0000891092-17-003379.txt : 20170425 0000891092-17-003379.hdr.sgml : 20170425 20170425073145 ACCESSION NUMBER: 0000891092-17-003379 CONFORMED SUBMISSION TYPE: 20-F PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20161231 FILED AS OF DATE: 20170425 DATE AS OF CHANGE: 20170425 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EKSPORTFINANS ASA CENTRAL INDEX KEY: 0000700978 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS BUSINESS CREDIT INSTITUTION [6159] IRS NUMBER: 000000000 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 20-F SEC ACT: 1934 Act SEC FILE NUMBER: 001-08427 FILM NUMBER: 17779712 BUSINESS ADDRESS: STREET 1: DRONNING MAUDS GT 15 0250 CITY: OSLO 2 NORWAY STATE: Q8 BUSINESS PHONE: 2124219210 MAIL ADDRESS: STREET 1: PER H HOUGE, TRADE COMMISSIONER STREET 2: TRADE COMM OF NORWAY 825 THIRD AVE CITY: NEW YORK STATE: NY ZIP: 10022 FORMER COMPANY: FORMER CONFORMED NAME: AS EKSPORTFINANS DATE OF NAME CHANGE: 19951122 20-F 1 e73696_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
   
☒

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

   
 

For the fiscal year ended December 31, 2016

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

 

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:

 

None

 

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.

 

☐  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    ☒  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.

 

☒  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 ☒
     

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  ☒		 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    ☒  No 

 

2 

 

 

TABLE OF CONTENTS

 

     
    Page
     
Forward-Looking Statements 5
Presentation of Information and Exchange Rates 5
PART I 6
Item 1. Identity of Directors, Senior Management and Advisers 6
Item 2. Offer Statistics and Expected Timetable 6
Item 3. Key Information 6
  A. Selected Financial Data 6
  B. Capitalization and Indebtedness 9
  C. Reasons for the Offer and Use of Proceeds 9
  D. Risk Factors 9
Item 4. Information on the Company 12
  A. History and Development of the Company 12
  B. Business Overview 13
  C. Organizational Structure 29
  D. Property and Equipment 29
Item 4A. Unresolved Staff Comments 29
Item 5. Operating and Financial Review and Prospects 30
  A. Operating Results 30
  B. Liquidity and Capital Resources 38
  C. Research and Development, Patents and Licenses, etc. 42
  D. Trend Information 42
  E. Off-Balance Sheet Arrangements 42
  F. Contractual Obligations and Commitments 43
Item 6. Directors, Senior Management and Employees 43
  A. Directors and Senior Management 43
  B. Compensation 45
  C. Board Practices 45
  D. Employees 47
  E. Share Ownership 47
Item 7. Major Shareholders and Related Party Transactions 48
  A. Major Shareholders 48
  B. Related Party Transactions 48
  C. Interests of Experts and Counsel 50
Item 8. Financial Information 50
  A. Consolidated Statements and Other Financial Information 50
  B. Significant Changes 51
Item 9. The Offer and Listing 51
  A. Offer and Listing Details 51
  B. Plan of Distribution 51
  C. Markets 51
  D. Selling Shareholders 51
  E. Dilution 51
  F. Expenses of the Issue 51
Item 10. Additional Information 51
  A. Share Capital 51
  B. Memorandum and Articles of Association 51
  C. Material Contracts 53
  D. Exchange Controls 53
  E. Taxation 53
  F. Dividends and Paying Agents 67
  G. Statements by Experts 67
  H. Documents on Display 67

 

3 

 

 

  I. Subsidiary Information 67
Item 11. Quantitative and Qualitative Disclosures about Market Risk 68
Item 12. Description of Securities Other than Equity Securities 71
PART II 71
Item 13. Defaults, Dividend Arrearages and Delinquencies 71
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds 71
Item 15. Controls and Procedures 71
Item 16. 72
  Item 16A. Audit Committee Financial Expert 72
  Item 16B. Code of Ethics 72
  Item 16C. Principal Accountant Fees and Services 72
  Item 16D. Exemptions from the Listing Standards for Audit Committees 72
  Item 16E. Purchase of Equity Securities by the Issuer and Affiliated Purchasers 72
  Item 16F. Change in Registrant’s Certifying Accountant 72
  Item 16G. Corporate Governance 73
PART III 74
Item 17. Financial Statements 74
Item 18. Financial Statements 74
Item 19. Exhibits 74
Signatures 76

 

4 

 

 

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:

 

  ● inability to renew derivatives contracts for hedging purposes, insolvency of derivative counterparties, or inefficacy of hedging strategies,

 

  ● loss of key personnel could increase operational risks, ,

 

  ●  unexpected market movements

 

  ● the failure of our 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,

 

  ● the effects of changes in laws, regulations or accounting policies or practices,

 

  ● various concentrations of credit risk, 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.

 

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 term “Eksportfinans” to refer to Eksportfinans ASA. We use the terms “us”, “we”, “our”, “the Group” and “Company” to refer to Eksportfinans ASA and Eksportfinans’ former subsidiary, Eiendomsselskapet Dronning Mauds gate 15 AS (EDM 15) as a consolidated group, and where relevant for periods prior to the disposal of our former subsidiary Kommunekreditt Norge AS (Kommunekreditt), to refer to Eksportfinans and Kommunekreditt as a consolidated 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 8.6107 = $1.00 ($0.1161 = NOK 1.00), the noon buying rate of the Federal Reserve Bank of New York on December 31, 2016. On April xx, 2017, such rate was NOK X.xxx = $1.00 ($0.xxxx = 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.

 

5 

 

 

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, 2016, 2015, 2014, 2013 and 2012.

 

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

 

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, 2016, 2015, 2014, 2013 and 2012 and the notes thereto.

 

6 

 

 

INCOME STATEMENT DATA

 

Year ended December 31,   2016   2016   2015   2014   2013   2012
    (USD
millions)
(except as indicated)		   (NOK millions)
(except as indicated)
Interest and related income on loans due from
credit institutions		   7   63   90   176   290   549
Interest and related income on loans due from customers   123   1,063   1,404   1,805   2,543   3,542
Interest and related income on securities   14   118   229   264   236   566
Other interest and related income   4   35   53   15   32   63
                         
Total interest and related income   148   1,279   1,776   2,261   3,101   4,720
Interest and related expenses on commercial paper and bond debt   117   1,008   1,388   1,782   2,389   3,342
Interest and related expenses on subordinated debt   —   —   4   3   4   6
Interest and related expenses on capital contribution securities   —   —   —   —   1   10
Other interest and related expenses   1   11   10   15   10   119
                         
Total interest and related expenses   118   1,019   1,402   1,800   2,404   3,476
                         
NET INTEREST INCOME   30   260   374   461   697   1,244
                         
Commissions and income related to banking services (1)   —   —   —   —   —   —
Commissions and expenses related to banking services   —   1   2   2   2   4
Net gains/(losses) on financial instruments at fair value   (105)   (903)   (791)   (6,069)   (7,379)   (25,816)
Other income   28   243   14   12   5   60
NET OTHER OPERATING INCOME   (77)   (661)   (780)   (6,060)   (7,377)   (25,759)
TOTAL OPERATING INCOME   (47)   (401)   (406)   (5,599)   (6,680)   (24,515)
Salaries and other administrative expenses   10   90   115   154   138   118
Depreciation   1   6   16   16   18   18
Other expenses   1   11   11   10   9   8
TOTAL OPERATING EXPENSES BEFORE IMPAIRMENT CHARGES ON LOANS   12   107   142   180   165   144
Impairment charges on loans   —   —   —   —   —   —
PRE-TAX OPERATING PROFIT/(LOSS)   (59)   (508)   (548)   (5,779)   (6,844)   (24,659)
Taxes*   (21)   (177)   (171)   (1,506)   (1,995)   6,904)
PROFIT/(LOSS) FOR THE YEAR FROM CONTINUING OPERATIONS   (38)   (331)   (376)   (4,274)   (4,849)   (17,756)
Profit/(loss) for the year from discontinued operations, net of taxes   —   —   —   —   —   —
Other comprehensive income   (2)    (14)   25   (41)   (1)    38
Total comprehensive income   (40)   (435)   (351)   (4,315)   (4,850)   (17,717)
Ratio of earnings to fixed charges (2) (unaudited)   0.50   0.50   0.61   —   —   —  
PER SHARE DATA (thousands of USD/NOK) (unaudited):                        
Dividends per share (3)   —   —   —   —   —   —
Shares outstanding at December 31 (number of common shares)   263,914   263,914   263,914   263,914   263,914   263,914
Profit/(loss) for the year per share (4)   (0.14)   (1.25)   (1.43)   (16.19)   (18.37)   (67.28)
Dividends in respect of 2016 proposed per share (5)   —   —   —            

 

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

 

7 

 

 

BALANCE SHEET DATA
As of December 31,

                           
    2016   2016   2015   2014   2013   2012  
    (USD millions)
(except as indicated)		   (NOK millions)
(except as indicated)		  
ASSETS                          
Loans due from credit institutions   261   2,251   7,053   12,370   17,704   26,410  
Loans due from customers   2,006   17,270   24,462   33,372   47,363   71,879  
Securities   1,025   8,823   24,187   27,991   26,462   36,707  
Repurchase receivable   —   —   —   —   —   5,078  
Financial derivatives   210   1,804   4,293   7,071   5,500   10,884  
Deferred tax asset   27   233   —   —   —   —  
Intangible assets   —   1   2   4   5   9  
Property, equipment and investment property   —   3   208   217   213   207  
Other assets   324   2,786   4,938   4,604   3,545 en  6,232  
TOTAL ASSETS   3,853   33,171   65,142   85,629   100,793   157,406  
LIABILITIES                          
Deposits by credit institutions   —   —   —   —   —   4,476  
Commercial paper debt   —   —   —   —   —   —  
Bond debt   2,627   22,620   51,174   66,413   75,843   112,543  
Financial derivatives   279   2,400   4,398   5,129   5,145   9,343  
Taxes payable   2   17   76   372   0   317  
Deferred tax liabilities   —   —   1   229   2,124   4,121  
Other liabilities   109   935   1,952   4,599   4,607   8,133  
Provisions   16   134   132   161   97   96  
Subordinated debt   —   —   —   965   902   990  
Capital contribution securities   —   —   —   —   —   450  
TOTAL LIABILITIES   3,033   26,106   57,733   78,869   88,718   140,468  
SHAREHOLDERS’ EQUITY                          
Share capital   322   2,771   2,771   2,771   2,771   2,771  
Share premium reserve   —   —   —   —   —   177  
Other equity   489   4,213   4,638   4,989   9,304   13,991  
TOTAL SHAREHOLDERS’ EQUITY   820   7,065   7,409   7,760   12,075   16,938  
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY   3,853   33,171   65,142   85,629   100,793   157,406  
                           
FINANCIAL RATIOS/OPERATING STATISTICS (unaudited)                          
Return on average equity (6)   (4.77%)   (4.77%)   (4.63%)   (43.51%)   (33.45%)   (68.78%)  
Dividend (as a percentage of share capital)   —   —   —   —   —   —  
Return on assets (7)   0.60%   0.60%   0.50%   0.49%   0.54%   0.67%  
Ratio of operating and administrative expenses to average assets   0.21%   0.21%   0.17%   0.18%   0.12%   0.05%  
BALANCE SHEET STATISTICS (unaudited)                          
Capital adequacy   61.00%   61.00%   36.30%   24.41%   38.13%   27.97%  
Public sector share of total loans as borrowers/guarantors(8)   43.44%   43.44%   38.09%   35.40%   33.15%   40.04%  
Of which municipalities and counties   1.23%   1.23%   1.49%   1.90%   2.51%   1.83%  
Total loans outstanding/total assets   55.14%   55.14%   43.31%   45.75%   58.11%   55.59%  

 

(1)      Includes income on guarantees. For further details, see note 29.3 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 2016 of NOK 509 million (USD 59 million), driven by unrealized losses on the fair value of our own debt. The ratio of earnings to fixed charges had a deficit in 2015 of NOK 547 million (USD 62 million) and a deficit in 2014 of NOK 5,779 million (USD 777 million), also driven by unrealized losses on the fair value of our own debt. 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 2016 proposed by the Board of Directors as the distribution of net income (profit/(loss)) for the year was approved at the annual general meeting of the shareholders of Eksportfinans held in April 2016. 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 are 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.

 

8 

 

 

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
2012 5.8183 5.5665
2013 5.9096  6.0657
2014 6.3717 7.4816
2015 8.1383 8.8542
2016 8.3848 8.6107

 

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

 

   High  Low
September 2016 8.3256 7.9897
October 2016 8.2643 7.9725
November 2016 8.6025 8.1660
December 2016 8.7485 8.3801
January 2017 8.6489 8.2444
February 2017 8.4049 8.2061
March 2017 8.6034 8.3667
April 2017 (through April 14) 8.5984 8.5741

 

The noon buying rate on April 14, 2017, was NOK 8.5741= $1.00 ($0.1166 = NOK 1.00).

 

B. CAPITALIZATION AND INDEBTEDNESS

 

Not applicable.

 

C. REASONS FOR THE OFFER AND USE OF PROCEEDS

 

Not applicable.

 

D. RISK FACTORS

 

If derivative contracts entered into by the Company for hedging purposes are terminated, or the Company’s derivative counterparties become insolvent, the Company may suffer an increased exposure to various risk elements embedded in its bond debt.

 

The Company is a party to certain long dated derivative contracts that hedge its obligations under bonds issued by it, and such contracts contain mutual early termination options that may be exercised by either party at its option for any reason or no reason. The counterparties may or may not for any number of possible reasons elect to exercise these options or may become insolvent or otherwise not honor their contracts. If Eksportfinans elects not to or cannot call the underlying bond to which a terminated derivative contract relates, it may seek to renew the terminated derivative contract and/or replace the insolvent counterparty. The Company’s rating, as well as reduced market appetite for long dated derivatives, may increase the Company’s costs of entering into new swaps or make it more difficult to find swap counterparties for replacement contracts. Consequently, there can be no assurance that Eksportfinans will find or obtain economically efficient hedging opportunities with suitable counterparties. If it cannot do so, the Company will be exposed to movements in the underlying risk factors to which its bonds are linked and to additional risks, not all of which are foreseeable, which could have a material adverse effect on its results of operations and financial condition.

 

9 

 

 

Loss of key personnel may increase operational risks.

 

Eksportfinans’ performance has historically been and continues to be dependent on the talents and efforts of highly skilled individuals. The size of the Company's balance sheet and the complexity of its business require a critical mass of employees who possess managerial, financial, risk management, administrative and other skills that are important to its operations. The Norwegian Government's (the Government) decision to assume responsibility for the export scheme previously run by the Company may have an adverse effect on the Company's ability to retain employees. The loss of or an extended interruption in the services of a substantial number of our personnel may lead to increased operational risks which could adversely affect the Company's results of operations and financial condition. There can be no assurance that Eksportfinans will be able to attract and retain such personnel, particularly in light of our current business model.

 

Unexpected market movements could occur or derivative counterparties could exercise early termination options for various reasons, which may shorten the expected term of the liabilities and lead to increased liquidity risk.

 

Certain of the Company’s structured bonds are linked to financial indices and/or cross currency rates. Under the terms of the bonds, developments in either the indices or foreign exchange rates may cause the structured bonds to become due and payable earlier than anticipated. The Company is also a party to long dated derivative contracts that hedge its obligations under bond debt issued by it, and such contracts contain mutual early termination options that may be exercised by either party at its option for any reason or no reason. Accordingly, such counterparties may or may not for any number of possible reasons elect to exercise these options, which may prompt Eksportfinans, where contractually possible, to call the underlying bonds. The unexpected occurrence of either event could negatively affect the Company’s available liquidity.

 

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

 

As of December 31, 2016, approximately 92% of our outstanding loans were secured by guarantees. The remaining loans were supported by pledges on cash deposits with banks (1%) or represent loans to banks that originally qualified by their creditworthiness to act as guarantors (7%). As of December 31, 2016, 43% of our outstanding loans were guaranteed by Norwegian banks. The majority of such guarantees were provided by DNB Bank ASA, which guaranteed 28.7% of outstanding loans as of December 31, 2016. The largest guarantor, GIEK, supported 42.23% of all loans as of December 31, 2016.

 

Further, the Company has entered into the Portfolio Hedge Agreement (as defined below) 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 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.

 

Our hedging strategies may not prevent losses.

 

The Company carries out interest rate risk, currency risk and other market-related risk management activities on a continuous basis. 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, but not limited to, human error, the Company may incur losses which could have a material adverse effect on the Company`s results of operations and financial condition.

 

10 

 

 

   Change in fair value measurements may bring volatility into our results.

 

Fair value measurements of Eksportfinans’ debt 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 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 increased significantly. This resulted in unrealized gains for the Company of NOK 40.8 billion in 2011. In 2015 and 2016 we experienced spread tightening, resulting in reversal of these unrealized gains, leading to losses to the Company. For the year ended December 31, 2016, unrealized losses on our own debt were NOK 0.8 billion (excluding derivatives) compared to unrealized losses of NOK 1.6 billion for the year ended December 31, 2015. The unrealized gains from 2011 are expected to be reversed as unrealized losses in the future. The cumulative unrealized gain due to credit spread effects on Eksportfinans own debt net of derivatives, is 0.8 billion as of December 31, 2016. For further details, see note 27.7 to our audited consolidated financial statements in Item 18.

  

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. 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 the loan origination date. If these credit ratings do not fully reflect the counterparty credit risk, we may face the 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.

 

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 transactions with, and has aggregate risk exposures 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.

 

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 its 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 increases or the correlation between different currencies, interest rates or credit spreads increases, this may lead to a higher market risk and more volatile results.

 

11 

 

 

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. 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.   

 

  Uncertainty with respect to certain aspects of the 108 Agreement may arise.

 

Although we are no longer making new loans under the 108 Agreement, the 108 Agreement will remain in effect until all loans issued pursuant to the 108 Agreement have been repaid. Certain practices and procedures that were historically followed under the 108 Agreement were implicitly based on the expectation that the Company would be continuing to make new loans pursuant to the 108 Agreement. As this is no longer the case, there can be no assurance that either we or the Ministry of Trade, Industry and Fisheries (the Ministry) will not determine that changes to the practices and procedures are appropriate.

 

On May 10, 2016 a judgment was entered by a court of arbitration in relation to a dispute between the Ministry and the Company over the Ministry’s assertions that the fixed gross margin which Eksportfinans is guaranteed under the agreement should be reviewed and reduced, and that break costs should apply in respect of certain prepaid loans. Although the court ruled in favor of Eksportfinans in the matter of fixed gross margin, it ruled that break costs would apply. In settlement of the matter, Eksportfinans has made provisions of NOK 220 million in respect of prepaid loans through 2015, as set forth in note 35 to our audited consolidated financial statements in Item 18. There can be no certainty that additional break costs will not arise with respect to loans that remain outstanding if such loans are prepaid; and if Eksportfinans is obligated to pay additional break costs in the future, such costs could be material. For further details, see Item 4.B. “Business Overview — LOANS — Credit Support, Credit Monitoring and Assessment— Arrangement with the Government”.

 

We are subject to foreign currency risk.

 

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, substantially all of the Company’s risk capital is denominated in Norwegian kroner. The Company’s risk-weighted assets are denominated in other currencies in addition to Norwegian kroner. The Company’s capital ratios are therefore subject to foreign exchange rate fluctuations with respect to Norwegian kroner. Also, 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.

 

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. Eksportfinans has therefore continued to report three operating segments.

 

On November 18, 2011, the Government announced that it would establish a government-run export financing scheme under which a new entity established by the Government would assume responsibility for the provision of government-subsidized loans as export credits. The Government’s decision to terminate the 108 Agreement (see item 4.B. “Business Overview — LOANS — Export Lending — Arrangement with the Government”) with respect to new loans adversely affected Eksportfinans' scope and extent of business activities and made it necessary for the Company to reassess its business model. As a result of the Government's decision, Eksportfinans decided to discontinue making new loans, except for loans for which commitments existed prior to November 18, 2011. The Company assisted the Government in administering government-sponsored export lending during a transition period which ended July 1, 2012. The new entity, Eksportkreditt Norge AS, was established on June 25, 2012, and became operational on July 2, 2012. Eksportfinans continues to operate and manage its existing loan portfolio and other assets and liabilities and service its borrowers and investors and expects to continue to do so for a significant period of time.

