currency sold spot or forward settling in NOK, adjusted for the value of any option positions.

 

Eksportfinans’ exposure to interest rate risk is measured according to the basis point value method. This measurement quantifies the change in the fair value of assets and liabilities that would result from a one basis point change in interest rates or a one basis point widening of credit spreads. Basis point value shows the change in value of the portfolio from a 0.01 percent (i.e. 1/100 of 1 percent) change in the underlying interest yield curves.

 

29.2 Foreign exchange risk

 

Currency exposure arises from future margins only. All notionals are currency hedged. Each instrument is swapped to Eksportfinans’ three main business currencies EUR, USD and NOK and net exposure in EUR and USD is further hedged by foreign exchange forward. The Board has approved this currency risk and strategy, and at the present time Eksportfinans can have aggregate net positions in foreign currencies according to limits set by the Board.

 

The tables below set forth a summary of Eksportfinans’ total exposure to currencies other than NOK:


(NOK thousands) Balance sheet
assets/(liabilities)		   Derivatives   Net position *)   Amount of net
position covered by
108 Agreement items
December 31, 2011              
CAD (1,243,140 ) 1,246,580   3,440   2,432
JPY (74,040,848 ) 74,041,659   811   305
SEK 1,979,364   (1,978,821 ) 543   0
EUR 29,322,232   (29,299,872 ) 22,360   21,088
DKK 4,165,719   (4,165,741 ) (22 ) 195
USD (28,225,921 ) 28,249,099   23,178   24,058
Other currencies (14,520,929 ) 14,523,214   2,285   4,321
TOTAL (82,563,523 ) 82,616,118   52,595   52,399

F-37
  

(NOK thousands) Balance sheet
assets/(liabilities)		   Derivatives   Net position*)   Amount of net
position covered by
108 Agreement items		  
December 31, 2010                
CAD (1,259,065 ) 1,260,165   1,100   159  
JPY (70,476,336 ) 70,476,755   419   305  
SEK (301,329 ) 301,567   238   0  
EUR 21,708,437   (21,687,825 ) 20,612   16,089  
DKK 5,621,804   (5,632,362 ) (10,558 ) 194  
USD (28,436,386 ) 28,397,660   (38,726 ) (78,322 )
Other currencies (11,879,535 ) 11,878,008   (1,527 ) 1,484  
TOTAL (85,022,410 ) 84,993,968   (28,442 ) (60,091 )

 

*) Net position includes amounts covered by the 108 Agreement.

 

Eksportfinans has set currency risk limits and does currency hedging according to these. The set currency limits exclude currency exposure from subsidized lending (the 108 Agreement), as the Government assumes this risk. Currency exposure from subsidized lending is adjusted after regular meetings with the Government, and adjustments may be less frequent than for the Company’s residual currency risk management. The below tables show currency exposure through 2010 and 2011, including peaks, and excluding the exposure from subsidized lending and for liabilities in contracts covering leases and maintenance. These exposures constitutes what we manage currency risk relative to, and as described do not equal the above tables for total currency positions.

 

Currency exposure:


        Other      
(NOK thousands) EUR USD   currencies   Total  
As of December 31, 2011 2,415 (446 ) (197 ) 1,772  
               
Maximum through 2011 *) 12,754 52,845   6,579   72,178  
Minimum through 2011 *) 2,415 (11,396 ) (9,161 ) (18,142 )
Average through 2011 7,409 18,266   (1,614 ) 24,061  
               
As of December 31, 2010 5,675 39,721   (12,471 ) 32,925  
               
Maximum through 2010 *) 20,582 39,721   1,881   62,184  
Minimum through 2010 *) 5,675 (8,745 ) (20,949 ) (24,019 )
Average through 2010 9,782 14,744   (10,662 ) 13,864  
               
As of December 31, 2009 59,598 156,886   (18,634 ) 197,850  

*) The maximum and minimum exposures in general do not occur on the same date for different currencies.

 

The above table does not include foreign currency commitments because the currency exposure first comes to effect at disbursement. At that time any currency/interest rate exposure will be hedged.

 

The profit and loss effect on Eksportfinans’ balance sheet as of December 31, 2011 due to an adverse change of 10 percent in foreign currency exchange rates is estimated to be NOK 0.2 million compared to NOK 3.2 million as of December 31, 2010. Annualized fluctuation in EURNOK and USDNOK based on 95 percent confidence interval of daily changes through 2011 are 13 percent and 24 percent respectively, compared to 13 percent and 23 percent through 2010.

 

29.3 Interest rate risk

 

Eksportfinans’ guidelines with respect to interest rate risk include limits on interest rate exposure for market-based activities.

 

Interest rate risk is managed by a separate risk management function and reported regularly to the Group of Managing Directors and to the Board. The Board sets the permitted level of interest rate exposure.

 

The table below displays a summary of the change in fair values resulting from a shift in yield curves of 1 basis point. The interest rate exposure as of December 31, 2011 is negative NOK 108 thousand. Since Eksportfinans swaps all fixed rate instruments to floating rate, the interest rate exposure mainly arises from interest rate fixings occurring on different dates. Interest rate maturities between the selected interest rate points are given estimated values allocated to the selected interest rate points. However, actual interest rate exposure may be different since the estimates do not account for covariance between the selected interest points. The below table shows interest rate risk of exposure with up to one year of maturity as this is the subportfolio that is daily hedged. Earlier annual reports have shown all exposure also for exposure without strict limits and hedging routines and are hence not directly comparable.

F-38
  

Interest rate exposure from a 1 basis point shift of interest rate curves:



(NOK thousands) NOK   EUR   USD   currencies   Total
As of December 31, 2011 (59 ) (14 ) (33 ) (2 ) (108)
                   
Maximum through 2011 *) 54   19   2   88   (16)
Minimum through 2011 *) (121 ) (145 ) (84 ) (4 ) (175)
Average through 2011 (43 ) (39 ) (36 ) 12   (106)
                   
As of December 31, 2010 (84)   (6)   (70)   (7)   (167)
                   
Maximum through 2010 *) 4   76   12   40   (46)
Minimum through 2010 *) (135 ) (67 ) (82 ) (94 ) (293)
Average through 2010 (71 ) (20 ) (31 ) 1   (131)
                   
As of December 31, 2009 (131 ) (40 ) 70   (191 ) (292)

*) The maximum and minimum exposure in general does not occur on the same date for different currencies.

 

 

Eksportfinans considers changes of interest rates of 6 basis points over a period equal to the expected maximum time before the Company will be able to hedge exposure to be reasonably possible as of December 31, 2011 (15 basis points as of December 31, 2010). The effect on profit and loss from such changes in interest rates is shown below:

 

        Other  
(NOK thousands) NOK EUR USD currencies Total
As of December 31, 2011 (836) (100) (210) (16) (694)
As of December 31, 2010 (1,220) (94) (1,021) (104) (2,439)

 

Credit spread risk

 

We define changes in credit spreads in the market as market risk and not credit risk, which we define to include default probability only. Isolated for the securities portfolio (PHA portfolio + liquidity reserve portfolio) a potential increase in credit spreads of one basis point will reduce the fair value by NOK 8 million as of December 31, 2011, compared to NOK 12 million as of December 31, 2010. The annualized fluctuation of the credit spread in the securities portfolio based on 95 percent confidence interval of monthly changes through 2010-2011is 39 basis points. Through 2009-2010, 95 percent of the annualized monthly spread changes were less than 34 basis points.

 

29.4 Effects from economic hedging

 

Note 5 specifies the net realized and unrealized gains/ (losses) on financial instruments, showing separately the effects from financial derivatives. When presented to the Company’s chief operating decision maker, this presentation is made with the various financial instruments shown after netting with related economic hedges, as derivatives are used in economic hedges of the market risk of specific assets and liabilities.

 

Net realized and unrealized gains/(losses) on financial instruments at fair value, netted with the related economic hedges:


(NOK thousands) 2011   2010   2009  
Securities 1) (184,866 ) (41,971 ) (58,224 ) 
Other financial instruments at fair value 1) 43,247   (7,204 ) 122,585  
Net realized gains/(losses) (141,619 ) (49,175 ) 64,361  
             
Loans and receivables1) (51,292 ) (89,018 ) (48,512 )
Securities1) 19,276   (61,868 ) 99,438  
Commercial paper debt 1)2)3) 1,291   1,225   74,694  
Bond debt 1)2)3) 40,343,394   (392,753 ) (3,917,868 )
Subordinated debt and capital contribution securities 1)2)3) 308,457   2,243   1,122  
Other financial instruments at fair value1) (12,598 ) 6,376   (77,878 )
Net unrealized gains/(losses) 40,608,528   (533,795 ) (3,869,004 )
             
Financial derivatives related to 108 Agreement 4) (93,495 ) (20,105 ) 11,473  
NET REALIZED AND UNREALIZED GAINS/(LOSSES) 40,373,414   (603,075 ) (3,793,170 )


1) Including financial derivatives with purpose of economic hedging

2) Accumulated net gain on own debt is NOK 42.1 billion as of December 31, 2011, compared to NOK 1.4 billion as of December 31, 2010.

3) In the year of 2011, Eksportfinans had an unrealized gain of NOK 40.7 billion (NOK 390 million in 2010) on its own debt, net of derivatives.

4) Derivatives related to components of the 108 Agreement. The 108 Agreement is accounted for at amortized cost, hence these derivatives are not included in the effects related to financial instruments at fair value.

F-39
  

 

Net realized and unrealized gains/ (losses) on securities:

 

(NOK thousands) 2011   2010   2009  
Net realized gains/(losses) on securities1) (184,866 ) (41,971 ) (58,224 )
Net unrealized gains/(losses) on securities1) 19,276   (61,868)   99,438  
TOTAL (165,590 ) (103,839 ) 41,214  
             
             
(NOK thousands) 2011   2010   2009  
Securities not hedged by PHA1) (37,730 ) 28,232   15,554  
Securities hedged by PHA1) (184,741 ) 70,149   1,607,765  
Portfolio Hedge Agreement (PHA) 56,881   (202,220 ) (1,582,105 )
TOTAL (165,590 ) (103,839 ) 41,214  

 

See note 12 for a description of the Portfolio Hedge Agreement (PHA).

 

Interest, and the interest effect on economical hedging instruments, is classified as interest income or expense in the statement of comprehensive income. Changes in fair value are recorded in the line item ’Net gains/(losses) on financial instruments at fair value‘. For the years ended December 31, 2011, 2010, and 2009, the company recorded NOK 6,064 million, NOK 6,242 million and NOK 7,712 million, respectively, of interest income on loans due from credit institutions, loans due from customers and securities and NOK 6,608 million, NOK 7,837 million and 8,739 million, respectively, of interest expense on commercial paper and bond debt, subordinated debt and capital contribution securities. In the same periods the company recorded NOK negative 436 million, NOK negative 425 million and NOK negative 500 million, respectively, of interest income on economical hedging instruments and NOK negative 2,529 million, NOK negative 3,439 million and NOK negative 2,996 million, respectively, of interest expense on economical hedging instruments.

 

30 LIQUIDITY RISK

 

Liquidity risk is the risk that an entity will encounter difficulty in meeting obligations associated with financial liabilities that are settled by delivering cash or another financial asset.