 

12 

 

 

On July 30, 2013 Eksportfinans registered a wholly owned subsidiary, EDM 15, and transferred to it 11 (of 16) sections it owns of the building it occupies at Dronning Mauds gate 15, gnr. 209, bnr. 430 in Oslo. The rationale behind this decision was to separate the Company’s property investment from the ordinary business of Eksportfinans, and thus facilitate further development of the property and the value thereof. The sections transferred to EDM 15 are leased to five tenants, including Eksportfinans ASA.

 

On March 30, 2016, Eksportfinans entered into an agreement with GNNOR DMG 15 Holding AS to sell all shares in Eksportfinans' subsidiary EDM 15. The sale of this subsidiary includes all 11 sections owned at Dronning Mauds gate 15, with effect as of April 15, 2016.

 

B. BUSINESS OVERVIEW

 

LOANS

 

Export Lending

 

The following describes the Company’s export lending activities and portfolio. The Company has not engaged in new export lending since November 18, 2011 except for loans for which legal commitments existed prior to that date, but continues to actively manage its existing portfolio.

 

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.

 

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

 

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 is 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 96.76% of the export-related balance as of December 31, 2016). The remaining export-related loans outstanding as of December 31, 2016 are supported by pledges on cash deposits with banks (1.14%) or represent loans to banks that are themselves qualified by their creditworthiness to act as guarantors (2.1%).

 

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.

 

13 

 

 

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 that established by the Consensus Agreement for export financing (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 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. The 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 some are supported by guarantees from insurance companies, the Guarantee Institute or other Norwegian or foreign governmental agencies, pledges on cash deposits with banks or are loans to banks for the purpose of refinancing of their loans to the export industry.

 

Types of Financing

 

Overview. Our export-related loan portfolio consists of three types of financing: (1) contract financing, (2) financing of international and export related activities and (3) acquisition of loans from banks.  Approximately 96.76% of our outstanding export loans are guaranteed. The remaining loans are supported by pledges on cash deposits with banks (1.14%) or represent loans to banks that are qualified by their creditworthiness to act as guarantors (2.1%). 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/or services. A buyer credit is one where Eksportfinans lends to the foreign purchaser of goods or services originating in Norway. The majority of the credits were extended as buyer credits. 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”.

 

14 

 

 

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.

 

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 discontinued direct loans to saving banks. From 2008, loans in co-operation with savings 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 at December 31, 2016, no loans were outstanding that were extended via Norwegian savings banks, compared to NOK 400 million as of December 31, 2015.

 

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 ordinary course of its business.

 

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. No loans were acquired from banks in 2016 and 2015, as compared to NOK 33 million acquired in 2014. As loans are repaid and mature, new loans are acquired to maintain the balance with the amount of the deposit placed with the selling bank.

 

Loan Commitments

 

Eksportfinans had no actual and probable loan commitments as of December 31, 2016. The last remaining loan commitment of NOK 261 million was terminated in 2015. 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 a pledge over bank deposits in Norwegian or 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. Consistently, the entirety of the rated portfolio consists of investment grade counterparties. For details on our unrated portfolio, see note 27.5 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”.

 

15 

 

 

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.

 

Guarantees issued by GIEK cover political risks (e.g. 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 (e.g. 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 44% of export related loans as of December 31, 2016 compared with 39% of export related loans as of December 31, 2015.

 

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 the importing country, establish minimum interest rates and require down payments and maximum loan maturities for government-supported export financing, among other things. 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 (Proposition No. 108 to the Storting) to permit Eksportfinans to arrange and extend export credits in accordance with the OECD Consensus. The stated purpose of the agreement was to offer Norwegian exporters of capital goods a competitive export credit system. From August 1995 until November 18, 2011 (as described below), the 108 Agreement enabled Eksportfinans to issue export credits at the OECD’s CIRR rates.

 

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 established 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 was determined by the difference between the applicable reference rates for such borrowing and lending at the time of disbursement. 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 resulting from currency or interest rate fluctuations and any gains resulting from 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 assets and liabilities. 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.

 

16 

 

 

Under the 108 Agreement, Eksportfinans is required to keep separate accounts and a settlement account for payables to and receivables due from the Ministry of Trade, Industry and Fisheries If the settlement account shows a deficit, the Ministry of Trade, Industry and Fisheries makes payments to Eksportfinans; conversely, Eksportfinans pays to the Ministry of Trade, Industry and Fisheries 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 Eksportfinans. As a result, Eksportfinans no longer extends new loans under the 108 Agreement 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 108 Agreement. Approximately 63% of Eksportfinans’ outstanding export-related loans as of December 31, 2016 were disbursed pursuant to the 108 Agreement, compared to 54% of export-related loans at the end of 2015. 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:

 

    2016   2015   2014   2013   2012   2011   2010
Amount paid or payable to Eksportfinans (NOK millions) 169    62    337    322    405   382   332
Payment in respect of (year) 2014    2013    2012    2011    2010   2009   2008

 

Pursuant to a declaratory judgment entered by a court of arbitration on May 10, 2016, the 108 Agreement must be interpreted to apply break costs in respect of prepaid government supported loans. As a result, Eksportfinans and the Ministry entered into a settlement agreement [in March/April 2017] to agree a total and final amount of break costs for each of 14 loans prepaid between 2011 and 2015. This resulted in a reduction of the payment due to Eksportfinans from the Ministry in the amount of NOK 220 million. Accordingly, a provision of that amount has been made in the Company’s 2016 financial results, as set forth in note 35 to our audited consolidated financial statements in Item 18. The settlement agreement also provides that the Ministry and Eksportfinans shall jointly develop and agree on new accounting principles to be applied from 2017 and onwards, including the agreement of methods to settle any future prepayments of government supported loans, following the principles set forth in the judgment of the court of arbitration.

 

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 were the joint undertaking of two or more municipalities (so called inter-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 ten 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).

 

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 loans with a book value (equal to fair 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. As at 31 December 2016, the book value of the Retained Municipal Portfolio was NOK 1.55 billion.

 

17 

 

 

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 fulfillment of the municipality’s payment obligations.

 

In its local government transactions, Kommunekreditt offered loans to municipalities, counties or 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 less than one year to more than ten years remaining. As of December 31, 2016, 86% (as of December 31, 2015, 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, 2016, 86% were at floating interest rates (77% as of December 31, 2015).

 

If a loan has a 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, 2016, 14% of the loans were at fixed interest rates (as of December 31, 2015, 23%).

 

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 was required, even if the credit risk was borne by the guarantor. The credit limits of municipalities were 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 was 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.

 

18 

 

 

Loans in the Retained Municipal Portfolio were extended to Norwegian municipalities, counties and inter-municipal companies or companies that were 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 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 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.

 

19 

 

 

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:

  

   As of and for the year ended December 31, 
(NOK millions) (1)  2016   2015   2014   2013   2012 
Loan disbursements (during the year):   —    —    —    —    — 
   Export-related commercial loans   —    —    —    —    781 
   Export-related Government-supported loans (2)   —    —    —    —    142 
Total (3)   —    —    —    —    923 
                          
Loans outstanding (at year-end):                         
   Export-related commercial loans   6,127    12,271    18,249    30,029    50,301 
   Export-related Government-supported loans (2)   10,601    14,149    17,841    21,601    28,351 
   Loan to KLP Kreditt AS   —    —    —    —    — 
   Direct loans to Norwegian local government   849    1,074    2,345    3,513    4,374 
   Municipal-related loans to other credit institutions   700    700    700    3,388    4,448 
   Loans to employees   12    21    39    37    35 
Total   18,289    28,215    39,174    58,568    87,509 

 

(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 provided 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 are protected by the types of credit support presented under the heading “Credit Support” later in this section.
   
(3)      Amounts for 2012 include loans acquired from shareholders amounting to NOK 141 million.
   
 The following table represents an analysis of the Company’s loans outstanding for each of the last five years:

                     
(NOK millions) (1)  2016   2015   2014   2013   2012 
Beginning balance   28,215    39,174    58,568    87,509    121,807 
Add — disbursements   —    —    —    —    923 
Deduct — repayments   (9,846)   (14,016)   (23,438)   (33,250)   (31,555)
                          
Adjustments related to year-end exchange rates (1)   (80)   3,057    4,044    4,309    (3,666)
                          
Balance at year-end   18,289    28,215    39,174    58,568    87,509 

 

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

 

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.

 

20 

 

 

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:

 

Loan disbursements (during the year):

 

(NOK millions)   2016     2015     2014     2013     2012
Export-related Loans   —     —     —        —      
   of which Ships (1)   —     —     —       —     174
   of which Capital goods (2)   —     —     —       —     137
   of which Other export-related and
international activities (3)		   —     —     —       —     612
   Total (4)   —     —     —       —     923

 

(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.

                     
(NOK millions)  2016   2015   2014   2013   2012 
Aviation and shipping   —    —    —    612    612  
Renewable energy   —    —    —    —    — 
Infrastructure   —    —    —    —    — 
Environment   —    —    —    —    — 
Consumer goods   —    —    —    —    — 
Real estate   —    —    —    —    — 
Banking and finance   —    —    —    —    — 
Oil and gas   —    —    —    —    — 
IT and telecommunication   —    —    —    —    — 
  Total   —    —    —    —    612   

  

(4)      Amounts for 2012 include loans acquired from shareholders amounting to NOK 141 million .

 

Loans outstanding at year-end: 

   As of December 31, 
(NOK millions)  2016   2015   2014   2013   2012 
Export-related Loans                         
   of which Ships (1)   9,114    12,872    17,443    21,630    34,148 
   of which Capital goods (2)   6,033    8,146    10,112    13,678    23,973 
   of which Other export-related and international activities (3)   1,581    5,402    8,535    16,322    20,532 
Direct loans to Norwegian local government   849    1,074    2,345    3,513    4,373 
Municipal-related loans to other credit institutions   700    700    700    3,388    4,448 
Loans to employees (4)   12    21    39    37    35 
   Total   18,289    28,215    39,174    58,568    87,509 

 

(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.

  

21 

 

 

   
(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.

 

  As of December 31,
(NOK millions)  2016   2015   2014   2013   2012
Shipping   1,405    2,476    2,934    3,446    4,284
Infrastructure   0    790    977    1,289    1,333
Banking and finance   0    747    626    2,684    4,615
Real estate   70    679    995    849    660
Oil and gas   106    309    485    596    1,223
Consumer goods   0    300    450    1,831    2,275
Environment   0    101    118    632    646
Renewable energy   —    —    1,950    4,994    5,494
Other categories   —    —    —    1    2
   Total   1,581    5,402    8,535    16,322    20,532

 

(4)      There were no material loan disbursements to employees in 2016.

 

 Maturity of Loans

 

The following table shows the nominal amounts (balance sheet values exclusive of interest accrued and fair value adjustments) of our outstanding loans as of December 31, 2016, categorized by maturity.

 

(NOK millions)  1 year  From 1 year up to and
including 5 years		  Over 5 years  Total
Municipal and county loans   229    377    944    1,550 
Export-related loans   4,896    10,816    1,027    16,739 
   Total   5,125    11,193    1,971    18,289 

 

Loans by Type of Interest Rate

 

The following table shows nominal amounts (balance sheet values exclusive of interest accrued and fair value adjustments) of outstanding loans as of December 31, 2016, categorized by type of interest rate.

 

(NOK millions)  Fixed
interest
rates		  Adjustable
interest
rates		  Total
Municipal and county loans   219    1,331    1,550 
Export-related loans   10,661    6,078    16,739 
   Total   10,880    7,409    18,289 

 

22 

 

 

Currency of Loans

 

The following table shows the composition of the Company’s loans by currency, 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)		  2016   2015   2014   2013   2012 
U.S. dollars   8,014  43.8%   13,708  48.6%   16,739  42.7%   19,962  34.1%   32,245  36.9%
Norwegian kroner   9,789  53.6%   13,504  47.9%   21,381  54.6%   37,026  63.2%   53,580  61.2%
Euro   76  0.4%   532  1.9%   575  1.5%   1,092  1.9%   1,155  1.3%
Other   400  2.2%   471  1.6%   488  1.2%   488  0.8%   529  0.6%
   Total   18,289  100.0%   28,215  100.0%   39,174  100.0%   58,568  100.0%   87,509  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”.

 

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”.

 

(NOK millions) (1)  2016    2015   2014   2013   2012 
Norway (2)   11,101    17,761    25,886    42,497    60,100 
Qatar   1,828    2,090    1,950    1,748    1,739 
The Netherlands   1,174    1,818    1,834    1,747    1,823 
Cayman Islands   561    997    1,276    1,366    2,442 
Denmark   611    745    879    1,100    1,248 
Other (3)   3,011    4,804    7,349    10,110    20,157 
   Total   18,289    28,215    39,174    58,568    87,509 

 

(1)      Amounts in foreign currencies have been converted to kroner using year-end exchange rates.
   
(2) Of which loans related to Norwegian municipalities amounted to NOK 1,550 million NOK 1,774 million, NOK 3,045 million, NOK 6,901 million and NOK 8,821 million in 2016, 2015, 2014, 2013 and 2012, respectively.
   
(3) In 2016, “Other” does not include any individual country amounts greater than those disclosed by individual country for that year.

 

Credit Support

 

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

 

Municipal Lending:                                   
                                    
(NOK millions, except percentages) (1)  2016   2015   2014   2013   2012 
Loans to Norwegian Banks   700  45.0%   700  39.0%   700  23.0%   3,388  49.0%   4,448  50.4%
Norwegian bank guarantees   631  41.0%   670  38.0%   1,600  52.5%   2,044  29.6%   2,771  31.4%
Loans to or guaranteed by Norwegian                                        
Municipalities   219  14.0%   404  23.0%   745  24.5%   1,468  21.3%   1,602  18.2%
Loan to KLP Kreditt AS       -       -   -      -      -   
Total   1,550  100%   1,774  100%   3,045  100%   6,900  100%   8,821  100%

 

23 

 

 

Export-related Lending:                                   
                                    
(NOK millions, except percentages) (2)  2016   2015   2014   2013   2012 
Government Guarantees (3)   7,719  46.0%   10,747  41,0%   13,108  36.3%   17,962  34.8%   33,440  42.5%
Norwegian Bank Guarantees   6,908  41,0%   10,313  39,0%   14,747  40.9%   22,092  42.8%   24,535  31.2%
Loans to Norwegian banks   0,00  0.0%   400  2,0%   400  1.1%   2,173  4.2%   4,167  5.3%
Foreign Bank Guarantees (4)   1,559  9.0%   2,023  8,0%   2,767  7.7%   3,624  7.0%   9,098  11.6%
Pledges over cash deposits with banks   191  1.0%   2,430  9,0%   4,596  12.7%   5,482  10.6%   7,079  9.0%
Loans to foreign banks   352  2.0%   508  2,0%   475  1.3%   335  0.6%   334  0.4%
Corporate guarantees                                        
Total   16,728  100%   26,421  100%   36,093  100%   51,668  100%   78,653  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)      Consists of guarantees by the Guarantee Institute, other Norwegian agencies and foreign governments.
   
(4)      Includes direct loans to foreign banks from which we would accept a guarantee.

 

In addition, mortgage loans to employees accounted for NOK 12 million, NOK 21 million, NOK 39 million, NOK 37 million and NOK 35 million in 2016, 2015, 2014, 2013 and 2012, respectively.

 

Government guarantees supported 46.14% of total outstanding export-related loans as of December 31, 2016, substantially all of which were covered by the Guarantee Institute. The relative percentage of government guarantees for export-related lending increased from 40.67% as of December 31, 2015 due to the scheduled repayment and maturity of government guaranteed loans.

 

No loans to a single customer guaranteed by the Government or its agencies exceeded 10 % of total export-related loans as of December 31, 2016. Guarantees issued by two Norwegian banks, DNB Bank ASA and Nordea Bank Norge ASA, which together owned 63.2% of the Company’s share capital as of December 31, 2016, supported 35.81% of total export-related loans. As of the same date, guarantees issued by one of those banks, DNB Bank ASA, supported approximately 31.38% of total export-related loans. No loan to a single customer guaranteed by DNB Bank ASA exceeded 6.0% of total loans in 2016.

 

Guarantees issued by Nordea Bank Norge ASA, another shareholder, supported 4.05% of total export-related loans. No loan to a single customer guaranteed by Nordea Bank exceeded 1.16% of total loans. For further details, see Item 7.A. “Major Shareholders” and Item 7.B. “Related Party Transactions”.

 

Non-Performing Loans

 

Default interest accrues if a 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.

 

24 

 

 

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:

 

  As of December 31, 
(NOK millions)  2016   2015   2014   2013   2012 
Interest and principal installments more than 90 days past due (1)  30   195   212   112   522 
Not matured principal on loan with payments more than 90 days past due (2)  47   322   329   86   148 
Total  77   517   541   198   670 
Interest and principal installments more than 90 days past due                    
expected to be collected from guarantor (3)  8   9   20   18   25 

 

(1) Of the amounts for 2016, 2015, 2014, 2013 and 2012,  NOK 0 million, NOK 108 million, NOK 101 million, NOK 94 million and NOK 485 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 27.4 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 27.7 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, 2016.

 

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. The Company mitigates credit risk by a variety of means, including through lending guaranteed by guarantors with high credit ratings. Consequently, loans with guarantees 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.

 

25 

 

 

The Company benefits from 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 was accepted for international banks (excluding the three largest owner banks: DNB Bank, Nordea and Danske Bank) is A- /A3. Select loans may additionally provide for a replacement guarantor if (i) an existing guarantor’s credit rating falls below specified levels, or (ii) at the Company’s discretion 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. Eksportfinans participated in a euro-denominated syndicated loan to Glitnir Banki hf (Glitnir), with Eksportfinans’ exposure being NOK 108 million (at exchange rates applicable as of December 31, 2015). In January 2016 the Company received payment from the Glitnir estate: the payments were made principally in a basket of currencies, plus an immaterial portion that was repaid in shares and notes linked to the residual Glitnir estate. The shares give voting rights and the notes have no certainty as to maturity. During 2016, several repayments of these notes were made from the Glitnir estate. As of December 31, 2016 the remaining exposure in these notes have a nominal value of NOK 3.0 million. Save for the outstanding amounts under the Icelandic syndicated loan, the Company has incurred no loan losses to date.

 

26 

 

 

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 as of December 31, 2016. 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, 
   2016   2015   2014   2013   2012 
(NOK millions)  Outstanding 
                          
Denmark   1,928    3,457    6,124    5,363    9,015 
USA   1,864    3,414    4,826    4,604    3,592 
Sweden   1,694    2,632    3,698    2,632    2,659 
Germany   1,430    3,157    4,451    2,964    8,353 
Spain   1,248    1,469    1,617    1,787    (1)
United Kingdom   884    1,409    3,367    2,429    3,692 
Ireland   628    (1)   (1)   (1)   — 
Finland   (1)   1,470    1,712    4,628    8,483 
Italy   (1)   (1)   (1)   (1)   (1)
France   (1)   —    (1)   2,849    6,489 
China   (1)   —    —    —    — 
The Netherlands   —    (1)   (1)   1,708    4,416 
Belgium   —    (1)   (1)   —    — 
Japan   —    (1)   —    —    — 
Australia   —    —    (1)   —    (1)
Austria   —    —    1,984    2,227    (1)
                          
Other countries (1)   1,549    3,717    5,456    3,189    6,976 
Total   11,225    20,725    33,235    34,380    53,675 

 

(1) Represents countries with respect to which the Company’s outstandings were between 0.75% and 1.5% of total assets. This includes Finland, Italy, France and China as of December 2016; Ireland, The Netherlands, Italy, Japan and Belgium as of December 2015; France, The Netherlands, Italy, Australia, Ireland and Belgium as of December 31, 2014; Belgium, Ireland and Italy as of December 31, 2013; and Spain, Austria, Australia, Italy and Belgium as of December 31, 2012. 