 

Liquidity risk can arise from call and trigger features in the structured funding portfolio that have unknown maturity dates, constituting approximately 42 percent of the Company’s total funding (securities issued) at year-end. Liquidity risk can also arise from prepayment options in asset backed securities. As of year-end 2011 the asset backed securities portfolio makes up approximately 47 percent of the liquidity portfolio that is covered by the Portfolio Hedge Agreement (PHA), whereas the PHA portfolio is approximately 11 percent of total assets.

 

30.1 Liquidity risk management process

 

The risk associated with insufficient access to liquidity was until mid November 2011 managed by operating several diversified short-term and long-term borrowing programs that provided access to the funding markets. In addition, Eksportfinans holds a securities portfolio that consists of a liquidity reserve portfolio and the PHA portfolio.

 

Following the government’ decision to establish a new state owned entity to manage the export financing schemes on 18th November 2011, the funding programs are no longer active. The securities portfolios however remain, and as of December 31, 2011 the liquidity reserve portfolio and the PHA portfolio had market values of NOK 29 billion and NOK 23 billion respectively, a change from NOK 32 billion and NOK 36 billion as of December 31, 2010. In addition to liquid securities the company also held cash and cash equivalent assets totaling NOK 13.4 billion as of end of 2011 compared to NOK 3.9 billion as of end of 2010. Total liquidity reserves were hence NOK 65.3 billion as of 31st Dec 2011 (NOK 71.9 billion as of Dec 31st 2010).

 

The primary purpose of the liquidity reserve portfolio was to be a liquidity buffer when funding cannot be secured according to plan. It continues to be used to absorb fluctuations in the cash flow due to prepayment of assets, or as a buffer for liabilities maturing early due to structured funding calls/triggers being activated. The liquidity reserve portfolio is invested in assets that can easily be converted to cash. The conversion to cash may happen through sale in the secondary market, through a repo-line or through repayment of principal. The PHA portfolio is likely to be held to maturity as a consequence of the Portfolio Hedge Agreement.

 

Until mid November 2011, the Company monitored the liquidity capacity and the need for refinancing over the next 12 months under both normal and stressed conditions. In a normal situation the maturities on the liability side would be met by new borrowings, however in a stressed condition, access to the wholesale funding market would be assumed closed. The Company aimed for positive liquidity capacity over the next 12 months under stressed conditions. Monitoring expected time to maturity for assets and liabilities as well as the difference between the financing need and the liquidity capacity gave the Company a good indication of the liquidity risk, and symmetrical maturity profiles on the asset and liability sides are important mitigating factors. Eksportfinans also monitored concentration risk to mitigate dependency on one market or one trader, and controlled refinancing risk by limiting short-term borrowing.

 

Since mid November 2011, the Company continues to monitor 12 month liquidity capacity and the maturity of assets and liabilities. As funding is no longer available, the main instrument for securing sufficient liquidity at all times is now the securities portfolio described above.

 

F-40
  

30.2 Maturity analysis

 

Maturity analysis of financial liabilities based on contractual maturities (including off-balance sheet items):

 




(NOK thousands)		 Up to and including
1 month		 From 1 month up to and including
3 months		 From 3 months
up to and including
1 year		 From 1 year up to and including
5 years		 Over
 5 years
December 31, 2011          
Deposits by credit institutions 574 0 0 0 0
Non-structured bond debt 1,254,395 9,654,025 6,383,196 74,011,369 11,209,312
Structured bond debt 19,240,036 34,459,610 38,730,189 8,893,741 3,597,512
Commercial paper debt 2,302,599 2,265,241 1,198,540 0 0
Cash collateral 10,259,759 0 0 0 0
Subordinated loans 0 0 55,717 1,327,927 0
Preference share 0 0 0 0 0
Capital contribution securities 0 27,468 0 464,145 0
Derivatives net settled 268,911 121,593 595,660 2,545,681 1,717,418
Derivatives gross settled 1) 14,922,121 14,920,026 12,434,060 5,920,994 311,910
Financial guarantees (off-balance) 1,422,436 0 0 0 0
Loan commitments (off-balance) 29,241 943,615 2,112,869 0 0
TOTAL 49,700,073 62,391,577 61,510,231 93,163,856 16,836,152
           
1)  Including only cash flows from the paying leg of derivatives, cash flows from the receiving leg of derivatives are shown below:  
   
Derivatives gross settled 17,428,977 17,782,833 16,191,629 5,876,275 449,366
           
Cash flows from derivatives on the asset side are shown below:        
Derivatives net settled (net cash inflow) 27,853 227,309 1,936,168 4,118,641 602,874
Derivatives gross settled (paying leg) 24,913,191 33,729,726 22,204,783 45,588,386 6,505,806
Derivatives gross settled (receiving leg) 26,823,455 37,074,530 25,710,621 50,149,602 7,471,109
           
December 31, 2010          
Deposits by credit institutions 44,754 0 0 0 0
Non-structured bond debt 520,760 348,566 21,948,111 59,646,374 19,321,108
Structured bond debt 18,967,532 37,049,936 40,838,006 11,229,910 3,997,493
Commercial paper debt 1,668,173 1,639,817 0 0 0
Cash collateral 6,448,707 0 0 0 0
Subordinated loans 412 102 491,137 1,286,502 0
Preference share 0 0 11 0 0
Capital contribution securities 0 26,832 0 480,232 0
Derivatives net settled 132,502 15,494 391,466 3,127,486 2,762,731
Derivatives gross settled 1) 26,576,847 50,958,663 20,317,850 21,136,128 509,612
Financial guarantees (off-balance) 1,591,918 0 0 0 0
Loan commitments (off-balance) 1,051,542 1,472,159 1,682,467 726,007 0
TOTAL 57,003,147 91,511,569 85,669,049 97,632,639 26,590,944
           