 

FINANCIAL GUARANTEES

 

Eksportfinans issued 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

 

In early 2008 shareholders representing 99.5% of Eksportfinans’ shares signed a risk mitigation agreement, as amended with effect as of March 1, 2016 (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). Upon entering into the Portfolio Hedge Agreement the Company set up a new liquidity portfolio (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 28.4 to our audited consolidated financial statements in Item 18.

 

27 

 

 

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, primarily senior bank notes and bonds and asset-backed securities. 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 a note, Eksportfinans entered 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.

 

Eksportfinans does not enter into credit default swaps for income generating purposes as an alternative to investing in ordinary bonds.

 

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, including the Public Limited Liability Companies Act of June 13, 1997 No. 45 (the Public Limited Liability Companies Act) and the Act on Financial Companies of April 10, 2015 No. 17 (the Financial Companies Act). The Financial Companies 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 Companies Act entered into force on January 1, 2016 and replaces the Act on Financing Activity and Financial Institutions of June 10, 1988 No. 40 (the Financial Institutions Act). Eksportfinans implemented the new requirements within the one-year transitional period provided in the Act.

 

The Financial Companies Act supplements the Public Limited Liability Companies Act with respect to formation, requirements of the articles of association, and governing bodies, among others. In addition to these acts, the Financial Supervision Act of December 7, 1956 No. 1, the Act on Securities Trading of June 29, 2007 No. 75 and the Act on Regulated Markets of June 29, 2007 No. 74, replaced previous acts, and also play important roles in the daily business and supervision of financial institutions.

 

Under the Financial Companies 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. The Articles of Association of Eksportfinans, among other things, provide for the Company’s management through the Board of Directors’ supervision and control. The previous Financial Institutions Act (in force throughout 2015) also provided for a Council of Representatives and a Control Committee. For further details, see Item 6. “Directors, Senior Management and Employees”.

 

As provided for by the Financial Companies Act and previously the Financial Institutions Act, the Ministry of Finance 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”.

 

28 

 

 

The Financial Companies Act and previously 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.

 

On February 13, 2012, the Financial Supervisory Authority of Norway (the FSA) granted the Company a prolongation of the transitional period for the five lending transactions then expected to exceed the regulatory limit for large exposures as of 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 to December 31 2016. At the end of 2016 there are no remaining loans for which the Company has a prolonged transitional period.

 

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.

 

With effect from September 30, 2014, the NFSA implemented new capital regulations reflecting CRD IV. These regulations resulted in increased risk weights on financial institutions, affecting mainly Eksportfinans’ bank guaranteed loans and securities, as well as a CVA (Credit Value Adjustment) charge in financial derivatives. These changes lead to decreases in the capital ratios for Eksportfinans. For further details, see Item 5.B. “Operating and Financial Review and Prospects – Liquidity and Capital Resources – Capital Adequacy”.

 

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 currently discontinue 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

 

On March 30, 2016, Eksportfinans entered into an agreement with GNNOR DMG 15 Holding AS to sell all shares in Eksportfinans’ subsidiary EDM 15. The sale of this subsidiary includes all 11 sections of the building it occupies at Dronning Mauds gate 15. The sale took effect as of April 15, 2016.

 

D. PROPERTY AND EQUIPMENT

 

After the March 30, 2016 sale mentioned above, Eksportfinans does not own any property.

 

Item 4A. UNRESOLVED STAFF COMMENTS

 

None.

 

29 

 

 

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 2016, Eksportfinans generated positive financial results. Following the Government’s decision on November 18, 2011, Eksportfinans announced that it would discontinue new lending, except where an existing commitment existed prior to this date. As a consequence, there were no disbursements of new loans from Eksportfinans in 2016, 2015 or 2014.

 

Results of Operations

 

The following table sets forth our results for the years ended December 31, 2016, 2015 and 2014.

 

  Year ended December 31,
(NOK millions) 2016   2015   2014  
Total interest and related income 1,279   1,776   2,261  
Total interest and related expenses 1,019   1,402   1,800  
NET INTEREST INCOME 260   374   461  
Commissions and income related to banking services —   —   —  
Commissions and expenses related to banking services 1   2   2  
Net gains/(losses) on financial instruments at fair value (903 )  (791 )  (6,069 )
Other income 243   14   12  
NET OTHER OPERATING INCOME (661 )  (780 )  (6,060 )
TOTAL OPERATING INCOME (401 ) (406 ) (5,599 ) 
Salaries and other administrative expenses 90   115   154  
Depreciation 6   16   16  
Other expenses 11   11   10  
TOTAL OPERATING EXPENSES 107   142   180  
PRE-TAX OPERATING PROFIT/(LOSS) (508 )  (547 )  (5,779 )
Taxes (177 ) (171 ) (1,506 )
PROFIT/(LOSS) FOR THE YEAR (331 )  (376 )  (4,273 )
Other comprehensive income  (14 )   25 ) (41 )
TOTAL COMPREHENSIVE INCOME (345 )  (351 )  (4,314 )
   

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, 2016, approximately 68% 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, 2016, 2015 and 2014. 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.

 

30 

 

 

During 2016, the average short-term Norwegian krone NIBOR interest rate decreased by approximately 0.2 percentage points from 2015. During 2015 the average short-term Norwegian krone NIBOR interest rate decreased by approximately 0.4 percentage points from 2014 and decreased by approximately 0.1 percentage points during 2014. The average short-term euro London Inter-Bank Offered Rate (LIBOR) decreased by approximately 0.2 percentage points during 2016, decreased approximately 0.4 percentage points during 2015 and remained stable during 2014. The average short-term U.S. dollar LIBOR interest rate increased by approximately 0.4 percentage points during 2016, increased by approximately 0.3 percentage points during 2015 and remained stable during 2014.

 

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.

 

During 2016, the Norwegian kroner depreciated 5.5% against the euro and depreciated 2.2% against the U.S. dollar. During 2015 the Norwegian krone depreciated 6.4% against the euro and depreciated 18.5% against the U.S. dollar. During 2014, the Norwegian krone depreciated 7.8% against the euro and depreciated 22.2% against the U.S. dollar.

 

As of December 31, 2016, the Company’s net foreign currency position amounted to NOK 6 million in U.S. dollars and NOK 2 million in euros. As of December 31, 2015, the Company’s net foreign currency position amounted to NOK 1 million in U.S. dollars and NOK 1 million in euros (NOK 3 million in U.S. dollars and NOK 2 million in euros in 2014). Net profit in foreign exchange in 2016 amounted to NOK 1 million, compared to a profit of NOK 1 million in 2015 and a profit of NOK 5 million in 2014, as a result of changes in foreign exchange rates.

 

There was a decrease in both total interest income and total interest expense in 2016 compared to 2015 and a decrease in both items in 2015 compared to 2014. The main reasons for the decrease in both total interest income and total interest expense during 2016 were the decrease in the average balance of interest bearing assets and liabilities and the decrease in the average Norwegian krone short-term NIBOR interest rate. The main reasons for the decrease in both total interest income and total interest expense during 2015 were the decrease in the average balance of interest bearing assets and liabilities and the decrease in the average Norwegian krone short-term NIBOR interest rate.

 

Total interest and related income in 2016 was NOK 1,279 million, compared to NOK 1,776 million in 2015, a decrease of NOK 497 million, or 28.0%, which represented a decrease of NOK 485 million, or 21.5%, to total interest and related income in 2014, which was NOK 2,261 million. Changes in total interest and related income are discussed in the following paragraphs.

 

Interest and related income on loans decreased by NOK 360 million, or 24.0%, from 2015 to 2016. Interest and related income on loans decreased by NOK 474 million, or 24.0% from 2014 to 2015.

 

Interest and related income on securities and other interest and related income decreased by NOK 138 million, or 50.0% from 2015 to 2016. Interest and related income on securities and other interest and related income decreased by NOK 10 million, or 3.5%, from 2014 to 2015.

 

Total interest and related expenses in 2016 was NOK 1,019 million compared to NOK 1,402 million in 2015, driven by a decrease of NOK 383 million (27.3%) of interest and commissions on the Company’s debt during this period. Total interest and related expenses in 2015 was NOK 1,402 million compared to NOK 1,800 million in 2014, which was driven by a decrease of NOK 398 million (22.1%) of interest and commissions on the Company’s debt during this period.

 

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.”

 

31 

 

 

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 2016 was NOK 260 million, a 30.5% decrease from net interest income of NOK 374 million in 2015, itself an 18.9% decrease from net interest income of NOK 461 million in 2014. The main reason for the decrease in net interest income in both 2016 and 2015 was the decrease in the average balance of interest bearing assets and liabilities, combined with reduced margins on investments.

 

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.

 

Net gains/(losses) on financial instruments at fair value showed a total loss of NOK 903 million in 2016, compared to a loss of NOK 792 million in 2015 and to a loss of NOK 6,070 million in 2014.

 

During 2016, 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 loans. In 2016, unrealized losses on Eksportfinans’ own debt amounted to NOK 46 million, compared to unrealized gains of NOK 365 million in 2015 and unrealized losses of NOK 9,313 million in 2014 (see note 5 to the accompanying audited consolidated financial statements). Net of derivatives, this amounted to an unrealized loss of NOK 818 million in 2016, compared to an unrealized loss of NOK 682 million in 2015 and an unrealized loss of NOK 6,024 million in 2014 (see note 28.4 to the accompanying audited consolidated financial statements). Accumulated in the balance sheet, the unrealized gain on Eksportfinans’ own debt, net of derivatives, is NOK 0.8 billion as of December 31, 2016. 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. Eksportfinans’ capital adequacy will not be affected by this effect in any material way.

 

Of the total net losses on financial instruments at fair value of NOK 903 million in 2016, NOK 612 million was unrealized losses on financial instruments. Of the total net losses on financial instruments at fair value of NOK 792 million in 2015, NOK 700 million was unrealized losses on financial instrument. Of the total net losses on financial instruments at fair value of NOK 6,070 million in 2014, NOK 6,017 million was 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 28.4 to our audited consolidated financial statements.

 

As shown in the table in note 28.4 to the audited consolidated financial statements, the unrealized losses of NOK 612 million in 2016 came almost entirely from unrealized losses on bond debt (net of derivatives) of NOK 818 million. The unrealized losses of NOK 700 million in 2015 came almost entirely from unrealized losses on bond debt (net of derivatives) of NOK 682 million. The unrealized losses of NOK 6,018 million in 2014 came almost entirely from unrealized losses on bond debt (net of derivatives) of NOK 6,024 million. The unrealized losses in 2016, 2015 and 2014 were almost entirely related to reversals of unrealized gains in 2011. The fair value of bond debt is established using a discounted cash flow model as presented under the heading “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 2016, the credit spreads on the Company’s bond debt changed from an interval of 100 to 175 basis points for different maturities as of December 31, 2015 to an interval of 75 to 125 basis points for different maturities as of December 31, 2016. As of December 31, 2014, the credit spreads on the Company’s bond debt were in an interval ranging from 132 to 175 basis points for different maturities. The decrease in credit spread in 2016 was not as significant as in 2015 and 2014. The significant decrease in credit spread in 2015 and 2014 caused a significant increase in the fair value of the Company’s bond debt in 2015 and 2014, respectively, which is reflected in the level of unrealized losses on bond debt in 2015 and 2014.

 

32 

 

 

The Company recorded unrealized gains on loans of NOK 110 million in the year ended December 31, 2016, compared to losses of NOK 68 million in the year ended December 31, 2015, to losses on loans of NOK 30 million in the year ended December 31, 2014. The fair values of loans are determined using a discounted cash flow model, incorporating appropriate yield curves and credit spreads obtained from the market.

 

For the year ended December 31, 2016, the Company recorded unrealized gains of NOK 102 million on securities, compared to unrealized gains of NOK 74 million in the year ended December 31, 2015 and unrealized gains of NOK 17 million in the year ended December 31, 2014. 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 243 million in 2016, compared to NOK 14 million in 2015 and NOK 12 million in 2014. The reason for the high other income in 2016, is the sale of the shares in the subsidiary Dronning Mauds gt 15 AS. Through this subsidiary, the Company owned 68.3 % of an office building in Dronning Mauds gt 15, gnr 209, bnr 430 in Oslo. The shares in this subsidiary were sold in April 2016, resulting in a gain of NOK 243 million. See note 15 in the accompanied audited consolidated financial statements.

 

Total operating expenses were NOK 107 million in 2016, compared with NOK 142 million in 2015 and NOK 180 million in 2014, with the decrease in 2016 mainly due to the lower level of activity.

 

Pre-tax operating results showed a loss of NOK 453 million in 2016, compared to a loss of NOK 548 million in 2015 and a loss of NOK 5,779 million in 2014.

 

The Company’s total taxes for 2016 were an income of NOK 177 million (which includes a decrease in deferred taxes of NOK 195 million), compared to an income of NOK 171 million in 2015 and an income of NOK 1,506 million in 2014. The statutory tax rate applied to pre-tax profit/(loss) in 2016 was 25% vs 27% in 2015.. Deferred taxes as of December 31, 2015 are calculated at 25%. The tax rate was changed to 25% effective from 2016, and deferred taxes as of December 31, 2015 and December 31, 2016 were calculated accordingly.

 

Other comprehensive income showed a loss of NOK 14 million in 2016, compared to a gain of NOK 25 million in 2015 and a loss of NOK 41 million in 2014.

 

As a result of the previously discussed line items, total comprehensive income for the year 2016 showed a loss of NOK 345 million, compared to a loss of NOK 351 million in 2015 and a loss of NOK 4,314 million in 2014.

 

Profit excluding unrealized gains and losses on financial instruments (see the table below), which is a non-GAAP/IFRS financial measure, amounted to NOK 177 million in 2016, NOK 172 million in 2015 and NOK 130 million in 2014. The increase from 2015 to 2016 was mainly due to the gain on the sale of the subsidiary Eiendomsselskapet Dronning Mauds gt 15 AS of NOK 243 million, offset by the provision made in connection with the judgment regarding the 108 agreement with the Ministry of Trade, Industry and Fisheries (see note 35). The increase from 2014 to 2015 was mainly due to a gain in 2015 of NOK 30 million related to the realization of ISK 2 billion from previously frozen funds in Iceland, as well as a reversal of a contingency of NOK 26 million related to Lehman Brothers International (Europe) (in administration), and an actuarial gain of NOK 25 million after tax related to changes in estimated pension commitments in 2015. The lower level of interest generating assets had an adverse effect. 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) 2016   2015   2014  
Total comprehensive income (345)   (351)   (4,314)  
Net unrealized losses/(gains) on financial instruments at fair value (1) 612   700   6,017  
Realized losses hedged by the Portfolio Hedge Agreement —   62   —  
Unrealized gains/(losses) related to Icelandic bank exposure 71   (12)   (7)  
Tax-effect of the items above (161)   (227)   (1,566)  
Profit for the period excluding unrealized gains/(losses) on financial instruments at fair value 177   172   130  
Return on equity based on profit for the period excluding unrealized gains/(losses) on financial instruments at fair value 2.3 % 2.3 % 1.8 %
               

(1)      For further details, see note 5 to our audited consolidated financial statements in Item 18.

 

33 

 

 

On February 16, 2017, the Board proposed not to pay any dividend related to the fiscal year 2016, in line with fiscal years 2015 and 2014.

 

There were no new disbursements of export-related loans in 2016, the same as in 2015, and 2014. Eksportfinans’ total outstanding export-related loans decreased to NOK 16.7 billion at December 31, 2016 from NOK 26.4 billion at December 31, 2015 and NOK 36.1 billion as of December 31, 2014. The decrease in outstanding export lending was due to the Company’s decision to cease lending activity, except where commitments already existed, after the Government announced the establishment of a new export financing entity on November 18, 2011.  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 1.6 billion at year-end 2016, compared to NOK 1.8 billion in 2015 and NOK 3.0 billion at year-end 2014.

 

Average balance sheet and net interest income

 

  2016     2015     2014
(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 2,571 23 0.89 %     4,722 44 0.93 %     5,240 16 0.31 %
Municipal and county loans 1,600 22 1.38 %     2,155 39 1.81 %     4,562 123 2.69 %
Export-related loans 21,352 1,104 5.17 %     31,444 1,455 4.63 %     42,597 1,846 4.33 %
Debt securities 15,855 117 0.74 %     29,983 229 0.76 %     31,363 264 0.84 %
Cash collateral 2,744 7 0.26 %     3,346 3 0.09 %     3,039 2 0.08 %
Other related income   6           6           8    
Total interest earnings assets 44,122 1,279 2.90 %     71,650 1,776 2.48 %     86,801 2,261 2.60 %
                                 
Commercial paper — — 0.00 %     — — 0.00 %     — — 0.00 %
Bond debt net of reacquired debt 36,005 1,009 2.80 %     60,823 1,387 2.28 %     74,669 1,782 2.39 %
Subordinated debt and capital                                
   contribution securities — — 0.00 %     1,152 4 0.35 %     394 3 0.73 %
Cash collateral 1,622 3 0.18 %     3,363 4 0.09 %     4,469 4 0.09 %
Other debt 28 1 3,57 %     43 3 6,54 %     44 3 6,54 %
Other related expenses   6           6           9    
Total interest bearing liabilities 37,655 1,019 2.71 %     65,381 1,402 2.14 %     79,576 1,800 2.26 %
Net interest earnings (*)   260           374           461    
Net yield on interest-earning assets (**)     0.19 %         0.34 %         0.34 %
   
(*)      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 27.4 to our audited consolidated financial statements in Item 18.

 

The average balances shown in the table are daily averages.

 

34 

 

 

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 2016, 2015, and 2014. 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) 2016/2015 Change due to
increase/(decrease) in:		 2015/2014 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 (21 )  (20 )  (1 )  28   (2 )  30  
Municipal and county loans (17 ) (10 ) (7 )  (84 ) (65 ) (19 ) 
Export-related loans (351 ) (467 )  116   (391 ) (483 )  92  
Debt securities (112 )  (1108 )  (4 )  (36 )  (12 )  (24 ) 
Cash collateral 4   (1 )  5   1   —   1  
Other related income —   —   —   (2 ) (2 ) —  
Total interest receivable (1) (497 ) (683 )  185   (485 ) (399 )  (86 ) 
Interest payable                        
Bond debt net of reacquired debt (378 )  (566 )  188   (395 )  (330 )  (64 ) 
Subordinated debt and capital                        
   contribution securities (4 )  (4 )  —   1   5   (4 ) 
Cash collateral 1   (1 )  2   (2 )  (1 )  (1 )
Other debt (2 )  (1 )  (1 )  —   —   —  
Other related expenses —   —   —   (2 )  (2 )  —  
Total interest payable (1) (383 ) (585 ) 212   (398 ) (321 ) (77 ) 
Movement in net interest income                        
(Decrease)/increase in interest receivable (497 ) (683 ) 185   (485 ) (399 ) (86 ) 
Decrease/(increase) in interest payable 383   595   (212 )  398   321   77  
Total change in net interest income (114 )  (88 ) (27 )  (87 )  (78 ) (9 ) 
                             
(1)      The volume and rate variances on total interest receivable and total interest payable are calculated on the total amounts, which do not add up to the total of each group of balance sheet items. This is due to the different rate of growth in volume on individual balance sheet items and the total volume.

 

The Company had no loan commitments at December 31, 2016. As at December 31, 2015 the company had no loan commitments, and approximately NOK 261 million in loan commitments at December 31, 2014. For further details, see Item 4.B. “Business Overview — LOANS — Export Lending — Loan Commitments”.

 

There were no new loan disbursements during 2016, 2015, or 2014. No loan disbursements have been made for municipal and county transactions since the sale of Kommunekreditt. Historically, loan disbursements for export transactions were principally denominated in U.S. dollars and Norwegian kroner to the shipping and offshore oil and gas sectors. Loan disbursements for loans acquired from shareholders may fluctuate from year to year depending on the volume of eligible loans and the banks funding requirements.

 

Export-related loans accounted for NOK 17 billion, or 91.5% of total loans outstanding at December 31, 2016 as compared to NOK 26 billion, or 93% of total loans outstanding at December 31, 2015, and NOK 36 billion, or 92% of total loans outstanding in 2014.