1)  Including only cash flows from the paying leg of derivatives, cash flows from the receiving leg of derivatives are shown below:  
   
Derivatives gross settled 28,543,554 52,396,675 23,182,679 19,941,727 765,620
           
Cash flows from derivatives on the asset side are shown below:        
Derivatives net settled (net cash inflow) 46,566 127,280 2,231,959 4,158,061 1,122,273
Derivatives gross settled (paying leg) 20,165,009 25,318,073 11,737,487 17,349,854 6,884,253
Derivatives gross settled (receiving leg) 21,393,014 28,313,797 14,599,358 21,834,322 8,258,335
           

The figures in the above table include principal and interest payable at nominal value, i.e. undiscounted cash flows. Interest payable is based on the market conditions at the balance sheet date. First possible call dates and trigger dates, according to the contracts, are applied in the classification of the maturities. Maturity of cash collateral depends on the development of fair value of derivatives, and is in the table applied to the first time bucket.

 

The Company manages its liquidity risk, inter alia, by monitoring the difference between expected maturities of its assets and liabilities.

 

F-41
  

Maturity analysis of financial assets and liabilities based on expected maturities:

 




(NOK thousands)		 Up to and
including
1 month		   From 1 month up
to and including
3 months		   From 3 months
up to and
including
1 year		   From 1 year up to
and including
5 years		   Over
 5 years
December 31, 2011                  
                   
Assets                  
Loans and receivables due from credit institutions 11,994,658   1,898,169   6,002,907   18,484,210   2,213,423
Loans and receivables due from customers 528,330   3,644,240   11,751,251   50,760,461   45,693,761
Securities 4,555,316   7,649,338   21,155,877   13,250,856   10,387,132
Derivatives net settled 27,853   227,309   1,936,564   4,567,156   1,445,985
Derivatives gross settled (paying leg) (22,796,586 ) (25,556,312 ) (19,467,454 ) (49,578,080 ) (15,718,888)
Derivatives gross settled (receiving leg) 24,006,961   26,514,537   20,467,871   54,895,589   21,227,866
Cash collateral 0   4,612,500   0   0   0
TOTAL ASSETS 18,316,531   18,989,781   41,847,017   92,380,191   65,249,280
                   
Liabilities                  
Deposits by credit institutions 574   0   0   0   0
Non-structured bond debt 1,254,395   9,654,025   6,383,196   74,011,369   11,209,312
Structured bond debt 2,085,350   3,714,671   20,090,733   42,761,576   46,625,414
Commercial paper debt 2,302,599   2,265,241   1,198,540   0   0
Derivatives net settled 268,911   121,576   577,624   2,458,793   1,677,117
Derivatives gross settled (paying leg) 3,910,305   2,216,761   3,580,800   26,476,317   12,640,026
Derivatives gross settled (receiving leg) (3,905,033 ) (2,299,306 ) (3,836,265 ) (29,023,348 ) (18,741,650)
Cash collateral 0   10,259,759   0   0   0
Subordinated loans 0   0   55,717   1,327,927   0
Capital contribution securities 0   27,468   0   464,145   0
Preference share 0   0   0   0   0
TOTAL LIABILITIES 5,917,102   25,960,193   28,050,346   118,476,779   53,410,219


F-42
  

 




(NOK thousands)		 Up to and
including
1 month		   From 1 month up
to and including
3 months		   From 3 months
up to and
including
1 year		   From 1 year up to
and including
5 years		   Over
 5 years
December 31, 2010                  
                   
Assets                  
Loans and receivables due from credit institutions 1,709,717   4,923,542   10,252,373   23,276,393   3,212,589
Loans and receivables due from customers 2,606,628   1,368,931   4,132,538   49,882,270   42,520,014
Securities 2,294,651   13,756,736   19,464,563   26,884,495   10,134,770
Derivatives net settled 46,566   126,080   2,231,957   4,505,860   1,967,223
Derivatives gross settled (paying leg) (16,420,800 ) (13,300,192 ) (11,614,445 ) (26,303,690 ) (13,748,946)
Derivatives gross settled (receiving leg) 16,889,245   13,866,678   13,280,095   32,242,795   18,259,386
Cash collateral 0   2,952,537   0   0   0
TOTAL ASSETS 7,126,008   23,694,313   37,747,081   110,488,123   62,345,035
                   
Liabilities                  
Deposits by credit institutions 822   0   43,932   0   0
Non-structured bond debt 520,760   348,566   21,948,111   59,646,374   19,321,108
Structured bond debt 2,779,471   4,997,690   20,490,635   43,715,316   66,162,454
Commercial paper debt 1,668,173   1,639,817   0   0   0
Derivatives net settled 132,502   15,269   380,338   1,473,015   (3,403,514)
Derivatives gross settled (paying leg) 18,608,816   40,062,953   12,648,275   32,798,784   15,110,362
Derivatives gross settled (receiving leg) (18,122,763 ) (38,887,589 ) (12,033,137 ) (33,607,834 ) (21,946,102)
Cash collateral 212,380   6,236,327   0   0   0
Subordinated loans 412   102   491,137   1,286,502   0
Capital contribution securities 0   26,832   0   480,232   0
Preference share 0   0   11   0   0
TOTAL LIABILITIES 5,800,573   14,439,967   43,969,302   105,792,390   75,244,308

For the figures in the above table, call and trigger dates as estimated in models are applied in the classification of the maturities. For some issues with call and trigger optionalities, the expected maturity is estimated using a sophisticated valuation system.