 

35 

 

 

Export transactions

 

Prior to November 18, 2011, 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 administered on behalf of the Government. In 2016 and 2015 there were no new loan disbursements. For further details, see Item 4.B. “Business Overview — LOANS — Analysis of Loan — Composition of Loans”.

 

As at December 31, 2016, loans for ship financing represented 54% of total export transaction loans outstanding. Loans for capital goods as of December 31, 2016 comprised 36% of total export transaction loans outstanding. Loans for additional export-related activities represented 9% of total export loans outstanding in 2016. As of December 31, 2015, loans for ship financing represented 49% of total export transaction loans outstanding (48% as of December 31, 2014). Loans for capital goods as of December 31, 2015 comprised 31% of total export transaction loans outstanding (28% as of December 31, 2014). 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 20% of total outstanding export transaction loans in 2015, (24% as of December 31, 2014). 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, 2016, the Retained Municipal Portfolio amounted to NOK 1.55 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 critical accounting policies.

 

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 in the valuation technique. These inputs are to the fullest extent possible based on other observable prices or rates identified during the above mentioned steps.

 

36 

 

 

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 as of 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 in absence of suitable market spreads has produced variation in credit spreads of 4 basis points on average for the guaranteed portfolio over the history for which the Company has data for. As of December 31, 2016, the guaranteed portfolio constitutes 66 % of the loan portfolio and is assessed using this methodology.

 

Plain borrowings are priced based on credit spreads obtained in the market. Our structured borrowings were priced based on our prices from new issues until the Government’s decision in November 2011. 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. As fewer benchmarks are outstanding and the trading activity in the benchmarks is lower, the Company has decided to use broker quotes from the major provider of such quotes in the Norwegian market. These quotes have been compared to the historical benchmark credit spreads observed on Bloomberg to ensure high correlation with historical trading prices. The credit spreads for the combined borrowing portfolio have varied 133 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 2016 going forward would result in a month on month gain/loss of NOK 1,000 million (more than NOK 1,500 million as of December 31, 2015) with 95% probability. Since the multi-notch downgrade of Eksportfinans in November 2011, the credit spread volatility has been high, but decreasing over the last years. A one basis point increase in credit spreads would have resulted in an estimated gain of NOK 8 million as of December 31, 2016 (NOK 11 million as of December 31, 2015). We do not expect volatility to return to the levels that existed prior to the Government’s decision any time soon.

 

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.

 

37 

 

 

Pension commitments

 

For a description of the key economic and actuarial assumptions related to pension commitments, see notes 2.11 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 displayed positive financial performance in 2016 and demonstrated a solid core capital adequacy ratio of 61-% as of December 31, 2016. The Board has decided not to propose a dividend for 2016.

 

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. Since November 18, 2011, the Company has not accessed the international capital markets for new funding.  

 

After the Government’s decision triggered the substantial downgrades in the Company’s credit ratings, the Company has not accessed the capital markets for funding 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 see that our asset-liability position is positive and is expected to remain as such despite a continued absence of new funding.

 

Commercial paper borrowings

 

Eksportfinans has not borrowed in the commercial paper market since 2011 and has not had any outstanding commercial paper borrowings since 2012. Historically, commercial paper borrowings were primarily made through the Company´s U.S. dollar and euro commercial paper programs.

 

Bond borrowings

 

Senior funding

 

The company has not accessed the funding markets since November 18, 2011. Historically, the Company borrowed 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, 2016, 2015, and 2014, was NOK 23,254 million, NOK 51,882 million, and NOK 66,413 million, respectively.

 

Eksportfinans’ EMTN program facilitated 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. At December 31, 2016, USD 1,597 million was outstanding under this program compared to USD 2,153 million at December 31, 2015 and USD 3,635 million at December 31, 2014.

 

A U.S. medium-term note program was established in June 2004, under which USD 1,000 million was outstanding as of December 31, 2016 compared to USD 3,238, million at December 31, 2015 and USD 4,492 million at December 31, 2014.

 

38 

 

 

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, 2016 no bond issues were outstanding on the primary shelf while JPY 3,597 million in uridashi offerings was outstanding. The following table shows the composition of the Company’s senior bond debt measured at fair value as at December 31, 2016, 2015 and 2014:

 

Composition of Bond Debt (NOK millions)
Structure Type December 31, 2016 December 31, 2015 December 31, 2014
Plain vanilla 14,782 42,670 47,689
Foreign Exchange Linked 3,869 4,382 13,705
Equity Linked 330 384 1,110
Commodity Linked - - 20
Other 3,640 3,739 3,889

 

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

 

Bond Debt (NOK millions except percentages)
Period ended December 31, Average
amount outstanding		 Maximum
amount outstanding		 Actual
amount outstanding
at December 31.		 Average interest
rate
2016  34,090  51,019  22,620 2.46 %
2015 60,570 70,868 51,174 3.48 %
2014 73,269 80,496 66,413 1.95 %

 

Liquidity Facility Agreements

 

Eksportfinans is the borrower under a committed liquidity facility (by way of revolving loans) with a syndicate of major owner banks consisting of Danske Bank A/S, DNB Bank ASA and Nordea Bank Norge ASA with a maximum facility amount of USD 250 million backing the ordinary course of business. It is the intention of the parties that this agreement will be renewed annually as deemed necessary. No amounts have been drawn under this agreement. For further details, see Item 7.B. “Related Party Transactions — Committed Liquidity Facility Agreement”. 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 Liquidity Portfolio consists mostly of highly rated covered bonds, asset-backed securities, senior bank notes and bonds issued by Norwegian municipalities.

 

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 4.4 billion as of December 31, 2016 (NOK 18 billion as of December 31, 2015). The portfolio consists mainly of covered bonds with short maturities and bonds issued by Norwegian municipalities. The portfolio has an average rating of AA+. The primary purpose of the Liquidity Reserve Portfolio is to provide a liquidity buffer. It can 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”.

 

39 

 

 

PHA Portfolio. The underlying securities of the PHA Portfolio had a market value of approximately NOK 4.4 billion as of December 31, 2016 (approximately NOK 6.2 billion as of December 31, 2015) and consist of approximately 26% senior bonds from banks, agencies and treasuries with an average rating of A-. The remaining 74% of the portfolio consists of asset-backed securities (ABS) with an average rating of A-. 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”.

 

Management believes that these substantial liquidity reserves help to ensure that the Company has sufficient funds to cover future obligations. The Company also has 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)   2016               2015 2014
Liquidity Reserve Portfolio Trading portfolio      
  Money market instruments - 2,247 -
  Senior bank notes and bonds 570 5,870 10,011
  Treasury Bills - 1,609 1,172
  Covered Bonds 1,088 2,622 7,229
  Other securities 2,764 5,654   2,714
  Total Liquidity Reserve Portfolio 4,423 18,002 21,126
PHA Portfolio Trading portfolio      
  Asset-backed securities 3,236 4,289 5,166
  Total trading portfolio 3,236 4,289 5,166
  Other securities at fair value through profit and loss      
  Senior bank notes and bonds 1,032 1,770 1,699
  Other securities 0,131 0,125 -
  Total other securities at fair value through profit and loss 1,164 1,895 1,699
  Total PHA Portfolio 4,399 6,184 6,865
  Total Liquidity Portfolio 8,823 24,186 27,991

 

 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 27.7 to our audited consolidated financial statements in Item 18.

 

40 

 

 

The following table sets forth with respect to the Liquidity Portfolio the maturities of the note debt (after deducting the carrying amount of debt securities repurchased by Eksportfinans), loans and long-term investments as of December 31, 2016, and the cumulative liquidity (as measured by short-term liquidity as of December 31, 2016, 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 (2)		   Loan Receivables
Maturing (3)		   Long-Term
Investments
Maturing (PHA
Portfolio) (4)		   Cumulative Liquidity(5)
      (NOK billions)    
Short-term liquidity at December 31, 2016 (1)               5.4
2017   11.2   5.1   1.8   1.1
2018   1.7   3.6   0.4   3.5
2019   2.4   3.0   0.3   4.4
2020   1.1   2.3   0.3   5.9
2021   2.3   1.3   0.5   5.4
2022   0.5   0.9   0.3   6.0
2023   0.2   0.5   0.3   6.6
2024   0.0   0.4   0.2   7.3
Thereafter   4.0   1.1   0.5   4.8
Total   23.4   18.1   4.6    

  

(1) Short-term liquidity is comprised of the sum of our Liquidity Reserve Portfolio (at fair value) and deposits.
   
(2)      Principal outstanding of own debt securities. The column includes single- and multi-callable issues. Includes notional cash flows of derivatives economically hedging structured bond debt.
   
(3)      Represents principal outstanding of Loan Receivables.
   
(4)    Represents principal outstanding of investments in the PHA Portfolio
   
(5) Represents estimated cumulative liquidity at year-end except for the first row which states actual liquidity at December 31, 2016.

 

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 for the years 2014–2016 was 8%. As of December 31, 2016, Eksportfinans’ capital adequacy ratio was 61.6%, compared with 36.5%, as of December 31, 2015 and 24.4% as of December 31, 2014. The core capital adequacy ratio was 61.6% as of December 31, 2016, compared to 36.5% as of December 31, 2015 and 24.3% as of December 31, 2014.  Dividends are determined with the aim of ensuring an adequate level of capital for Eksportfinans as well as a satisfactory return for its shareholders. As proposed by the Board of Directors, the General Assembly decided on April 6, 2017 not to pay dividends related to the fiscal year 2016. On April 14, 2016, the General Assembly and the Council of Representatives declared no dividend related to the fiscal year 2015. On April 16, 2015, the General Assembly and the Council of Representatives declared no dividend related to the fiscal year 2014.

 

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

 

41 

 

 

The tables below give details of the Company’s risk capital, risk-weighted balance sheet and off-balance sheet items as of December 31, 2016, 2015 and 2014:

 

Risk capital

 

  As of December 31,
(NOK millions and as percentage of risk-weighted assets and off-balance sheet) 2016     2015     2014
Share capital 2,771     2,771     2,771    
Share premium reserve —     —     —    
Reserve for unrealized gains 81     566     1,043    
Other equity 4,213     4,072     3,946    
Total equity 7,065     7,409     7,760    
Declared dividends —     —     —    
Deductions 620     1,225     1,786    
Additions —     —     13    
Total core capital: 6,445       61.0 %   6,184       36.53 %   6,987       24.3 %
Subordinated debt —     —     —    
Capital contribution securities not included in core capital —     —     —    
Deductions —     —     —    
Additions             37    
Additional capital: — 0.0 % — 0.0 % 37 0.1 %
Total risk capital 6,445 61.0 % 6,184 36.5 % 6,024 24.4 %
     

 Risk-weighted balance sheet and off-balance sheet items

 

    As of December 31,
(NOK millions)   2016     2015     2014
    Book
value		   Weighted
value		     Book
value		   Weighted
value		     Book
value		   Weighted
value
Loans due from credit institutions   2,251   670     7,053   2,613     12,370   4,330
Loans due from customers   17,270   4,135     24,462   5,704     33,372   8,839
Securities   8,822   1,422     24,187   2,276     27,991   3,974
of which held for trading   4,423   127     22,292   1,761     26,292   3,399
Financial derivatives   1,804   1,284     4,293   2,072     7,071   2,843
Other assets   3,024   948     5,147   903     4,822   807
Total assets on balance sheet   33,171   8,459     65,142   13,568     85,626   20,794
Off-balance sheet items   —   51     —   53     —   70
Operational risk   —   588     —   1,079     —   1,847
Foreign currency exchange risk   —   —_     —   704     —   546
CVA   —   1,463     —   1,558     —   1,419
Total risk-weighted assets   —   10,561     —   16,962     —   24,677
                             

 

C. RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES, ETC.

 

Not applicable.

 

D. TREND INFORMATION

 

Lending

 

Since the Government’s announcement on November 18, 2011, to the effect that new Government-supported export lending will be made by a new state entity, the Company has not engaged in new lending activities.

 

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 has not had a need for additional funding. 

 

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. 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.

 

42 

 

 

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, 2016.

 


(NOK millions)		          
Contractual obligations Total Up to and
including
1 year		 From 1 year
up to and
including
5 years		 After
5 years		  
Bond debt 24,886   11,797   7,834     5,254  
                   
Other liabilities 1,042   921   4     117  
Total 25,928   12,718   7,838     5,371  

 

(NOK millions)                  
Other commercial commitments Total Up to and
including
1 year 		From 1 year
up to and
including
5 years		 After
5 years
Commercial loan commitments (1) — — — —
Financial guarantees 103 103 — —
Total 103 103 — —

 

(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 29.3 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, 2016 were:

 

Name   Title
     
Sigurd Carlsen   Chairperson of the Board and Director
Christian Berg   Deputy Chairperson of the Board and Director
Tone Lunde Bakker   Director
Bjørn Berg   Director
Marianne Heien Blystad   Director
Rune Helgeland   Director elected by the employees
     
Pål Jensen   Alternate Director elected by the employees
     
Geir Bergvoll   Chief Executive Officer
Jens Olav Feiring   Executive Vice President and General Counsel
Christian Grøm   Executive Vice President, Risk Management
Martine Mills Hagen   Executive Vice President, Funding and Lending
Elise Lindbæk   Executive Vice President, Staff
Geir Ove Olsen   Executive Vice President, Financial Control and Internal Bank

 

43 

 

 

Under Norwegian law the employees may require that an observer to the Board shall be elected by and among the employees. The observer is entitled to engage in discussions with the board at meetings, but do not carry voting rights. Mr. Ole Anders Næss has been elected as observer, with Siri Brustad as alternate observer.

 

Mr. Sigurd Carlsen (born 1959) joined the Board in 2012. Mr. Carlsen became Chairperson of the Board and the Remuneration Committee on November 1, 2014. He was Deputy Chairperson of the Board and Head of the Audit Committee and Risk Committee until November 1, 2014. He is Chief Risk Officer in Nordea Bank Norge ASA (since January 1, 2017 he has been employed by Nordea Bank AB (publ) Norwegian Branch) and has held various leading positions within Nordea since he was first employed by the bank in 1986. Mr. Carlsen has a business degree from the BI Norwegian Business School, and holds a Master of International Management from Thunderbird School of Global Management (then the American Graduate School of International Management) in Arizona, USA.

 

 Mr. Christian Berg (born 1969) joined the Board in 2011. Mr. Berg became Deputy Chairperson of the Board on November 1, 2014 and is a member of the Audit Committee and the Risk Committee. He has been Group CFO of Wilh. Wilhelmsen Holding ASA since April 2016. He was previously Senior Partner of HitecVision AS. Until January 2012, he was CEO of Hafslund ASA. Prior to this, he was CFO of the company from 2001, after serving as manager of group financial investments. He has previous experience from positions at PwC and the investment company Brothers AS. Mr. Berg has a business degree from the Norwegian School of Economics and Business Administration (NHH).

 

Ms. Tone Lunde Bakker (born 1962) joined the Board in 2009. Ms. Bakker is a Board Member and a Member of the Audit Committee and the Risk Committee. She is Global Head of Cash Management at Danske Bank, and has management experience from Danske Bank, SEB and Nordea. Ms. Bakker holds a business degree from Arizona State University, USA, and is an Authorized Financial Analyst from the Norwegian School of Economics and Business Administration (NHH).

 

Mr. Bjørn Berg (born 1957) joined the Board on November 1, 2014. He became Head of the Audit Committee and the Risk Committee on November 6, 2014. He works at DNB Bank ASA, where he is Chief Investment Officer. He previously had management responsibility for the bank's owner position in Eksportfinans. He has held various senior positions in finance since 1986, and previously worked as an auditor. Mr. Berg has a MBA from University of Wisconsin and a CPA from Norwegian School of Economics and Business Administration (NHH).

 

Ms. Marianne Heien Blystad (born 1958) joined the Board in 2007. Ms. Blystad is a Board Member and Member of the Remuneration Committee. She is an Attorney-at-law with the law firm Ro Sommernes. Prior to this, she was associated with the law firms Nordia SA and Bull & Co. Previous experience includes positions in Blystad Shipping and Trading, Eksportfinans and Citibank. Ms. Blystad holds a business degree from the BI Norwegian Business School and a law degree from the University of Oslo.

 

Mr. Rune Helgeland (born 1968) is a Board Member, elected by and amongst the employees of Eksportfinans. His current term expires in 2017. He is also an observer in the Remuneration Committee. Mr. Helgeland joined Eksportfinans in 2001 as an IT systems application manager. Since May 2015 he is the Head of IT. He has international experience from the financial software vendors SunGard and SimCorp. Mr. Helgeland holds a Bachelor in economics and an MBA in finance from Drexel University in Pennsylvania, USA, and also holds an Executive Master of Management degree from BI Norwegian Business School in Oslo.

 

Mr. Ole Anders Næss (born 1979) is an observer to the Board since 2016 and Main Representative, elected by the employees of Eksportfinans. He joined Eksportfinans in 2008, and has held prior positions in the Back Office, Risk Management and Funding departments. Since 2010 he has been a Senior Portfolio Manager in Treasury. Mr. Næss has a Bachelor degree in Business Administration and a Master of Science degree in Financial Economics from BI Norwegian Business School.

 

44 

 

 

Mr. Pål Jensen is an alternate director to the Board, elected by the employees. He was elected in 2016, and his current term expires in 2018. Mr. Jensen joined Eksportfinans in 1994 and is Senior Portfolio Manager in Treasury.

 

Ms. Siri Brustad is an alternate observer to the Board, elected by the employees. She was elected in 2016, and her current term expires in 2018. Ms Brustad joined Eksportfinans in 2004 and is Senior Controller Accounting.

 

Mr. Geir Bergvoll (born 1952) is CEO. He was Chairman of the Board of Directors of Eksportfinans from 2008 to November 2014. He held the position as Head of Mergers and Acquisitions in DNB Bank in Oslo from 2007 to 2014, and he was Division Manager in DnB NOR Asset Management between 2005 and 2007. Prior to this, he has held several managerial positions within the bank. He started in DNB (then Sparebanken NOR) in 1990, following a period as bank manager of ABC-Bank. Mr. Bergvoll holds a degree in economics from the University of Oslo.

 

Mr. Jens Olav Feiring (born 1946) joined Eksportfinans in 1974. Mr. Feiring is Executive Vice President and General Counsel. He has a law degree from the University of Oslo and joined Eksportfinans as legal advisor. He has previously held the position as EVP and Director of the Legal Department in the company from 1981 to September 2011 and returned to the position in February 2012.

 

Mr. Christian Grøm (born 1958) joined Eksportfinans in 2009. Mr. Grøm is Executive Vice President and Director of Risk Management. He joined Eksportfinans from DNB, where he had worked since 1990. He has additional work experience from the management consulting company IKO Strategi and from Elkem. Mr. Grøm holds a business degree from the Norwegian School of Economics and Business Administration (NHH) in Bergen.

 

Ms. Martine Mills Hagen (born 1968) joined Eksportfinans in 2005. Ms. Mills Hagen is Executive Vice President and Director of Funding and Lending. She was Head of Funding from 2007 to July 2012. She has previously been with Kommunalbanken, Bankers Trust International (London) and Tokai Bank Europe (London). Ms Mills Hagen has an MA in Economics and Politics from the University of Glasgow and an Executive MBA from ESCP Europe in Paris and the BI Norwegian Business School in Oslo.

 

Ms. Elise Lindbæk (born 1964) joined Eksportfinans in 1991. Ms. Lindbæk is Executive Vice President and Director of Staff. She was Head of Communications from 2003 to 2008, and has also held different positions within lending, funding and treasury in Eksportfinans. She has previous work experience from Nordea. Ms. Lindbæk has a business degree from the Norwegian School of Economics and Business Administration (NHH) in Bergen and an Executive Master of Management degree from the BI Norwegian Business School.

 

Mr. Geir Ove Olsen (born 1966) joined Eksportfinans in 2008. Mr. Olsen is Executive Vice President and CFO. He came to the position after serving as CFO of Toyota Kreditbank GmbH, Norway, a position he had held since 1997. He has previous work experience from Dyno Industrier, Skattekontoret for storbedrifter and Puget Sound Bank in Seattle, USA. Mr. Olsen holds an MBA from Pacific Lutheran University in Tacoma, USA.

 

Eksportfinans believes that 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. Bjørn Berg, Mr. Sigurd Carlsen and Ms. Tone Lunde Bakker are representatives of the owners on the Board of Directors.

 

B. COMPENSATION

 

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

 

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. In addition, from 2016 there is one observer elected by the employees. The member and observer elected by the employees both have personal deputies. The members elected by the shareholders are appointed for one-year terms. The employee’s representative and observer are elected for two-year terms. The members elected by the shareholders are appointed by the Annual General Meeting based on nominations from the Nomination Committee. 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 CEO. The Board of Directors also appoints the CEO.

 

45 

 

 

Executive Management

 

The CEO has responsibility for the day-to-day conduct of Eksportfinans’ business, subject to standing instructions issued by the Board of Directors. The CEO has established a Management Board consisting of Executive Vice Presidents Mr. Jens Olav Feiring, Mr. Christian Grøm, Ms. Martine Mills Hagen, Ms. Elise Lindbæk and Mr. Geir Ove Olsen. 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.

 

Accountants and Audit Committee

 

The Financial Companies Act revoked the prior requirement under the Financial Institutions Act for a financial institution to maintain a Council of Representatives and a Control Committee as mandatory supervisory bodies. Subsequently, the Board of Directors has resolved to abolish both the Council of Representatives and the Control Committee as corporate bodies and invited the General Meeting to approve changes in the Articles of Association to that effect. Subsequent approval was made at the Annual General Meeting in April, 2016. According to the Financial Companies Act the mandatory supervisory and controlling bodies of a Norwegian financial company such as Eksportfinans, in addition to the Board of Directors, are the Internal Auditor organized and hired by the Board of Directors, the Independent Auditor elected by the General Meeting and the Audit Committee, a committee within the Board of Directors, whose members are elected by and among the members of the Board of Directors.

 

Independent auditors audit the accounts of the Company annually. The independent auditors are state-authorized public accountants appointed by the General Meeting. The shareholders of the Company approve the audited accounts at the Annual General Meeting. The auditors of the Company are currently the Independent Registered Public Accounting Firm PricewaterhouseCoopers AS.

 

None of the members of the Board of Directors is party to any contract providing for any benefits upon termination. The CEO has a severance package covering salary for 12 months in the event that the employment is terminated by the Company by December 31, 2017. The agreed retirement age for the current CEO is 67 years and he is a member of the Company’s defined contribution scheme. Four of the other executive officers have an arrangement with Eksportfinans under which such executive officer, upon a termination, will receive 12 months’ payment. One executive officer has no such arrangement.

 

In accordance with previous and current legislation 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 accountants’ qualifications and independence,
     
  ● the performance of the Company’s internal audit function and independent accountants, and
     
  ● the compliance by the Company with legal and regulatory requirements.

 

As of December 31, 2016, the Audit Committee consisted of Bjørn Berg, Tone Lunde Bakker and Christian Berg. Mr. Bjørn Berg acted as the financial expert, independent of management, and Chairperson of the Audit Committee.

 

46 

 

 

 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.

 

Risk Committee

 

In accordance with the Financial Companies Act, Eksportfinans maintains a Risk Committee. The members of the Risk Committee are elected by and among the members of the Board of Directors, and are identical to the members of the Audit Committee. The Risk Committee acts as a consultative and preparatory body to enable the Board to supervise and manage the Company’s total risk. At regular intervals the Risk Committee assesses if the Company’s risk management and supervisory systems are suited to the current level and magnitude of risk related to its activities.

 

Remuneration

 

At the Annual General Meeting in April 2016, the shareholders determined the compensation for the Board of Directors based on recommendations by the Nomination Committee, and the independent accountant.

 

The Board of Directors determines the compensation for the CEO. 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 Remuneration Committee (see Item 16G CORPORATE GOVERNANCE – Remuneration Committee).

 

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

 

D. EMPLOYEES

 

As of December 31, 2016, the Company had 29 employees, all of whom are located in Norway.

 

Year   Employees
     
2012   56
2013   53
2014   48
2015   44
2016   29

 

A smaller balance sheet has led to a natural reduction in activity. Consequently, voluntary severance packages were granted to 11 employees in December 2015.

 

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.

 

47 

 

 

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 (Nordea Bank AB (publ) Norwegian Branch from January 1, 2017) 61,246   23.21  
The Norwegian State 39,587   15.00  
Danske Bank A/S 21,348   8.09  
21 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 ASA (Nordea Bank AB (publ) Norwegian Branch from January 1, 2017), Danske Bank A/S, and two minority shareholders collectively 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 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”. The 108 Agreement has been terminated with regard to new commitments but remains in force for existing commitments.

 

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 third valuation date (February 28, 2013) resulted in a payment from Eksportfinans to the participating shareholders of NOK 852 million. The fourth valuation date (February 28, 2014) resulted in a payment from Eksportfinans to the participating shareholders of NOK 392 million. The fifth valuation date (February 28, 2015) resulted in a payment from Eksportfinans to the participating shareholders of NOK 234 million. The sixth valuation date (February 29, 2016) resulted in a payment from the participating shareholders to Eksportfinans of NOK 192 million. The seventh valuation date (February 28, 2017) resulted in a payment from Eksportfinans to the participating shareholders of NOK 205 million.

 

48 

 

 

The maximum commitment payable to Eksportfinans by the shareholders under the agreement was NOK 5 billion. As of March 1, 2016 the agreement was renegotiated to reduce the amount for losses covered from NOK 5 billion to NOK 1.5 billion. This was due to the reduction of the underlying portfolio. 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 December 31, 2016, Eksportfinans owed the shareholders NOK 845 million and NOK 1.5 billion remained 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 1.5 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 1.5 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.

 

Committed Liquidity Facility Agreement

 

Eksportfinans’ major owner banks DNB Bank ASA, Nordea Bank Norge ASA (Nordea Bank AB (publ) Norwegian Branch from January 1, 2017) and Danske Bank A/S have extended a committed liquidity facility (by way of revolving loans) (Committed Liquidity Facility Agreement) to Eksportfinans to provide what management considers to be sufficient liquidity buffers for the Company. The first facility was established in 2009 with a 364 day maturity. As has been the intention of the parties, it has been renewed annually, last time on June 16, 2016 (effective from June 23, 2016), still with a maturity of 364 days. When renewed, the facility amount was reduced from USD 1 billion to USD 250 million. Eksportfinans has not yet utilized this credit facility

 

Loans

 

As of December 31, 2016, 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, 2016, the Company had NOK 12 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.

 

49 

 

 

Other Transactions with Shareholder Banks

 

Eksportfinans from time to time also entered into agreements to acquire loans from shareholders and 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 standard 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 interests 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 2016, 2015 and 2014, Eksportfinans acquired loans from its shareholders amounting to NOK 0 million, NOK 0 million and NOK 33 million, respectively.

 

In some instances, Eksportfinans provided lending 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 103 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, 2016, we had ordinary course banking deposits with, and held short-term liquid securities of, our shareholders totaling NOK 701 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, 2016, our shareholders provided guarantees for an amount of NOK 12.707 million (of which GIEK constitutes NOK 7.374 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 collectability 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.

 

50 

 

 

 B. SIGNIFICANT CHANGES

 

For further details, see note 36 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 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 have been listed by the Company on the Luxembourg Stock Exchange. The Company’s 5.500% USD 1,000,000,000 Notes due June 26, 2017 and 2.375% USD 1,250,000,000 Notes due May 25, 2016 have been listed by the Company on the New York Stock Exchange.

 

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.

 

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, and

 

  - domestic contracts where foreign credit is a competitive factors,

 

51 

 

 

  ● as approved or requested by Norwegian authorities, and

   

  ● for regional and local authorities.

 

The term financing operations means operations as defined in the Financial Companies 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 9-5 of the Financial Companies Act (previously Section 3-12 of the Financial Institutions Act) provides that no member of the Board or Executive Management, (and Council of Representatives or Control Committee under the Financial Institutions Act) 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. Under the Financial Enterprise Act, the Annual General Meeting (previously the Council of Representatives under the Financial Institutions Act) 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 the 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 CEO.

 

None of the Public Limited Liability Company Act, the Financial Companies 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 at the latest.

 

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.

 

The Articles of Association provide that the Chairman of the Board convenes the Annual General Meeting. An Extraordinary General Meeting is held when considered necessary by the Board of Directors . At least 14 days’ notice in writing must be given for the Annual General Meeting or an Extraordinary General Meeting. General Meetings are held at least once a year.

 

The Articles of Association provide 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 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.

 

52 

 

 

C. MATERIAL CONTRACTS

 

Eksportfinans has three material contracts:

 

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

 

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

  

  (iii) the USD 1 billion Committed Liquidity Facility Agreement (for further details, see Item 7.B, ”Related Party Transactions   Committed Liquidity Facility Agreement”);

 

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 incur indebtedness in foreign currency.

 

E. TAXATION

 

NORWEGIAN TAX CONSIDERATIONS

 

The following summary describes certain Norwegian tax considerations relevant for the acquisition, ownership and disposition of debt securities issued by Eksportfinans by noteholders that are non-residents for Norwegian tax purposes. This summary addresses only Norwegian tax considerations for the initial purchasers of the debt securities pursuant to the relevant offering and will hold the debt securities as capital assets. This summary is of a general nature and does not purport to be a comprehensive description of all the tax considerations that may be relevant for the noteholders and does not address foreign tax issues. This summary 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 is subject to change, which change could under certain circumstances apply retroactively and could affect the consequences described below. Each investor should consult with and rely upon their own tax advisor with respect to the 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 noteholders that are non-residents for Norwegian tax purposes are not subject to Norwegian income taxes, unless the bearer or registered owner engage or participate in business activities which are carried out in, or managed from, Norway and the premium and/or interest on such securities, if any, are effectively connected with said business. The Norwegian Ministry of Finance has, however, proposed to introduce withholding taxes on interest payments. As of the date of this annual report, it is uncertain whether withholding tax on interest will be implemented and, if so, at what rate. Any applicable tax treaty may, depending on the treaty, restrict or reduce the potential withholding tax rate.

 

Capital gains derived from the sale of Eksportfinans’ debt securities by noteholders that are non-residents for Norwegian tax purposes will not be subject to Norwegian income taxes or withholding taxes in Norway, unless said noteholders engage or participate in business activities which are carried out in, or managed from, Norway and gains on such securities are effectively connected to said business. Corresponding losses will generally not be tax deductible. However, if the noteholder previously has been a tax resident in Norway, an exit-tax on the debt securities could be applicable if the debt securities were acquired when the noteholder was a tax resident in Norway.

 

Corporate noteholders that are non-residents for Norwegian tax purposes are not liable to pay net wealth tax in Norway. Individual noteholders that are non-residents for Norwegian tax purposes are not liable to pay net wealth tax in Norway on the value of the notes unless the noteholder engage or participate in business activities which are carried out in, or managed from, Norway and the notes are effectively connected with said business.

 

53 

 

 

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 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,

 

  ● U.S. holders (as defined below) 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.

 

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 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.

 

54 

 

 

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 in the relevant prospectus supplement and 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 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.

 

55 

 

 

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 note’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 “Payments of 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 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.

 

56 

 

 

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”.

 

57 

 

 

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.

 

58 

 

 

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.

 

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).

 

59 

 

 

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.

 

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 CPDIs 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).

 

60 

 

 

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.

 

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).

 

61 

 

 

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 Treated as Forward Purchase Contracts

 

There can be no assurance that the IRS will accept, or that a court will uphold, this characterization of notes as forward purchase contracts. 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 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 the 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 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. 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.

 

62 

 

 

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 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.

 

63 

 

 

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).

 

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.

 

64 

 

 

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 of Notes Treated as a Put Option and a Deposit

 

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, 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.

 

65 

 

 

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.

 

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.

 

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.

 

66 

 

 

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 Disclosure Statement).

 

Certain U.S. holders that own “specified foreign financial assets” with an aggregate value that exceeds certain U.S. dollar thresholds 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 are urged to consult their tax advisors regarding the application of these disclosure requirements to their ownership of the notes.

 

In addition, 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.

 

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.

 

I. SUBSIDIARY INFORMATION

 

Not applicable.

 

67 

 

 

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 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 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, 2016, 2015 and 2014, 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 51,819 million, NOK 117,248 million and NOK 150,369 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 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 26-29.

 

68 

 

 

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, 2016, approximately 76% (61% as of December 31, 2015 and 71% as of December 31, 2014) 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, 2016, 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, 2016          
CAD (27,711) 27,730 19   0
JPY (5,877,370) 5,877,386 16   0
SEK (134,306) 134,314 8   0
EUR 2,943,129 (2,941,038) 2,091   336
DKK 996,315 (996,239) 76   0
USD 630,140 (614,913) 15,227   9,062
Other currencies (4,723,282) 4,721,581 (1,701)   2,862
TOTAL (6,193,085) 6,208,821 15,736   12,260

 

*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 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 28 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 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 14 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, 2016 is estimated to be NOK 0.9 million before taxes. The effect per December 31, 2015 was estimated to be NOK 0.3 million. There is no breach of currency exposure limits from normal operation during 2016.

 

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.

 

69 

 

 

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, 2016 is negative NOK 74,000. 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, 2016 2 (28) (48) 0 (74)
           
Maximum through 2016 *) 13 3 72 1 51
Minimum through 2016 *) (46) (50) (48) (26) (74)
Average through 2016 (13) (16) 15 (2) (16)
           
As of December 31, 2015 (48) (16) 36 (1) (28)
           
Maximum through 2015 *) 48 63 109 2 167
Minimum through 2015 *) (95) (19) (91) (1) (96)
Average through 2015 (13) 15 9 (0) 11
           
As of December 31, 2014 (37) (5) 23 0 (19)

 

*      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.

 

70 

 

 

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 5 million, as of December 31, 2016 (NOK 8 million as of December 31, 2015) 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 2 million as of December 31, 2016, compared to NOK 2 million as of December 31, 2015. 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 not give an accumulated loss of more than NOK 1.6 million. This limit has not been breached since they were introduced.

 

FX Basis spread risk

 

A significant part of the Company´s net interest income is due to euros and US dollars being attractive relative to Norwegian kroner. Most of the company’s funding is in euros and dollars while some loans and liquidity placements are in Norwegian kroner. Hence the Company has swapped significant amounts from dollars and euros over to Norwegian kroner, earning on the basis swap spread. The Company used to hedge basis risk, both on portfolio level and for all new loans larger than NOK 500 million and with maturity longer than three years. Most of the basis swaps have matured. This hedging amounted to approximately NOK 0.5 billion as of December 31, 2016. As of December 31, 2015 the amount was NOK 8.9 billion.

 

Item 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

 

Not applicable.

 

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 CEO and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2016. Based on that evaluation, our CEO 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

 

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 Management, including the CEO 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 (2013)). Based on this assessment, management has concluded that our internal control over financial reporting as of December 31, 2016 was effective.

 

71 

 

 

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 2016 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 November 2014 Mr. Bjørn Berg has acted as the Audit Committee financial expert, 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 all employees, including Eksportfinans’ CEO, Chief 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.

 

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) 2016 2015
Audit fees 2,865 3,390
Audit-related fees (1) — —
Tax fees — —
All other fees 210 443
   
(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 2016.

 

Item 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT

 

Not applicable.

 

72 

 

 

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 (NUES), 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 is elected by the Annual General Meeting. One Director and one observer, and their personal alternates, are elected by and among the employees of Eksportfinans. The observer has the right to attend meetings and speak, but has no voting rights. 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, Risk Committee and the Remuneration 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 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

 

Eksportfinans is required to have an Audit Committee under Norwegian law.

 

The Audit Committee charter 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 rest 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 Accountant’s qualifications and independence, (3) the performance of the Company’s internal audit function and Independent Accountants 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 a recommendation under the Code of Practice. Eksportfinans has established a Nomination Committee according to its Articles of Association. The nomination committee prepares the election of members to the Board of Directors. The Nomination Committee has four members. Three of the members are elected for a period of two years by the Annual General Meeting and shall be representatives of the shareholders. The Chair of the Nomination Committee is independent of the shareholders and chairs its meetings. The Chair of the Board of Directors and the CEO are normally, but without any voting rights, called to at least one meeting before the Committee makes its final resolution. The Nomination Committee is informed of the members, observer and alternates elected by and among the employees.

 

73 

 

 

Remuneration Committee

 

Eksportfinans maintains a Remuneration Committee. The compensation of the CEO is set by the Board, based on recommendations from the Remuneration Committee. The Board is the corporate body that employs the CEO. The compensation to the Board, the Independent Accountant, and the Nomination Committee is set by the shareholders at the Annual General Meeting based on recommendations by the Nomination Committee.

 

Risk Committee

 

Eksportfinans’ Board Risk Sub-Committee oversees the Company’s risk management activities in advance of presenting these issues to the Board. The members of the Audit Committee have also been appointed members of the Risk Committee.

 

Corporate Governance

 

The Company’s corporate governance guidelines are addressed in the annual report in accordance with Norwegian law. This includes information on the remuneration paid to the Directors, the CEO and the Independent Accountant. (Remuneration means any salary, pensions and other benefits received.)

 

Norwegian law does provide for rules on partiality. The general rule provides that a Board Member may not participate in decisions where the Board Member or any person close to him has a financial or other personal interest in the outcome of the decision.

 

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-77
Statements of comprehensive income for the three years ended December 31, 2016 2015 and 2014 F-78
Balance sheets at December 31, 2016, 2015 and 2014 F-79
Statements of changes in equity for the three years ended December 31, 2016, 2015 and 2014 F-81
Cash flow statements for the three years ended December 31, 2016, 2015 and 2014 F-82
Notes to financial statements F-83

 

Item 19. EXHIBITS

 

1.1 Articles of Association (English translation of Norwegian-language original) (incorporated by reference to Exhibit 1.1 of the Company’s Annual Report on Form 20-F filed with the SEC April 25, 2016)
   
2.1 Indenture dated February 20, 2004, between the Company and The Bank of New York Mellon (formerly known as The Bank of New York), as Trustee (incorporated by reference to Exhibit 4.1 to the Company's registration statement on Form F-3 (No. 333-112973) filed with the Commission February 20, 2004)
   
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 First Amended and Restated Portfolio Hedge Agreement entered into by Eksportfinans ASA, DNB Bank ASA, Nordea Bank ASA (Nordea Bank AB (publ) Norwegian Branch from January 1, 2017) and Danske Bank A/S dated March 1, 2016 (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 April 25, 2016)

 

74 

 

 

4.3

 

 Committed Liquidity Facility Agreement between Eksportfinans ASA and DNB Bank ASA, Danske Bank, Norwegian Branch and Nordea Bank Norge ASA dated June 25 2015 (the Committed Liquidity Facility Agreement)* (incorporated by reference to Exhibit 4.3 of the Company’s Annual Report on Form 20-F filed with the SEC April 25, 2016)
   
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

 

*      Confidential treatment of specified material has been permitted by, 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.