 

30.3 Off-balance sheet items

 

Payment guarantees

 

In addition to the lending activity, the Company issues financial guarantees to support the Norwegian export industry. The beneficiary is normally a foreign buyer of Norwegian export products (goods and services etc.) or a foreign investor. Eksportfinans will make payment to the buyer/investor if the exporter does not fulfill its payment obligations. In each and every case Eksportfinans will have recourse to prime Norwegian or international banks with full payment indemnification. The maturity of the guarantees corresponds to the maturity of the underlying loans being covered by the guarantee.

 

(NOK thousands)   Dec. 31, 2011   Dec. 31, 2010
Notional amount of financial guarantees   1,422,436   1,591,918

Loan commitments

 

In the normal course of the Company’s lending business there are outstanding commitments to extend credit that are not reflected in the accompanying financial statements. The main portion of commitments outstanding is expected to be disbursed within three years. The following table shows the undrawn loan commitments at the reporting date, based on signed loan agreements.

 

(NOK thousands)   Dec. 31, 2011   Dec. 31, 2010
Loan commitments   3,085,725   4,932,175

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31 SEGMENT INFORMATION

 

The Company is divided into three business areas, export lending, municipal lending and securities. After the sale of Kommunekreditt, municipal lending consists of loans to KLP Kreditt AS, in addition to loans directly to municipalities and municipal-related loans to savings banks that were purchased from Kommunekreditt in connection with the sale of the subsidiary. The Company also has a treasury department, responsible for the Company’s funding. Income and expenses related to treasury are divided between the three business areas.

 

The segment information is in line with the management reporting.

 

  Export lending Municipal lending Securities
(NOK thousands) 2011 2010 2009 2011 2010 2009 2011 2010 2009
                   
Net interest income 1) 968,522 722,526 643,244 114,429 182,864 171,847 466,800 513,495 654,499
Commissions and income related to banking services 2) 1,032 1,515 1,576 0 0 0 0 0 0
Commissions and expenses related to banking services 2) 0 0 0 0 0 0 0 0 0
Net gains/(losses) on financial instruments at fair value 3) 18,532 16,811 91,255 0 0 0 (91,014) (41,971) (58,224)
Income/expenses divided by volume 4) 27,914 (3,246) 51,113 4,314 (1,227) 22,159 16,830 (2,865) 56,157
Net other operating income 47,478 15,080 143,944 4,314 (1,227) 22,159 (74,184) (44,836) (2,067)
Total net income 1,016,000 737,606 787,188 118,743 181,637 194,006 392,616 468,659 652,432
Total operating expenses 152,809 114,488 104,450 7,890 26,270 27,850 53,050 53,920 55,041
Pre-tax operating profit/(loss) 863,191 623,118 682,738 110,853 155,367 166,156 339,566 414,739 597,391
Taxes 241,980 174,586 191,167 31,076 43,531 46,523 95,191 116,201 167,270
Non-IFRS profit for the period from continuing operations excluding
unrealized gains/(losses) on financial instruments at fair value		 621,211 448,532 491,571 79,777 111,836 119,633 244,375 298,538 430,121

 

1) Net interest income includes interest income directly attributable to the segments based on Eksportfinans’ internal pricing model. The treasury department obtains interest on Eksportfinans’ equity and in addition the positive or negative result (margin) based on the difference between the internal interest income from the segments and the actual external funding cost. Net interest income in the treasury department is allocated to the reportable segments based on volume for the margin, and risk weighted volume for the interest on equity.

2) Income/(expenses) directly attributable to each segment.

3) For Export lending the figures are related to unrealized gains/(losses) on the Icelandic bank exposure. In this context, the fair value adjustments on the Icelandic bank exposure have been treated as realized, as they are not expected to be reversed towards maturity, as other unrealized gains and losses. For Securities the figures are related to realized gains/(losses) on financial instruments.

4) Income/expenses, other than interest, in the treasury department have been allocated to the business areas by volume. These are items included in net other operating income in the income statement. For 2011, this mainly consists of realized gains on repurchase of Eksportfinans’ own debt.

 

Reconciliation of segment profit measure to total comprehensive income

(NOK thousands) 2011   2010   2009  
Export lending 621,211   448,532   491,571  
Municipal lending 79,777   111,836   119,633  
Securities 244,375   298,538   430,121  
Non-IFRS profit/(loss) for the period from continuing operations
excluding unrealized gains/(losses) on financial instruments at fair value		 945,363   858,906   1,041,325  
             
Profit/(loss) for the year from discontinued operations, net of taxes 0   0   1,148  
Net unrealized gains/(losses) on financial instruments at fair value 40,515,031   (553,900 ) (3,857,530 )
Unrealized losses/(gains) related to the Icelandic bank exposure included above 1) (13,952 ) (16,811 ) (91,255 )
Realized (losses) hedged  by the Portfolio Hedge Agreement (93,853 ) 0   0  
Tax effect 2) (11,314,023 ) 159,799   1,105,660  
Total comprehensive income 30,038,566   447,994   (1,800,652 )

 

1) Reversal of previously recognized loss (at exchange rates applicable at December 31, 2011 and December 31, 2010). This amount is included in the line item ‘Net unrealized gains/(losses) on financial instruments at fair value’, and adjusted for because the Company believes this loss will materialize.

2) 28 percent of the items above.

 

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Segment assets

 

(NOK thousands) 2011 2010
Export lending 111,297,954 99,816,402
Municipal lending 10,451,306 23,543,565
Securities 52,242,107 68,371,454
Unallocated assets 39,937,266 23,818,004
Total assets 213,928,633 215,549,425

 

Geographical segments

 

The geographical segments are based on the location of the Company's customers. For property, equipment and intangible assets, the carrying amount is allocated based on the location of the asset. Norway is the home country of the Company and is also its main geographical segment.