 

75 

 

 

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/ GEIR BERGVOLL  
  Geir Bergvoll
  Chief Executive Officer

 

Dated: April 25, 2017

 

76 

 

 

Report of Independent Registered Public Accounting Firm

 

To the CEO, Board of Directors and Shareholders of Eksportfinans ASA:

 

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of comprehensive income, changes in equity and cash flows present fairly, in all material respects, the financial position of Eksportfinans ASA and its subsidiaries (the "Company") at December 31, 2016 and 2015 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2016, 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
April 25, 2017

 

77 

 

 

STATEMENT OF COMPREHENSIVE INCOME

 

PARENT COMPANY   GROUP   NOTE
2016 2015 2014 (NOK million) 2016 2015 2014  
               
63 90 176 Interest and related income on loans due from credit institutions 64 90 176  
1,062 1,404 1,805 Interest and related income on loans due from customers 1,062 1,404 1,805  
118 229 264 Interest and related income on securities 118 229 264  
35 53 15 Other interest and related income 35 53 15  
1,278 1,776 2,260 Total interest and related income 1,279 1,776 2,260  
               
1,008 1,388 1,782 Interest and related expenses on commercial paper and bond debt 1,008 1,388 1,782  
0 4 3 Interest and related expenses on subordinated debt 0 4 3  
11 10 15 Other interest and related expenses 11 10 15  
1,019 1,402 1,800 Total interest and related expenses 1,019 1,402 1,800  
               
259 374 460 NET INTEREST INCOME 260 374 461  
               
      Net gains from sale of group companies 240      
               
           (1)             (2)                (2) Net commissions related to banking services              (1)           (2)                (2)  
               
     (904)        (792)        (6,069) Net losses on financial instruments at fair value        (904)      (792)        (6,069) 5, 28.4
               
0 0 0 Other income               3            14                 12 7
               
 (823)   (794)   (6,072) NET OTHER OPERATING INCOME    (661)  (780)   (6,060)  
               
 (564)   (420)   (5,607) TOTAL OPERATING INCOME    (401)  (406)   (5,599)  
               
90 115 154 Salaries and other administrative expenses 90 115 154 9
2 3 4 Depreciation 6 16 16 14 ,15
12 16 15 Other expenses 11 11 10 10
104 134 173 TOTAL OPERATING EXPENSES  107 142 180  
               
 (668)   (554)   (5,780) PRE-TAX OPERATING PROFIT/(LOSS)    (508)  (548)   (5,779)  
               
      (177)          (171)         (1,573) Tax benefit         (177)       (172)         (1,506) 11
               
  (491)   (383)   (4,207) PROFIT/(LOSS) FOR THE YEAR    (331)  (376)   (4,273)  
               
        (14)            25               (41) Other comprehensive income *            (14)           25               (41)  
               
 (505)   (358)   (4,248) TOTAL COMPREHENSIVE INCOME    (345)   (351)   (4,315)  
               
     (323)        (529)        (4,360) Allocated to/(from) reserve for unrealized gains        (323)      (477)        (4,306) 23
      (167)           146              149 Allocated to/(from) other equity             (8)          101                33  
  (491)   (383)    (4,211) TOTAL ALLOCATIONS    (331)  (376)   (4,273)  

 

* Items that will not be reclassified to profit or loss. The income / (loss) arises from actuarial calculations on pension.

 

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

 

78 

 

 

BALANCE SHEET

 

PARENT COMPANY     GROUP   NOTE
Dec. 31, 2016 Dec. 31, 2015 Dec. 31, 2014 (NOK million) Dec. 31, 2016   Dec. 31, 2015 Dec. 31, 2014  
                 
      ASSETS          
2,251 7,050 12,368 Loans due from credit institutions 1) 2,251   7,053 12,370 13
17,270 24,462 33,372 Loans due from customers 2) 17,270   24,462 33,372 13
8,823 24,187 27,991 Securities 8,823   24,187 27,991 28.5
1,804 4,293 7,071 Financial derivatives 1,804   4,293 7,071 12
0 338 338 Investments in group companies 0   0 0  
1 2 3 Intangible assets 1   2 4 14
233 25 0 Deferred tax asset 233   0 0  
3 4 7 Property, equipment and investment property 3   208 217 15
2,786 4,936 4,620 Other assets 2,786   4,937 4,604 16
33,171 65,297 85,770 TOTAL ASSETS 33,171   65,142 85,629  
                 
      LIABILITIES          
22,620 51,174 66,413 Bond debt 3) 22,620   51,174 66,413 17
2,400 4,398 5,129 Financial derivatives 2,400   4,398 5,129 12
17 74 372 Taxes payable 17   76 372 11
0 0 202 Deferred tax liabilities 0   1 229 11
935 1,950 4,602 Other liabilities 935   1,952 4,600 21
134 132 161 Provisions 134   132 161 8, 19
0 0 965 Subordinated debt 0   0 965 22
26,106 57,728 77,844 TOTAL LIABILITIES 26,106   57,733 77,869  
                 
      SHAREHOLDERS' EQUITY          
2,771 2,771 2,771 Share capital 2,771   2,771 2,771 23
81 404 933 Reserve for unrealized gains 81   566 1,043 24
4,213 4,394 4,222 Other equity 4,213   4,072 3,946  
7,065 7,569 7,926 Total shareholders' equity 7,065   7,409 7,760  
                 
33,171 65,297 85,770 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 33,171   65,142 100,793  

 

1)Of NOK 2,251 million at December 31, 2016, NOK 2,208 million is measured at fair value through profit or loss and NOK 43 million is measured at amortized cost. Of NOK 7,053 million at December 31, 2015, NOK 6,493 million is measured at fair value through profit or loss and NOK 560 million is measured at amortized cost.

2)Of NOK 17,270 million at December 31, 2016, NOK 6,484 million is measured at fair value through profit or loss and NOK 10,786 million is measured at amortized cost. Of NOK 24,462 million at December 31, 2015, NOK 10,064 million is measured at fair value through profit or loss and NOK 14,398 million is measured at amortized cost.

3)Of NOK 22,620 million at December 31, 2016, NOK 11,286 million is measured at fair value through profit or loss and NOK 11,334 million is measured at amortized cost. Of NOK 51,174 million at December 31, 2015, NOK 35,856 million is measured at fair value through profit or loss and NOK 15,318 million is measured at amortized cost..

 

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

 

79 

 

 

Sigurd Carlsen 

Chair person

 

 

  

Christian Berg 

Deputy chair person

 

  

Bjørn Berg

         
Tone Lunde Bakker   Marianne Heien Blystad   Rune Helgeland

  

80 

 

 

STATEMENT OF CHANGES IN EQUITY

 

PARENT COMPANY
(NOK million)   Share   
capital 1)		   Reserve  
unrealized
gains 1)2)		   Other 
 equity		   Total
 equity
                 
EQUITY AS AT JANUARY 1, 2015   2,771   933   4,045   7,927
                 
Actuarial gains/(loss) and other comprehensive income   0   0                 25               25
Total comprehensive income for the period   0             (529)               146            (383)
EQUITY AS AT DECEMBER 31, 2015   2,771   404   4,216   7,569
                 
                 
EQUITY AS AT JANUARY 1, 2016   2,771   404   4,216   7,569
                 
Actuarial gains/(loss) and other comprehensive income 3)   0   0               (14)   (14)
Total comprehensive income for the period   0             (323)             (167)            (490)
EQUITY AS AT DECEMBER 31, 2016   2,771   81   4,035   7,066
                 
GROUP
(NOK million)   Share   
 capital 1)		   Reserve  
unrealized
gains 1)2)		   Other 
 equity		   Total
 equity
                 
EQUITY AS AT JANUARY 1, 2015   2,771   1,043   3,946   7,760
                 
Actuarial gains/(loss) and other comprehensive income   0   0                 25               25
Total comprehensive income for the period   0             (477)               101            (376)
EQUITY AS AT DECEMBER 31, 2015   2,771   566   4,072   7,409
                 
                 
EQUITY AS AT JANUARY 1, 2016   2,771   566   4,072   7,409
                 
Realized reserve of unrealised gains, due to sale of subsidiary   0             (162)   162   0
Actuarial gains/(loss) and other comprehensive income 3) 0   0               (14)              (14)
Total comprehensive income for the period   0             (323)                 (8)            (331)
EQUITY AS AT DECEMBER 31, 2016   2,771   81   4,213   7,065

 

1)Restricted equity that cannot be paid out to the owners without a resolution to reduce the share capital in accordance with the Public Limited Companies Act under Norwegian law.

2)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. The reserve for unrealized gains represents restricted equity that cannot be distributed as dividend.

3)The tax effect on OCI items is MNOK 5 in 2016 and MNOK minus 8 in 2015.

 

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

 

81 

 

 

CASH FLOW STATEMENT

 

PARENT COMPANY     GROUP   NOTE
2016 2015 2014 (NOK million)   2016 2015 2014  
                 
(668) (554) (5,784) Pre-tax operating profit/(loss)    (508) (548) (5,779)  
                 
      Provided by operating activities:          
(73) (163) (169) Accrual of contribution from the Norwegian government   (73) (163) (169)  
612 699 6,017 Unrealized losses/(gains) on financial instruments at fair value   612 699 6,017 5
220     Realized losses on financial instruments
at fair value through profit and loss [non-cash items]		   220      
2 3 4 Depreciation   6 16 16 14, 15
(81)     Net gain from sale of group company   (241)      
                 
9,846 14,016 23,438 Principal collected on loans   9,846 14,016 23,438  
(16,492) (12,092) (22,775) Purchase of financial investments (trading)   (16,492) (12,092) (22,775)  
30,655 17,458 22,713 Proceeds from sale or redemption of financial investments (trading)   30,655 17,458 22,713  
0 0 337 Contribution paid by the Norwegian government   0 0 337  
(88) (361) 0 Taxes paid   (90) (361) (1)  
                 
      Changes in:          
176 568 96 Accrued interest receivable   176 568 96  
2,166 485 (730) Other receivables   2,164 468 (730)  
(1,350) (3,860) (911) Accrued liabilities   (1,353) (3,856) (910)  
24,925 16,199 22,236 NET CASH FLOW FROM OPERATING ACTIVITIES   24,922 16,205 22,253  
                 
688 2 1,010 Proceeds from sale or redemption of financial investments   688 2 1,010  
(544) 0 0 Investment in group companies   (544) 0 0  
422 6,948 7,197 Net cashflow from financial derivatives   422 6,948 7,197  
0 (1) (1) Purchases of property and equipment and intangible assets   0 (6) (18) 14, 15
0 1 0 Proceeds from sales of property and equipment   0 1 0  
566 6,950 8,206 NET CASH FLOW FROM INVESTING ACTIVITIES   566 6,945 8,189  
                 
0 (2) 2 Change in debt to credit institutions   0 (2) 2  
(27,245) (26,160) (31,809) Principal payments on bond debt   (27,245) (26,160) (31,809)  
0 (1,083) 0 Repayment of subordinated debt   0 (1,083) 0  
(27,245) (27,245) (31,807) NET CASH FLOW FROM FINANCING ACTIVITIES   (27,245) (27,245) (31,807)  
                 
(1,754) (4,096) (1,365) NET CHANGE IN CASH
AND CASH EQUIVALENTS		   (1,757) (4,095) (1,365)  
                 
2,824 6,011 6,252 Cash and cash equivalents as at beginning of period   2,827 6,013 6,254 25
                 
(60) 909 1,124 Effect of exchange rates on cash and cash equivalents   (60) 909 1,124  
1,010 2,824 6,011 CASH AND CASH EQUIVALENTS AT END OF PERIOD   1,010 2,827 6,013 25

 

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

 

82 

 

 

1GENERAL INFORMATION

 

Eksportfinans ASA manages a portfolio of both government supported and market-based export credits.

 

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. In the second half of 2013, Eksportfinans ASA founded Eiendomsselskapet Dronning Mauds gate 15 AS for the sole purpose of owning and managing the office building formerly accounted for directly in Eksportfinans’ balance sheet. Eiendomsselskapet Dronning Mauds gate 15 AS was owned 100 percent by Eksportfinans. In April 2016 Eksportfinans ASA completed the sale of this subsidiary.

 

In these financial statements the terms ‘Eksportfinans ASA’, ‘company’ and ‘Eksportfinans’ are used for the parent company Eksportfinans ASA. The term ‘EDM 15’ is used for the subsidiary Eiendomsselskapet Dronning Mauds gate 15 AS. The term ‘group’ refers to the parent company and the subsidiary as a financial group.

 

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 February 16, 2017.

 

2SUMMARY 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.

 

2.1Basis of preparation

 

These financial statements have been prepared in line with accounting regulations and legislation in Norway. The Norwegian Accounting Act requires the group 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). 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.

 

IFRSs and IFRICs adopted by the company and the group in 2016.

 

There are no standards that have been adopted by the company and the group for the first time for the financial year beginning on or after January 1, 2016 that have a material impact on the group.

 

New and amended standards (IFRSs) and interpretations (IFRICs) issued but not effective for the financial year beginning January 1, 2016, and not early adopted by the company and the group.

 

IFRS 9 “Financial Instruments”
IASB has completed the new standard for financial instruments, IFRS 9 “Financial instruments”. IFRS 9 covers recognition and derecognition, classification and measurement, impairment and hedging and replaces the current requirements covering these areas in IAS 39. The standard is endorsed by the EU and the standard is effective as from annual periods beginning on or after 1 January 2018. Earlier application is permitted. The company does not currently intend to early adopt the standard.

 

The recognition and derecognition regulation is carried forward from IAS 39 without changes relevant for the company.

 

The classification and measurement requirements in IFRS 9 states that financial assets should be classified as, and measured at, amortised cost, fair value through profit and loss or fair value through other comprehensive income. The classification of a financial instrument is dependent on the business model as set by key management personnel and selling volumes for the portfolio where the instrument is included and on whether the cash flows are solely payments of principal and interest (SPPI).

 

While the company has yet to undertake a detailed assessment of the classification and measurement of financial assets, loans currently classified as loans and receivables (loans under the 108 agreement) would appear to satisfy the conditions for classification as at amortized cost and hence there will be no expected change to the accounting for these assets. Loans currently classified at fair value through profit and loss are classified as such because of an accounting mismatch. This fair value option is available in IFRS 9 and hence no change in classification is expected for these assets. Financial derivatives will continue to be measured at fair value through profit and loss after IFRS 9 adoption. The Securities portfolio is currently held at fair value through profit and loss using the fair value option and the company expects to use the fair value option in IFRS 9 for these assets. Accordingly, the company does not expect the new guidance to have a significant impact on the classification and measurement of its financial assets. There will be an impact on the company’s accounting for financial liabilities, as the new requirements affect the accounting for financial liabilities that are designated at fair value through profit or loss and the company has bond debt for which the fair value option is applied. Under IAS 39, the changes in fair value have been recognized in profit and loss. Under IFRS 9, the company expects to continue to use the fair value option, and as a result, the changes in fair value as a result of changes in credit spread will be recognized in OCI.

 

The new hedge accounting rules will align the accounting for hedging instruments more closely with the the company’s risk management practices. As a general rule, more hedge relationships might be eligible for hedge accounting, as the standard introduces a more principles-based approach. The company does currently not apply the hedge accounting rules in IAS 39 and does not currently intend to apply the hedge accounting rules in IFRS 9.

 

83 

 

 

The new impairment model requires the recognition of impairment provisions based on expected credit losses (ECL) rather than only incurred credit losses as is the case under IAS 39. It applies to financial assets classified at amortised cost, debt instruments measured at FVOCI, contract assets under IFRS 15 Revenue from Contracts with Customers, lease receivables, loan commitments and certain financial guarantee contracts. As a result of the guarantees covering the majority of the loans, The company has currently not recorded any impairment provisions. The company does not expect that changing to a ECL model will result in any material changes to the impairment provisions. The new standard also introduces expanded disclosure requirements and changes in presentation. These are expected to change the nature and extent of the company’s disclosures about its financial instruments particularly in the year of the adoption of the new standard.

 

IFRS 15 “Revenue from Contracts with Customers”

The IASB published the new standard, IFRS 15 “Revenue from Contracts with Customers” in 2014. Clarifications to the standard were published in April 2016. The new standard outlines a single comprehensive model of accounting for revenue arising from contracts with customers and supersedes current revenue recognition standards and interpretations within IFRS, such as IAS 18 “Revenue”. The new standard is effective for annual periods beginning on or after 1 January 2018, with earlier application permitted. The standard was endorsed by the EU-commission in 2016 and the clarifications are expected to be endorsed in 2017. The company does not currently intend to early adopt the standard. The standard does not apply to financial instruments, insurance contracts or lease contracts. The company has not finalised the investigation of the impact on the financial statements but the current assessment is that the new standard will not have any significant impact on the financial statements, capital adequacy, or large exposures in the period of initial application.

 

IFRS 16 “Leases”

The IASB has published the new standard, IFRS 16 “Leases”. The new standard changes the accounting requirements for lessees. All leases (except for short term- and small ticket leases) should be accounted for on the balance sheet of the lessee as a right to use the asset and a corresponding liability, and the lease payments should be recognised as amortisation and interest expense. The accounting requirements for lessors are unchanged. Additional disclosures are also required. The new standard is effective for annual periods beginning on or after 1 January 2019 and earlier application is permitted. The amendments are expected to be endorsed by the EU-commission in 2017. The company does not currently intend to early adopt the amendments. The company’s current assessment is that the new standard will change the accounting of the property lease in Dronning Mauds gate 15 which mainly affects The company’s balance sheet.

 

There are no other IFRSs or IFRIC interpretations that are not yet effective that would be expected to have a material impact on the group.

 

2.2Foreign currency translation

 

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

 

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 recorded in the statement of comprehensive income. This is not applied for items related to the Parliamentary Bill No. 108 (1977-78), (referred to as the 108 Agreement), as foreign currency risks are covered by the 108 Agreement. 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). Exchange rate differences on transactions under the 108 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.

 

2.3Recognition 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.

 

2.4Revenue 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’.

 

2.5Financial instruments

 

2.5.1Financial 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.

 

84 

 

 

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 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.

 

2.5.2Measurement

 

2.5.2.1Initial measurement

 

Financial instruments are measured at fair value on the date of recognition, see note 2.3.

 

2.5.2.2Subsequent 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 two exceptions. Firstly, lending, borrowing and liquidity under the government supported 108 Agreement are measured at amortized cost. Secondly, 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.

 

The fair value option is applied when this results in the most relevant information under the options available for measurement of financial instruments and when alternative principles of measurement result in greater accounting mismatches. The most important cause of accounting 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.

 

2.5.3Presentation 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.

 

85 

 

 

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 due from credit institutions.

 

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

Lending, borrowing and liquidity under the 108 Agreement are included in the relevant balance sheet items together with transactions not covered by the 108 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 108 Agreement. Fees are recognized as interest income using the effective interest method when applying amortized cost. The 108 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.

 

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.

 

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, meet the definition of financial derivatives in IAS 39, and 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.

 

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 IAS 39. 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 is recorded in the income statement.

–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 IAS 39.

–Grants denominated in a foreign currency meet the definition of a derivative in accordance with IAS 39. 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.

 

See note 12 for additional information.

 

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 28.1).

 

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.

 

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.

 

86 

 

 

Interest, and the interest effect on economic 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 27.4 for the impact of this economic hedging.

 

Portfolio Hedge Agreement

The Portfolio Hedge Agreement (PHA) meets the definition 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 using the nominal interest

 

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 (apart from transaction costs), as the debt is already measured at fair value.

 

2.6Intangible 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.

 

2.7Property 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 group. Expenses for repairs and maintenance are recognized in the statement of comprehensive income as they occur. Depreciation is recorded 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.

 

2.8Investment property

 

In April 2016 Eksportfinans ASA completed the sale of this subsidiary, see notes 1 and 15.

 

Part of the building owned by the group could be sold separately and was leased out to various tenants. Investment property constituted approximately 38 percent of the property. The cost model was applied for investment property. After initial recognition investment property was thus accounted for in the same way as property classified under property and equipment, and depreciation was recorded on a straight-line basis over the property’s remaining life.

 

Gains and losses on disposals are determined by comparing proceeds with carrying amount and are included in the income statement

 

See notes 6, 10 and 15 for further information related to investment property.

 

2.9Impairment 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.

 

2.10Dividend

 

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. No dividends were paid in the years 2010 to 2016.

 

87 

 

 

2.11Pension 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 pension plans is the present value of the defined benefit obligation at the balance sheet date less the fair value of the plan assets.

 

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 on high quality corporate bonds are used as an estimate for the discount rate, adjusted for differences in the payment structure and the average maturity of the pension liability.

 

Return on plan assets is calculated at the beginning of the period based on the discount rate.

 

Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions of the value of plan assets or of the defined benefit obligation are recognized in the statement of comprehensive income.

 

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.

 

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 8 for further information.

 

2.12Income 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 operating profit 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.

 

88 

 

 

2.13Provisions

 

A provision is a liability of uncertain timing and amount that is recognized when the group 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.

 

2.14Leases

 

Until April 2016, the group acts as lessor in operating lease contracts. After this the company had an operating lease obligation to the buyer of the previously owned property.

 

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.

 

2.15Cash equivalents

 

Cash equivalents are defined as bank deposits with maturity of less than three months from the date of acquisition. Change in 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 24 for further information.

 

2.16Financial 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.