 

(NOK thousands)   Total interest
and related income		   Total
assets		   Investments *)
2011            
Norway   3,186,558   94,440,240   21,892
Other European countries   1,271,662   86,186,331    
The Americas   184,498   10,682,954    
Other countries   985,706   22,619,108    
Total   5,628,424   213,928,633   21,892
             
2010            
Norway   3,262,389   95,981,254   14,173
Other European countries   1,249,103   75,872,272   0
The Americas   895,886   26,293,856   0
Other countries   409,245   17,402,043   0
Total   5,816,623   215,549,425   14,173
*) Investments made during the year in property, plant, equipment, and intangible assets  

 

32 RELATED PARTIES

 

The Company’s two largest shareholders are considered to be related parties.

(NOK thousands) Acquired
loans 1)		 Deposits 2) Guarantees
issued 3)		 Guarantees
recieved 4)		 Portfolio hedge
agreement 5)
Balance January 1, 2011        10,869,032          1,276,675             655,617        21,479,906             534,768
Change in the period          1,504,434          2,209,809             118,266          3,234,343               80,532
Balance December 31, 2011        12,373,466          3,486,484             773,883        24,714,249             615,300
           
Balance January 1, 2010          9,225,513          2,068,428          1,189,974        21,815,333             613,766
Change in the period          1,643,519            (791,753)            (534,357)            (335,427)              (78,998)
Balance December 31, 2010        10,869,032          1,276,675             655,617        21,479,906             534,768

 

1) The company acquires loans from banks. The loans are part of the Company’s ordinary lending activity, as they are extended to the export industry. As the selling banks provide guarantee for the loans, not substantially all the risk and rewards are transferred to the Company, thus the loans are classified as loans due to credit institutions in the balance sheet.

2) Deposits made by the Company.

3) Guarantees issued by the Company to support the Norwegian export industry. See note 30.3.

4) Guarantees related to the loans described in footnote 1 provided to the Company from the related parties.

5) The Portfolio Hedge Agreement is described in note 12. The balances show the related parties’ share of the fair value of the contract as of the balance sheet date.

 

In 2008, Eksportfinans’ three major owner banks extended a committed credit line of USD 4 billion for repo purposes to Eksportfinans to provide what management considered to be sufficient liquidity buffers for the Company. The facility had a 12 month maturity with the possibility of extension. The facility was extended in the second quarter of 2011, the last time with an adjusted committed credit line of USD 2 billion. Eksportfinans has not yet utilized this credit facility.

 

All transactions with related parties are made on market terms.

 

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33 REMUNERATION

(NOK thousands) 2011 2010 2009
Audit services 2,657 2,701 4,211
Audit fees related to SEC filing in USA 2,065 2,452 5,097
Total Audit Services 4,722 5,153 9,308
Audit related services *) 953 1,124 1,866
All other 161 157 1,141
TOTAL 5,836 6,434 12,315

*) Audit related services include attestations related to funding transactions.

 

Remuneration to General Executive Management:

  Salary Incentive scheme
paid 5)		 Other taxable
benefits		 Pension cost Total   Loans 2)
(NOK thousands) 2011
Marchand, Gisèle 1) 2,353 0 177 2,765 5,295   0
Siem, Oliver  1,694 0 155 706 2,555   1,484
Rygg, Olav E.  1,238 0 178 504 1,920   522
Grøm, Christian 1,235 0 181 715 2,131   0
Slengesol, Ivar 1,192 0 173 246 1,611   0
Olsen, Geir Ove  1,044 0 189 465 1,698   0
Lindbæk, Elise  1,022 0 150 287 1,459   910
Feiring, Jens O. 3) 444 0 126 0 570   835
Lindman, Carine 4) 432 0 58 74 564   0
TOTAL 10,654 0 1,387 5,762 17,803   3,751

 

1) The President and CEO have a severance package covering salary for 18 months in the event that the employment is terminated by the Company. The agreed retirement age is 62 years with 70 percent of salary.

2) The loans have the same terms as other loans to employees.

3) For the period January 1, to August 31, 2011.

4) For the period September 1, to December 31, 2011.

5) A performance-based incentive scheme exists for all employees, including General Executive Management. Due to the funding agreement with the Norwegian Government, limiting payments to General Executive Management, no incentive payments to Executive Management have been made or have incurred in 2011.


  Salary Incentive scheme
paid 4)		 Other taxable
benefits		 Pension cost Total   Loans 2)
(NOK thousands) 2010
Marchand, Gisèle 1) 2,222 0 199 2,663 5,084   0
Rygg, Olav E.  1,143 0 164 394 1,701   558
Slengesol, Ivar 3) 784 0 119 186 1,089   0
Siem, Oliver  1,960 0 189 591 2,740   1,541
Feiring, Jens O 725 0 182 0 907   873
Grøm, Christian  1,167 0 145 728 2,040   0
Olsen, Geir Ove  979 0 164 420 1,563   0
Lindbæk, Elise  945 0 146 250 1,341   960
TOTAL 9,925 0 1,308 5,232 16,465   3,932

 

1) The President and CEO have a severance package covering salary for 18 months in the event that the employment is terminated by the Company. The agreed retirement age is 62 years with 70 percent of salary.

2) The loans have the same terms as other loans to employees.

3) For the period April 12, to December 31, 2010.

4) A performance-based incentive scheme exists for all employees, including General Executive Management. Due to the funding agreement with the Norwegian Government, limiting payments to General Executive Management, no incentive payments to Executive Management have been made or have incurred in 2010.

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  Salary Incentive scheme
paid 3)		 Other taxable
benefits		 Pension cost Total Loans 3)
(NOK thousands) 2009
Marchand, Gisèle 1) 2,163 530 194 2,363 5,250 0
Rygg, Olav E.  1,118 193 159 355 1,825 594
Breilid, Olav Tore 4) 425 10 61 151 647 1,803
Siem, Oliver  1,889 400 183 562 3,034 1,598
Feiring, Jens O 787 310 138 0 1,235 931
Grøm, Christian 5) 699 0 19 157 875 0
Olsen, Geir Ove  968 10 161 370 1,509 0
Lindbæk, Elise  911 235 175 209 1,530 1,008
TOTAL  8,960 1,688 1,090 4,167 15,905 5,934
             
Kommunekreditt Norge AS:            
Arnøy, Arnulf V. 6) 671 10 79 0 760 0
TOTAL 9,631 1,698 1,169 4,167 16,665 5,934

 

1) The President and CEO have a severance package covering salary for 18 months in the event that the employment is terminated by the Company. The agreed retirement age is 62 years with 70 percent of salary.

2) The loans have the same terms as other loans to employees.

3) Incentive scheme for the year 2008 according to agreements already established when the agreement with the Norwegian Government was made.

4) For the period January 1, to April 30, 2009

5) For the period May 1, to December 31, 2009

6) For the period January 1, to June 24, 2009

 

Members of General Executive Management have individual agreements on pensionable age upon reaching the age of 62-65 years with 70 percent of salaries. General Executive Management is also members of the ordinary pension scheme.

 

Remuneration to Board of Directors and Audit Committee:

  2011   2010   2010
(NOK thousands) Board of Directors Audit Committe  Total    Board of Directors Audit Committe  Total    Board of Directors Audit Committe  Total 
Bergvoll, Geir   250          14       264                 250            55      305              188                 41         229
Steen, Carl Erik   185           -         185                 185          185              139                  -           139
Hollingsæter, Bodil   150          40       190                 150            40      190              250                 44         294
Aker Haukvik, Live   150          51       201                 150            40      190              250                 40         290
Bergstrøm, Tor   150           -         150                 150             -        150              250                  -           250
Blystad, Marianne H   150           -         150                 150             -        150              250                  -           250
Østbø, Tor *)   150           -         150                 150             -        150              150                  -           150
Bakker Lunde, Tone   150          30       180                   38             -          38                 -                    -              -  
Borgen, Thomas                   -             -           -                   112             -        112              112                  -           112
Borgen, Erik                   -             -           -                      -               -           -                  62                  -             62
Syrrist, Baard                   -             -           -                      -               -           -                  46                  -             46
Laugen, Leif Johan                   -             -           -                      -               -           -                  38                 10           48
Total             1,335        135    1,470              1,335          135   1,470           1,735               125 1,870

 

*) In addition to ordinary salary amounting to NOK 1,120 thousands in 2011 and NOK 1,112 thousand in 2010.

 

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Remuneration to Committee of Representatives:

(NOK thousands) 2011 2010 2009
Alhaug, Frode                  55                  55            55
Riise, Sandra                  28                  28            26
Krokeide, Elisabeth                  24                  18            18
Tostrup, Trond                  24                  12            24
Ringnes, Petter                  16                  -               -  
Arntsen, Ingelise                  16                  -               -  
Nordli, Peder                  16                  -               -  
Johnsen, Laila                  16                  -               -  
Sture, Eldbjørg                  12                  24            24
Lundevik, Gro Elisabeth                  12                  18            16
Pedersen, Jørn                  12                  18            12
Guttelvik, Ottar B                  12                  18            10
Hongseth, Unni Karlsen                  10                  -               -  
Normann, Kristin                    8                  24            25
Tellefsen, Tellef                    8                  24            18
Djupvik, Jostein                    8                  12            18
Jensen, Arvid                    8                  12              6
Konterud, Harry                    8                    6            12
Eidesvik, Toril                    6                  12            18
Kapstad, Petter                    4                  -               -  
Heiberg, Richard                    4                  -               -  
Vik, Torbjørn                    4                  -               -  
Kraft, Morten                    4                  -               -  
Bratseth, Kjell Ove                    2                    6            18
Haugan, Finn                    2                    6              6
Næsguthe, Jens Olav                    2                    6              4
Bakker Lunde, Tone                  -                    18            10
Smith, Claudine                  -                    -                8
Ellefsen, Harald                  -                    -                2
Fasmer, Benedicte S                  -                    -                2
Stathella, Monica                  -                    -                2
Total                321                317          334
       
Remuneration to Control Committee:       
       
(NOK thousands) 2011 2010 2009
Ringnes, Petter                 75                  -               -  
Normann, Kristin                 25               100          100
Bratseth, Kjell Ove                 16                 65            65
Sture, Eldbjørg                 65                 65            65
Kapstad, Petter                 49                  -               -  
Guttelvik, Ottar B                 65                 65            49
Ellefsen, Harald                  -                    -              16
Total               295               295          295

 

34 NUMBER OF EMPLOYEES

 

  Dec. 31,2011 Dec. 31,2010
Number of employees 98 98
Number of man-years 94 95

 

35 CONTINGENCIES

 

a)One of Eksportfinans' borrowers reclaimed paid break cost in an amount of approximately NOK 19 million in connection with voluntary prepayment of loans. Eksportfinans refuted the claim and the dispute came to trial at Oslo City Court (Oslo Tingrett) that began August 26, 2010. Pronouncement of judgment has been served on the parties. The judgment went against Eksportfinans. Eksportfinans has appealed the judgment. Trial date for the appeal has been set to March 8, 2012. Appropriate accruals have been made regarding this contingency. These accruals have been made in earlier periods.