 

3CRITICAL 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 group may be exposed to changes to earnings that could be material.

 

3.1Fair 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 26.2 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 requires actual traded prices to be used if such quotes exist. The rating effect on the company’s significant liabilities overshadowed all other market fluctuation effects for 2011 and the unrealized gain for the year was several times higher than ever recorded for any year before in the history of the company. During the last five years, the credit spreads on the company’s own debt have gradually decreased and a significant part of the unrealized gain in 2011 has been reversed.

 

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.

 

Further information on fair value measurement techniques and assumptions are disclosed in note 4.

 

89 

 

 

4FAIR VALUE OF FINANCIAL INSTRUMENTS

 

4.1Methodology

 

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.

 

A market is considered to be active when the prices are 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.

 

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.

 

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 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.

 

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 market yield curves and credit spreads. 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). Most of Eksportfinans’ non-government guarantors are currently well rated 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.

 

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.

 

For the municipal portfolio 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.

 

For collaboration loans, the credit spreads are based on initial deposit spreads at the time of loan origination. When less than the initial deposit amount is being utilized, the credit spreads of the guaranteed banks are being used for the remaining amount.

 

90 

 

 

The following table shows the unrealized loss of each category of loans by increasing the credit spread by 1 basis point as well as the percentage of total lending portfolio.

 

PARENT COMPANY/GROUP December 31, 2016 December 31, 2015
(NOK million and percentage) Sensitivity (1 bp) Percentage Sensitivity (1 bp) Percentage
Direct loans (0.6) 10% (0.6) 7%
Loans to municipalities (0.5) 11% (0.3) 8%
Collaboration loans -       0% (0.1) 17%
Guaranteed loans (1.5) 79% (2.5) 68%
TOTAL LOANS   100%   100%

  

The spreads applied for fair value measurement of the combined total lending portfolio are in the range from 0 basis points to 111 basis points as of year-end 2016 (from -4 basis points to 152 basis points as of year-end 2015). For the combined total lending portfolio over the past two years credit spreads have changed 4 basis points per month in 95 percent of the time. As of year-end 2016 a spread widening of 4 basis points would give an estimated loss of NOK 10 million. As of the end of 2015 a 95 percent confidence interval was 4 basis points representing NOK 15 million.

 

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 valuation techniques used by Eksportfinans are index based models using publicly available market data as inputs, 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.

 

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. Eksportfinans retrieved prices and credit spread quotes from four different market makers and pricing vendors as of December 31, 2016. Among the four different quote providers, the major price provider (Bloomberg) covered 73 percent (64 percent as of December 31. 2015). 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.

 

Eksportfinans holds two securities originally in the PHA portfolio issued by the defaulted Washington Mutual (now non-existent). These securities were priced using recovery rates retrieved from Bloomberg.

 

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.

 

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 seven 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 Bermudan 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- 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 the Black-Scholes model to evaluate the foreign exchange rates and a Hull-White one factor model to treat the interest rate curves.

 

–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-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-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.

 

–No coupon is paid, but the notional is accreting. For one-currency issues a Hull-White model is used for the two interest rates. For two-currency issues a Black-Scholes model put together with an N-currency model is used.

 

91 

 

 

Structured bond debt (and their corresponding swaps, see section on financial derivatives above) are mostly valued using the company’s valuation system based on different, well known valuation models, such as Black-Scholes and Hull-White, as appropriate for the different types of 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 data systems like Reuters and Bloomberg. All models are calibrated to produce the transaction price at day one and consequently there are no day one profits calculated using Eksportfinans’ methodology. Which model and which structure setup are determined by the redemption structure, the number of FX, equities or indexes constituting the underlying and whether the coupon is accumulated or not as time passes.

 

The market data used is 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 the assessment for reasonableness against values for the same instruments received from the counterparty in the transaction.

 

Changes in credit spread are considered in the valuation of structured bond debt. Historically, the credit spreads applied in the fair value measurement have been derived from current spreads on Eksportfinans’ USD benchmarks quoted by Bloomberg. As fewer benchmarks are outstanding and the trading activity in the benchmark is lower, the Company has decided to use broker quotes from the major provider of such quotes in the Norwegian market. These quotes have been compared to the historical benchmark credit spreads observed on Bloomberg to ensure high correlation with historical trading prices.

 

The following table shows the unrealized gain of each category of bond debt by increasing the credit spread by 1 basis point:

 

PARENT COMPANY/GROUP December 31, 2016 December 31, 2015
(NOK million) Sensitivity (1 bp) Sensitivity (1 bp)
Plain vanilla bond debt                                   2.1                                  5.0
Structured bond debt                                   5.7                                  6.0

 

The spreads applied for fair value measurement of bond debt are in the range from 75 basis points to 125 basis points as of year-end 2016 (from 100 basis points to 175 basis points as of year-end 2015).

 

4.2Fair value hierarchy

 

IFRS 13 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 are classified as level 3.

 

This hierarchy requires the use of observable market data when available. The company considers relevant and observable market prices in its valuations where possible.

 

The assessments of which level each transaction falls into is a dynamic process.

 

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. Demand deposits in Norwegian and foreign bank accounts are classified as level 1. Short term deposits are classified as level 2 due to their contractual periods.

 

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 the 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 inputs 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.

 

92 

 

 

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. Other assets are collateral paid to swap counterparties (as specified in note 26.2) and are classified as level 2.

 

Financial assets measured at fair value through profit or loss:

 

PARENT COMPANY/GROUP                
  December 31, 2016 December 31, 2015
(NOK million) Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total
Loans due from credit institutions 773 1,082 353 2,208 286 5,800 408 6,494
Loans due from customers 0 225 6,259 6,484 0 462 9,602 10,064
Securities 0 8,822 0 8,822 0 24,187 0 24,187
Financial derivatives 0 1,036 768 1,804 0 3,365 928 4,293
Other assets 0 1,660 0 1,660 0 3,277 0 3,277
Total fair value 773 12,825 7,380 20,978 286 37,091 10,938 48,315

 

Non-structured bond debt and 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 21 and are valued using discounting techniques and observable market data and as such are classified as level 2.

 

Financial liabilities measured at fair value through profit or loss:

PARENT COMPANY/GROUP              
  December 31, 2016 December 31, 2015
(NOK million) Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total
Plain Vanilla bond debt 0 0 3,012 3,012 0 0 26,534 26,534
Structured bond debt 0 0 8,273 8,273 0 0 9,322 9,322
Financial derivatives 0 1,577 823 2,400 0 3,401 997 4,398
Other liabilities 0 684 0 684 0 1,895 0 1,895
Total fair value 0 2,261 12,108 14,369 0 5,296 36,853 42,149

 

The movements of level 3 assets and liabilities are shown as follows:

 

Financial assets measured at fair value through profit or loss based on level 3 inputs:

 

PARENT COMPANY/GROUP            
      2016 2015
(NOK million)     Loans and receivables due from credit institutions Loans and receivables due from customers Financial
derivatives		 Total Loans and receivables due from credit institutions Loans and receivables due from customers Financial
derivatives		 Total
Opening balance                408           9,602            928        10,938            384          13,471         1,408        15,263
Total gains or losses *)                 (7)            (109)            (97)           (213)              64            1,236            (45)          1,255
Issues     0 0 0 0 0 0 0 0
Settlements                (48)         (3,233)            (62)        (3,343)            (40)           (5,105)          (435)        (5,580)
Transfers into level 3     0 0 0 0 0 0 0 0
Transfers out of level 3   0 0 0 0 0 0 0 0
Closing balance                353           6,260            769          7,382            408            9,602            928        10,938
Total gains or losses *) for
the period in profit or loss for assets held at the end of the reporting period		     (7) (109) (93) (209) 64 1,236 1 1,301

 

*) Presented under the line item ‘Net gains/(losses) on financial instruments at fair value’ in the statement of comprehensive income.

 

93 

 

 

Financial liabilities measured at fair value through profit or loss based on level 3 inputs:

 

PARENT COMPANY/GROUP              
    2016 2015
(NOK million) Structured bond debt Plain vanilla bond debt Financial derivatives Total Structured bond debt Plain vanilla bond debt Financial derivatives Subordinated debt Total  
Opening balance 9,322 26,534 997 36,853 19,922 0 913 965 21,800  
Total gains or losses 1) 2)  118 (72) (42) 4 (547) 213 659 0 325  
Issues   0 0 0 0 0 0 0 0 0  
Settlements   (1,167) (23,450) (131) (24,748) (10,053) (1,595) (575) (965) (13,188)  
Transfers into level 3 3) 0 0 0 0 0 27,916 0 0 27,916  
Transfers out of level 3 0 0 0 0 0 0 0 0 0  
Closing balance   8,273 3,012 824 12,109 9,322 26,534 997 0 36,853  
Total gains or losses 1) 2) for the period in profit or loss for liabilities held at the end of the reporting period   114 171 (42) 243 (645) 196 705 0 256  

 

1) Presented under the line item ‘Net gains/(losses) on financial instruments at fair value’ in the statement of comprehensive income.

2) For liabilities, positive figures are represented as losses and negative figures are represented as gains.

3) Unstructured bond debt is transferred from level 2 to level 3 in June 30, 2015 due to lack of observable market data.

 

94 

 

 

4.3       Measurement categories

 

The classes of financial instrument fall into the following measurement categories (carrying amounts in NOK million):

PARENT COMPANY                
  2016 2015
FINANCIAL ASSETS FVO1) HFT2) L&R3) TOTAL FVO1) HFT2) L&R3) TOTAL
Loans due from credit institutions 2,208 0 43 2,251 6,493 0 557 7,050
Loans due from customers 6,484 0 10,786 17,270 10,064 0 14,398 24,462
Securities 1,164 7,659 0 8,823 1,895 22,292 0 24,187
Financial derivatives 0 1,804 0 1,804 0 4,293 0 4,293
Other assets 1,660 0 1,126 2,786 3,277 0 1,659 4,620
TOTAL 11,516 9,463 11,955 32,934 21,729 26,585 16,614 64,612
                 
FINANCIAL LIABILITIES FVO1) HFT2) OLB4) TOTAL FVO1) HFT2) OLB4) TOTAL
Plain vanilla bond debt 3,012 0 11,334 14,346 26,534 0 15,318 41,852
Structured bond debt 8,274 0 0 8,274 9,322 0 0 9,322
Financial derivatives 0 2,400 0 2,400 0 4,398 0 4,398
Other liabilities 684 0 251 935 1,893 0 57 1,950
TOTAL 11,970 2,400 11,585 25,955 37,749 4,398 15,375 57,522

 

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

GROUP                
  2016 2015
FINANCIAL ASSETS FVO1) HFT2) L&R3) TOTAL FVO1) HFT2) L&R3) TOTAL
Loans due from credit institutions 2,208 0 43 2,251 6,493 0 560 7,053
Loans due from customers 6,484 0 10,786 17,270 10,064 0 14,398 24,462
Securities 1,164 7,659 0 8,823 1,895 22,292 0 24,187
Financial derivatives 0 1,804 0 1,804 0 4,293 0 4,293
Other assets 1,660 0 1,126 2,786 3,277 0 1,660 4,937
TOTAL 11,516 9,463 11,955 32,934 21,729 26,585 16,618 64,932
                 
FINANCIAL LIABILITIES FVO1) HFT2) OLB4) TOTAL FVO1) HFT2) OLB4) TOTAL
Plain vanilla bond debt 3,012 0 11,334 14,346 26,534 0 15,318 41,852
Structured bond debt 8,274 0 0 8,274 9,322 0 0 9,322
Financial derivatives 0 2,400 0 2,400 0 4,398 0 4,398
Other liabilities 684 0 251 935 1,894 0 58 1,952
TOTAL 11,970 2,400 11,585 25,955 37,750 4,398 15,376 57,524

 

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:

PARENT COMPANY                
    December 31, 2016   December 31, 2015
(NOK million)   Fair value   Carrying value   Fair value   Carrying value
ASSETS                
Loans due from credit institutions   2,203   2,251   7,000   7,050
Loans due from customers   18,688   17,270   26,753   24,462
Securities   8,823   8,823   24,187   24,187
Financial derivatives   1,804   1,804   4,293   4,293
Other assets   2,786   2,786   4,937   4,937
                 
LIABILITIES                
Plain vanilla bond debt   15,439   14,347   43,634   41,852
Structured bond debt   8,273   8,273   9,322   9,322
Financial derivatives   2,400   2,400   4,398   4,398
Other liabilities   937   935   1,956   1,952

 

95 

 

 

GROUP                
    December 31, 2016   December 31, 2015
(NOK million)   Fair value   Carrying value   Fair value   Carrying value
ASSETS                
Loans due from credit institutions   2,203   2,251   7,003   7,053
Loans due from customers   18,688   17,270   26,753   24,462
Securities   8,823   8,823   24,187   24,187
Financial derivatives   1,804   1,804   4,293   4,293
Other assets   2,786   2,786   4,937   4,937
                 
LIABILITIES                
Plain vanilla bond debt   15,439   14,347   43,634   41,852
Structured bond debt   8,273   8,273   9,322   9,322
Financial derivatives   2,400   2,400   4,398   4,398
Other liabilities   937   935   1,956   1,952
Subordinated debt           0   0

 

5NET GAINS/(LOSSES) ON FINANCIAL INSTRUMENTS AT FAIR VALUE

 

Net realized and unrealized gains/(losses) on financial instruments at fair value:

 

PARENT COMPANY/GROUP    
(NOK million) 2016 2015 2014
Securities 1) 2 (63) 14
Financial derivatives (25) (63) (63)
Other financial instruments at fair value (268) 34 (4)
Net realized gains/(losses) (291) (92) (53)
       
Loans due from credit institutions  104 (35) (19)
Loans due from customers (9) (64) 13
Securities 2) 173 (201) 416
Financial derivatives 3)  (834) (765) 2,880
Bond debt 4) (46) 333 (9,313)
Subordinated debt and capital contribution securities 4) 0 32 0
Other financial instruments at fair value 0 0 6
Net unrealized gains/(losses) (612) (700) (6,017)
       
NET REALIZED AND UNREALIZED GAINS/(LOSSES) (903) (792) (6,070)

 

1)Net realized gains/(losses) on securities:

 

PARENT COMPANY/GROUP      
(NOK million) 2016 2015 2014
Securities held for trading                     2 (63) 14
Securities designated as at fair value at initial recognition 0 0 0
TOTAL                     2 (63) 14

 

2)Net unrealized gains/(losses) on securities:

 

PARENT COMPANY/GROUP      
(NOK million) 2016 2015 2014
Securities held for trading               136 (100) 442
Securities designated as at fair value at initial recognition                 37       (101)         (26)
TOTAL               173 (201) 416

3)The Portfolio Hedge Agreement entered into in March 2008, further described in note 12 of this report, is included with a loss of NOK 77 million in 2016 and a gain of NOK 219 million in 2015.

4)In 2016, Eksportfinans had an unrealized loss of NOK 46 million (gain of NOK 365 million in 2015) on its own debt.  

 

See note 28.4 for a presentation of the above tables through the eyes of management.

 

96 

 

 

6LEASES

 

As of December 31, 2016 Eksportfinans leased parts of an office building from Eiendomsselskapet Dronning Mauds gt 15 AS, which was previously owned by the company (see note 15). The future minimum lease payments payable under non-cancelable operating leases in the aggregate and for each of the following periods is shown in the table below:

 

GROUP        
(NOK million)   Dec. 31, 2016   Dec. 31, 2015
Up to and including one year   7.3   0
From 1 year up to and including 3 years   3.6   0
TOTAL PAYABLE   10.9   0

 

7OTHER INCOME

 

PARENT COMPANY     GROUP  
2016 2015 2014 (NOK million) 2016 2015 2014
0 0 0.0 Rental income 2.6 14.5 12.2
0.1 0.4 0.4 Services to subsidiary  0 0 0.0
0.2 (0.8) (0.1) Other income /(expenses) * 0.2 (0.9) 0.1
0.3 (0.4) 0.3 TOTAL 2.8 13.6 12.3

 

*) 2015 amount relates to impairment on equipment.

 

8EMPLOYEE RETIREMENT PLAN

 

Until 2011, Eksportfinans had a defined benefit occupational scheme for all employees in the form of a pension scheme. As of December 31, 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 actuarial calculations are based on the following assumptions: 

PARENT COMPANY/GROUP    
EXPENSES       COMMITMENTS
2016   2015   (Percent)   Dec. 31, 2016   Dec. 31, 2015
2.70   2.30   Discount rate   2.60   2.70
2.50   3.20   Future salary increases   2.50   2.50
2.25   3.00   Future basic amount increase   2.25   2.25
2.25   2.25   Future pension increases   2.25   2.25
K2013BE   K2013BE   Demographic assumption about mortality rate *)   K2013BE   K2013BE

 

*) Statistical assumptions about mortality, as officially calculated in 2013.

 

The pension expenses consist of the following components:

 

PARENT COMPANY/GROUP        
(NOK million)   2016 2015 2014
Current service cost   6 8 9
Interest cost   2 3 2
Curtailment   (4) (5) 0
Social security tax   1 1 1
TOTAL PENSION EXPENSES   5 7 13

 

97 

 

 

The amounts in the balance sheet are determined as follows:

 

PARENT COMPANY/GROUP

(NOK million)   Dec. 31, 2016   Dec. 31, 2015
         
Present value of funded obligations   152   144
Fair value of plan assets   99   99
Underfunded/(funded) status of funded obligations   53   46
         
Present value of unfunded obligations   63   56
Underfunded/(funded) status of all obligations   117   102
         
NET PENSION LIABILITY   117   102
         
Pension liabilities in the balance sheet   117   102
NET PENSION LIABILITY   117   102
Social security tax included   18   13

 

The movement in the defined benefit obligation over the year is as follows:

 

(NOK million)   2016   2015 2014
Beginning of year                      200                      235                164
Current service cost, excluding social security taxes                          6                          8                    9
Interest cost                          5                          5                    6
Actuarial losses/(gains)                        22                       (35)                  61
Social security tax                          1                          1                    1
Benefits paid                         (6)                         (9)                (51)
Curtailments                       (11)   -5 0
OBLIGATION AT AND OF YEAR   215   200 235

 

Curtailments are mainly related to reduction of members in the pension plan.

 

The contributions expected to be paid to the company’s pension schemes in 2017 is NOK 4 million.

 

The movement in the fair value of plan assets of the year is as follows:

 

PARENT COMPANY/GROUP  
(NOK million)   2016   2015 2014
Beginning of year                        99             99             88
Interest income                          3               2               3
Actuarial gains/(losses)                          2             (1)               5
Curtailment                         (7)   1 0
Employer contributions                          6               6               6
Benefits paid                         (4)             (8)             (4)
ASSETS AT END OF YEAR   99   99 99

 

A quantitative sensitivity analysis for significant assumptions as at December 31, 2016 is as shown below:

 

PARENT COMPANY/GROUP            
      Future salary Future pension cost
Assumptions Discount rate increases increase
  1 % 1 % 1 % 1 % 1 % 1 %
Sensitivity level increase decrease increase decrease increase decrease
Impact on the net defined benefit obligation (37) 49 17 (15) 36 (30)
Estimated change net pension cost 2016 (2) 3 2 (1) 2 (2)
Estimated change service cost 2016 (1) 2 1 (1) 1 (1)

 

98 

 

 

Plan assets are invested as follows (according to regulatory guidelines established for life insurance companies):

 

(Percent)   Dec. 31, 2016   Dec. 31, 2015
Equity securities   7   11
Debt securities   74   72
Property   7   14
Other assets   12   3
TOTAL PLAN ASSETS   100   100
         
(Percent)   2016   2015
Actual return on plan assets   3.2   1.9

 

*Figures as per September 30, 2016, due to lack of figures from life insurance company.