 

b)In 2009 Eksportfinans and Kommunal Landspensjonskasse gjensidige forsikringsselskap (KLP) entered into a sales and purchase agreement (SPA) for the sale of Eksportfinans's wholly owned subsidiary Kommunekreditt Norge AS (Kommunekreditt). In the SPA Eksportfinans made certain representations that among others included that (1) KLP could rely on an agreement and a guarantee document with respect to a counter guarantee provided by a Norwegian bank to Kommunekreditt and (2) the list and characterization of loans as part of the due diligence process was correct in all material respect.
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1)KLP and the Norwegian bank disagreed over the bank’s right to adjust the fee for the guarantee and summoned the bank for the amount of approximately NOK 71 million. In June this year, it became clear that the Oslo City Court (Oslo Tingrett) decided against KLP and in favor of the Norwegian Bank on this matter. This judgement now has full legal force and effect.

 

With reference to the representation in the SPA related to the guarantee provided by the Norwegian bank to Kommunekreditt, KLP threatened, at the same time it summoned the Norwegian Bank, to summon Eksportfinans if it is unsuccessful against the Norwegian bank. On October 1, 2010 KLP Banken AS, a wholly owned subsidiary of KLP summoned Eksportfinans with reference to the representations made in the SPA. KLP Banken AS also claimed that the claim against Eksportfinans should be united at trial with the case between KLP Banken AS and the Norwegian bank which Oslo City Court denied. The claim against Eksportfinans is based on the claim against the Norwegian bank which again is based on variable and uncertain factors and may be reduced if for instance the loan portfolio for which the guarantee was issued is partially prepaid or otherwise reduced and is therefore unspecified with respect to amount. The case between KLP Banken AS and Eksportfinans was activated by Oslo Tingrett in October 2011. Pleadings have been issued between KLP, Eksportfinans and Oslo Tingrett. The trial date has been set to 13th to 17th of February, 2012.

 

2)With reference to the representations in the SPA related to the list and characterization of loans, KLP asserts to have discovered after the closing of the sale that certain loans in the list of loans provided by Kommunekreditt to KLP were incorrectly characterized which, KLP claims, reduces the agreed value of Kommunekreditt by approximately NOK 48 million. On December 6th, 2011 Eksportfinans was formally summoned by KLP Banken AS. Eksportfinans is of the opinion that there are no grounds for the claim.

 

c)Because of the bankruptcy in Lehman Brothers, certain swap contracts were settled and replaced by new swap contracts with other counterparties. At the time of the bankruptcy, Eksportfinans had swap contracts with three different legal entities in the Lehman Brothers group. Payments related to the settlement of these swaps were calculated and paid by Eksportfinans in 2008. The valuation of the settlement amount has been contested by two of the legal entities. A final settlement was reached with one of the entities last year, and the final settlement amount has been paid. Negotiations are still ongoing with the second entity. Final settlement amount is uncertain, but the best estimate of the obligation has been recorded. The last entity has, to date, not contested the original valuation and Eksportfinans cannot with sufficient reliability calculate the size of the possible obligation.

 

36 REGULATORY FRAMEWORK

 

With effect from January 1, 2011, new regulations concerning calculation of exposures to one single client were introduced. The single most important change was that risk weighting for exposures to banks was discontinued. The maximum allowed exposure, equaling 25 percent of the institutions own funds, applies under the new provisions. Under the previous rules for calculating and reporting large exposures Eksportfinans risk weighted engagements with borrowers that were secured by on demand guarantees with 20 percent. Eksportfinans reported exposures to borrowers up to the maximum 25 percent and excess exposures, if any, were reported as exposures towards the guaranteeing bank. That meant that maximum exposure to a single client (borrower and guaranteeing bank) equaled NOK 7.1 billion. The new provisions for large exposures equal the prevailing provisions applicable in the European Union (Directive 2006/48/EU) and entail that the maximum exposure to borrower and guaranteeing banks are approximately NOK 1.4 billion and leaves little or no authority for Norwegian supervisory authorities to make exemptions. The new provisions are detrimental to Eksportfinans’ business concept. Eksportfinans was granted a transitional period ending December 31, 2011, which later was extended by one year until December 31, 2012, during which it could use the 2010 reporting standards for large exposures. On February 13, 2012, the FSA granted the Company a new temporary exemption for the five lending transactions currently expecting to exceed 1.4 billion at December 31, 2012. The temporary exemption is specific to each loan and runs until the lending transactions are scheduled to get within the regulatory limit due to ordinary repayments of principal, which is in the period December 31, 2014 – December 31, 2016.

 

37 EVENTS AFTER BALANCE SHEET DATE

 

On January 9, 2012, Moody’s affirmed its rating from November 22, 2011 and that the ratings are under review for possible downgrade. On February 15, 2012, Standard and Poor’s downgraded the Company with negative outlook.

 

On February 9, 2012, the FSA granted the Company a permanent exemption regarding renewal of the two loans within subordinated debt that were called in 2011.

 

On February 13, 2012, the FSA granted the Company a new temporary exemption for the five lending transactions currently expected to exceed the regulatory limit for large exposures at December 31, 2012. The temporary exemption is specific to each loan and runs until the lending transactions are scheduled to get within the regulatory limit due to scheduled repayments of principal, which is in the period December 31, 2014 – December 31, 2016.

On February 22, 2012 Eksportfinans entered into a Global Master Repurchase Agreement with DNB Bank ASA, where DNB Bank ASA is the Buyer and Eksportfinans ASA is the Seller. EUR 600 million has been drawn with a Repurchase Date of 26 February 2015 at the latest. The agreement has no expiration date.

The Board puts emphasis in maintaining the Company’s solidity, and has therefore decided, on March 1, 2012, not to propose a dividend for 2011.

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