 

Historical development of the pension liabilities: 

PARENT COMPANY/GROUP
  December 31,
(NOK million) 2016   2015   2014   2013   2012
                   
Present value of defined benefit obligations 216   200   235   164   164
Fair value of plan assets 99   99   99   88   82
Pension plan deficit/(surplus) 117   102   137   75   82
                   
NET RECORDED PENSION LIABILITY/(ASSET) 117   102   137   75   82
                   
Actuarial losses/(gains) for the year related to obligations            22             (35)                61                4            (38)
Actuarial gains/(losses) for the year related to assets              2               (1)                  4                3   0

 

99 

 

 

9SALARIES AND OTHER ADMINISTRATIVE EXPENSES

 

PARENT COMPANY     GROUP  
2016 2015 2014 (NOK million) 2016 2015 2014
58 76 85 Salaries, pension expenses and social security 58 76 85
0 9 0 Salaries, restructuring provisions 0 9 0
32 31 69 Administrative expenses 32 31 69
90 115 154 TOTAL 90 115 154

 

10OTHER EXPENSES

 

PARENT COMPANY     GROUP  
2016 2015 2014 (NOK million) 2016 2015 2014
2 2 3 Building service 3 5 6
0 1 0 Career support, restructuring provisions 0 1 0
10 13 12 Other expenses 8 5 4
12 16 15 TOTAL 11 11 10

 

11INCOME TAXES

 

Taxes payable:

 

2016   2015 2014 (NOK million)   2015 2015 2014
                 
(668)   (554) (5,784) Pre-tax operating profit/(loss)   (508) (548) (5,779)
(18)       Pre-tax other comprehensive income   (18)    
(81)   1  1  Permanent differences   (241) 1  1 
834    845  7,165  Change in temporary differences   833  847  7,163 
67    292  1,381  Taxable income   66  300  1,384 
                 
17    79  373  Current taxes   17  81  374 
9    (11) (26) Change in last year’s tax provision   9  (12) 39 
5    (4) 15  Other current tax adjustments   5  (4) 15 
(208)   (235) (1,935) Change in deferred taxes   (208) (237) (1,934)
(177)   (171) (1,573) Total income taxes in income statement   (177) (172) (1,506)
                 
17    79  373  Current taxes   17  81  374 
0    (1) (1) Withholding tax already paid   0  (1) (1)
0    (4) 0  Current tax receivable 2014 assessment   0  (4) (1)
17    74  373  Taxes payable in balance sheet   17  76  372 

 

Deferred tax liability / deferred tax assets:  

PARENT COMPANY     GROUP  
2016 2015 2014 (NOK million) 2016 2015 2014
             
       (25) 202 2,163 Deferred tax/(deferred tax assets) beginning of year 1 230 2,142
0            - (26) Deferred tax/(deferred tax assets) beginning of year adjustment 0 0 39
             
         -             1             1 Excess book value over tax depreciation      (102)          (2)               1
         95       (100)           (3) Accounts receivables          95        (99)             (3)
     (929) (945) 1,588 Mark-to-market adjustments financial instruments      (929)      (945)        1,588
       (15)           35         (61) Employee retirement plan        (15)          35           (61)
       (47)         365    (9,313) Debt at fair value        (47)        365      (9,313)
0 0 208 Deficit that can be carried forward 0           - 210
       172 (201) 416 Securities        172 (201) 416
     (110)     Other liabilities      (110)    
     (834)       (845)    (7,165) Change in tax-increasing temporary differences      (936)      (847)      (7,163)
             
     (233) (25) 202 Deferred tax/(deferred tax assets) end of year (233) 1 230

 

100 

 

 

Temporary differences:

 

PARENT COMPANY       GROUP
Dec. 31, 2016 Dec. 31, 2015 Dec. 31, 2014 (NOK million)   Dec. 31, 2016 Dec. 31, 2015 Dec. 31, 2014
               
(1) (1) (1) Excess book value over tax depreciation   (1) 101  102 
(4) (99) 0  Accounts receivables   (4) (99) 0 
(926) 3  948  Mark-to-market adjustments financial instruments   (926) 3  948 
(117) (102) (137) Employee retirement plan   (117) (102) (137)
894  941  576  Debt at fair value   894  941  576 
(669) (840) (640) Securities   (669) (840) 670 
(110)     Other liabilities   (110)    
(932) (98) 747  Total tax-increasing temporary differences (932) 4  850 
               
(233) (25) 202  Tax on temporary differences   (233) 1  229 
25.0% 25.0% 27.0% Applied tax rate on deferred tax   25.0% 25.0% 27.0%

 

Reconciliation of income taxes:

 

PARENT COMPANY   GROUP
2016 2015 2014 (NOK million) 2016 2015 2014
             
(668) (554) (5,784) Pre-tax operating profit/(loss)
from continuing operations		 (508) (547) (5,779)
(18)     Pre-tax other comprehensive income (18)    
(172) (149) (1,561) Tax calculated at a 27 % nominal tax rate (132) (148) (1,560)
             
      Tax effect of:      
0 2 0 - Change in tax rate for deferred taxes to 25 % 0  (1) 0 
(20) 0 0 - Permanent differences (60)   0 
5 (8) 15 - Actuarial losses according to IAS19 5  (8) 15 
10 (16) (26) - Change in tax prior year 10  (15) 39 
(5) (22) (11) Total tax effects (45) (24) 54 
             
(177) (171) (1,573) Taxes / (tax income) in the income statement (177) (172) (1,506)
             
26.4 % 30.9 % 27.2 % Effective tax rate of taxes in the income statement 34.7 % 31.4 % 26.1 %
-0.7 % -3.9 % -0.2 % Tax effect from reconciliation items above -9.0 % -4.4 % 0.9 %
25.6 % 27.0 % 27.0 % Tax rate after reconciliation 25.8 % 27.0 % 27.0 %
             
25.0 % 27.0 % 27.0 % Applicable tax rate 25.0 % 27.0 % 27.0 %
0.6 % 0.0 % 0.0 % Difference 0.8 % 0.0 % 0.0 %
             
25% 27% 27% Applied tax rate 25% 27% 27%

 

12FINANCIAL 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 the majority of the derivative counterparties Eksportfinans has entered into credit support annexes (CSAs) represented as annexes in the ISDA agreements. These CSAs enable Eksportfinans to call for collateral if the derivative exposure exceeds set limits. 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.

 

101 

 

 

Eksportfinans has active CSA agreements with 26 different counterparties as of December 31, 2016. As of December 31, 2016, 92 percent of the CSA’s have daily collateral exchange, which is about the same as of December 31, 2015. Eksportfinans accepts only cash as collateral. As of December 31, 2016, 99 percent of derivative exposures in terms of number of transactions and volume are covered under CSA agreements, which is the same as December 31, 2015.

 

The following overview of financial derivatives shows the nominal gross amounts and the fair value of the agreements involved:

 

PARENT COMPANY/GROUP Dec. 31, 2016 Dec. 31, 2015
(NOK million) Notional Fair value Notional Fair value
Interest rate derivatives                    29,512                           88                    61,705                         455
Currency rate derivatives                      9,611                         275                    24,619                         464
Interest and currency rate derivatives                    11,801                         (93)                    29,913                       (293)
Equity derivatives                         599                           33                         684                           67
Portfolio  Hedge Agreement                      1,500                       (897)                      5,000                       (819)
108 derivatives                    10,778                            -                    13,575                           (6)
Other financial derivatives                         296                           (2)                         327                           27
TOTAL                    64,097                       (596)                  135,823                       (105)
         
Financial derivatives assets                        1,804                        4,293
Financial derivatives liabilities                        2,400                        4,398
NET DERIVATIVES                         (596)                         (105)

 

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.

 

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 exchange 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 exchange 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):

■In March 2008 the company entered into an agreement with a majority of the shareholders. The shareholders guaranteed against any 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). From March 1. 2016 the guarantee was redused to NOK 1.5 billion. The company pays a monthly fee of NOK 1.5 million for the guarantee.
■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. As per December 31, 2016, Eksportfinans owe NOK 845 million to the guarantors. 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.

 

102 

 

 

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.

 

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 27.4.

13LOANS DUE FROM CREDIT INSTITUTIONS AND CUSTOMERS

 

Loans due from credit institutions:

 

GROUP    
(NOK million) Dec. 31, 2016 Dec. 31, 2015
Cash equivalents 1) 1,010 2,828
Other bank deposits and claims on banks                      -                   264
Loans to other credit institutions, nominal amount 2) 1,281 4,110
Accrued interest on loans and unamortised premium/discount on purchased loans                    (13)                    (17)
Adjustment to fair value on loans                    (27)                  (132)
TOTAL   2,251 7,053

  

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:

 

GROUP    
(NOK million) Dec. 31, 2016 Dec. 31, 2015
 Loans due from customers, nominal amount   17,008 24,105
Accrued interest on loans and unamortised premium/discount on purchased loans 239 325
 Adjustment to fair value on loans  23 32
 TOTAL  17,270 24,462

 

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.

 

GROUP    
(NOK million) Dec. 31, 2016 Dec. 31, 2015
Loans due from other credit institutions 1,281 4,110
Loans due from customers 17,008 24,105
TOTAL NOMINAL AMOUNT 18,289 28,215

 

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.

 

103 

 

 

Loans by categories:

 

GROUP    
(NOK million) Dec. 31, 2016 Dec. 31, 2016 
 Commercial loans 1,281 14,066
 Government-supported loans 17,008 14,149
 TOTAL NOMINAL AMOUNT 18,289 28,215
     
 Ships 9,114 12,872
 Capital goods 6,033 8,146
 Export-related and international activities  *) 1,581 5,402
 Direct loans to Norwegian local government sector 849 1,074
 Municipal-related loans to other credit institutions 700 700
 Loans to employees 12 21
 TOTAL NOMINAL AMOUNT 18,289 28,215
     
 Amount included that is
expected to be settled after more than twelve months 		13,065 18,896

 

*)    Export-related and international activities consist of loans to the following categories of borrowers:

 

GROUP    
(NOK million) Dec. 31, 2016 Dec. 31, 2015
Shipping 1,405 2,476
Infrastructure 0 790
Banking and finance 0 747
Real estate management 70 679
Oil and gas 106 309
Consumer goods 0 300
Environment 0 101
Renewable energy 0 0
TOTAL NOMINAL AMOUNT 1,581 5,402

 

14INTANGIBLE ASSETS

 

The company’s intangible assets consist mainly of software systems. 

PARENT COMPANY / GROUP    
(NOK million)   Intangible
assets
     
Book value at January 1, 2016   2
Depreciation during the year   1
Book value at December 31, 2016   1
     
Cost at December 31, 2016   67
Total accumulated depreciation at December 31, 2016   66
Book value at December 31, 2016   1
     
Book value at January 1, 2015   4
Depreciation during the year   1
Book value at December 31, 2015   2
     
Cost at December 31, 2015   87
Total accumulated depreciation at December 31, 2015   84
Book value at December 31, 2015   2
     
Useful life   3-7 years
Depreciation rates   14-33 %

 

Depreciation of intangible assets is included in the line item ‘Depreciation’ in the statement of comprehensive income.

 

104 

 

 

15PROPERTY, EQUIPMENT AND INVESTMENT PROPERTY

PARENT COMPANY   GROUP
Equipment Total (NOK million) Equipment   Buildings
and land at
own use		   Investment property *   Total
4 4 Book value at January 1, 2016 6   130   72   208
0 0 Additions during the year 0   0   0   0
0 0 Disposals during the year 2   128   71   201
1 1 Depreciation during the year 1   2   1   4
3 3 Book value at December 31, 2016 3   0   0   3
                   
22 22 Cost at December 31, 2016 22   0   0   22
19 19 Total accumulated depreciation at December 31, 2016 19   0   0   19
3 3 Book value at December 31, 2016 3   0   0   3
                   
7 7 Book value at January 1, 2015 8   134   75   217
1 1 Additions during the year 1   3   2   6
2 2 Disposals during the year 1   0   0   1
2 2 Depreciation during the year 2   7   5   14
4 4 Book value at December 31, 2015 6   130   72   208
                   
97 97 Cost at December 31, 2015 98   185   106   389
92 92 Total accumulated depreciation at December 31, 2015 92   55   34   181
4 4 Book value at December 31, 2015 6   130   72   208
                   
3-7 years   Useful life 3-7 years   4-67 years   4-67 years    
14-33 %   Depreciation rates 14-33 %   1.5-25 %   1.5-25 %    

 

*) The property and investment property is held for sale as per 31.12.2015 and valued at historical cost.

 

Through its wholly owned subsidiary Eiendomsselskapet Dronning Mauds gate 15 AS (EDM 15), Eksportfinans owned 68.3% of an office building in Dronning Mauds gate 15, gnr. 209, bnr. 430 in Oslo. The sections owned by EDM 15 are leased to five tenants, including Eksportfinans ASA. In April 2016 EDM 15 AS was sold. The lease agreement between EDM 15 and Eksportfinans ASA is still in affect after the sale.

 

Income and expenses related to the investment property are specified in note 7 and 10 respectively.

 

Disposal of Eiendomsselskapet Dronning Mauds gt 15 AS: 

GROUP (NOK Million)
   
Consideration received from sale of Company 422
Less: Carrying amount of net assets disposed of 179
Less: Direct expenses in relation to the disposal 3
Net gain from sale of group companies 240
   
The assets and liabilities of Dronning Mauds gt 15 AS at the date of the disposal were as follows:  
Property, plant and equipment 199
Other Assets 11
Deferred tax liabilities -25
Other liabilities -6
Net assets disposed 179

 

16OTHER ASSETS

 

PARENT COMPANY   GROUP
Dec. 31,2016 Dec. 31,2015 (NOK million) Dec. 31,2016 Dec. 31,2015
397 268 Settlement account 108 Agreement 397 268
1,660 3,277 Cash collateral 1,660 3,277
647 1,321 Collateral deposit * 647 1,321
82 70 Other 82 71
2,786 4,936 TOTAL 2,786 4,937

 

*The Collateral deposit relates to a USD 75 million deposit of collateral for the benefit of Citibank N.A. to cover Eksportfinans’ day to day settlement activity. This amount can be adjusted up or down depending on settlement activity of Eksportfinans. Citibank is entitled to at any time without prior notice to Eksportfinans to set-off or transfer all or part of the Deposit in or towards satisfaction of all or any part of the secured obligations.

 

105 

 

 

17BORROWINGS THROUGH THE ISSUE OF SECURITIES

 

In its outstanding debt portfolio the company has public benchmark bonds (primarily in USD) as well as smaller medium term notes / private placements. Public benchmark bonds are designed to manage the company’s liquidity position in terms of size and maturity. Medium term notes / private placements 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. See note 4 for a description of the bond structures.

 

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.

 

Commercial paper can be used for bridge financing as and when required.

 

Outstanding amounts and interest rates related to bond debt and commercial paper debt:

 

PARENT COMPANY/GROUP    
(NOK million) 2016 2015
Amount outstanding at year-end 22,620 51,174
Maximum amount outstanding 51,019 70,868
Average amount outstanding 34,090 60,570
Average interest rate 2.46% 3.48%

 

Structure composition of bond debt and commercial paper debt:

 

PARENT COMPANY / GROUP    
(NOK million) 2016 2015
Plain vanilla 14,782 42,670
Equity linked 330 384
Foreign exchange linked 3,868 4,382
Commodity linked 0 0
Other structures 3,640 3,739
TOTAL 22,620 51,174

 

18LOANS 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, no loans were provided as of December 31, 2016 and as of December 31, 2015.

 

Bank deposits are not defined as loans. These loans are granted as loans at ordinary terms to customers.

 

19PROVISIONS

 

PARENT COMPANY / GROUP    
(NOK million) Dec. 31,2016 Dec. 31,2015
Pensions 117 101
Restructuring provisions * 1 10
Salaries and social security 16 21
TOTAL 134 132

 

* Restructuring provisions are for voluntary severance packages to 11 employees with final payments in the first half of 2017.

 

20INTRAGROUP ACCOUNTS

  

As of April 2016, Eksportfinans completed the sale of its subsidiary Eiendomsselskapet Dronning Mauds gate 15 AS, and there are then no intragroup accounts as per 31.12.2016. Please see note 15. 

Operating income received from companies that were subsidiaries during the year, are included in the  statement of comprehensive income for the parent company, under the following line items:

 

(NOK million) 2016 2015
Other income 0 0
Other expenses 2 8
TOTAL                     (2)                    (8)

 

106 

 

 

Transactions with companies that were subsidiaries at the end of the year, are included in the following line items in the balance sheet of the parent company: 

(NOK million) Dec 31,2016 Dec 31,2015
Intragroup receivables due from Eiendomsselskapet DM15 0 0
Outstanding liabilities related to leases 0 0
TOTAL 0 0

 

21OTHER LIABILITIES

 

PARENT COMPANY   GROUP
Dec. 31,2016 Dec. 31,2015 (NOK million) Dec. 31,2016 Dec. 31,2015
20 38  Grants to mixed credits 20 38
684 1,889  Cash collateral 684 1,889
231 23  Other short-term liabilities 231 25
935 1,950  TOTAL 935 1,952

 

22SUBORDINATED DEBT

 

PARENT COMPANY/ GROUP      
(NOK million) Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
JPY 15 billion, 4.80 %, due 2015 0 0 965
TOTAL 0 0 965

 

The conditions comply with the requirements of The Financial Supervisory Authority of Norway (the NFSA) for additional capital. The loan was repaid on December 18, 2015 according to schedule.

 

23SHAREHOLDERS

 

At the end of 2015, 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, 2016 December 31, 2015
  Number
of shares		 Ownership
percentage		 Number
of shares		 Ownership
percentage
DNB Bank 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, Industry and Fisheries 39,587 15.00            39,587 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 Sør 4,026 1.52              4,026 1.52
Sparebanken Møre 3,551 1.35              3,551 1.35
Sparebanken 1 Hedmark 3,499 1.33              3,499 1.33
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 (Midt-Norge) 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 AB 563 0.21                 563 0.21
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 SA                   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              100.0 263,914                 100

 

There exists only one class of shares. One share represents one vote. There exists no regulatory or other restriction on any shareholder to exercise their voting rights.

 

107 

 

 

A shareholder agreement exists between the major (that is those with an ownership percentage of over 20 percent) 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.

 

24CAPITAL 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.

 

Capital adequacy is calculated in accordance with the CRD IV regulations in force from the Financial Supervisory Authority of Norway. These regulations were implemented as of September 30, 2014. The company has adopted the standardized approach to capital requirements. The CRD IV regulations decreases the company’s capital ratio, due to changed risk weights on financial institutions, affecting mainly Eksportfinans’ bank guaranteed loans and securities, as well as the CVA (Credit Valuation Adjustment) charge on financial derivatives.

 

Capital adequacy is currently above the internally set risk capital level. Through the ICAAP-process, the board has decided that the company should aim for a risk capital level of about NOK 5.2 billion, including NOK 2.0 billion to cover large exposure regulations, future economic downturns and possible future capital regulations. Dividends are determined with the aim to ensure an adequate level of capital for Eksportfinans as well as a satisfactory return for the shareholders.

 

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

 

Risk capital:        
         
(NOK million and as percentage of risk-weighted assets and off-balance sheet items)    
         
PARENT COMPANY Dec. 31, 2016 Dec. 31, 2015
Share capital 2,771   2,771  
Reserve for unrealized gains 81   404  
Other equity 4,213   4,394  
Total equity 7,065   7,569  
Deductions 620   1,225  
Total core capital 6,445   6,344 37.7 %
         
Additional capital 0 0.0 % 0 0.0 %
         
Total risk capital 6,445 61.0 % 6,344 37.7 %

 

Risk-weighted balance sheet and off-balance sheet items:      
 
PARENT COMPANY Dec. 31, 2016 Dec. 31, 2015
(NOK million) Book value Weighted value Book value Weighted value
Loans due from credit institutions 2,251 670 7,050 2,613
Loans due from customers 17,270 4,135 24,462 5,704
Securities 8,822 1,422 24,187 2,276
  of which held for trading 4,423 127 22,292 1,761
Financial derivatives 1,804 1,284 4,293 2,072
Other assets 3,024 948 5,305 700
Total assets on balance sheet 33,171 8,459 65,297 13,365
         
Off-balance sheet items   51   53
Operational risk   588   1,150
Foreign currency exchange risk   0   704
CVA   1,463   1,558
TOTAL RISK-WEIGHTED VALUE   10,561   16,830

 

108 

 

 

Risk capital:        
         
(NOK million and as percentage of risk-weighted assets and off-balance sheet items)      
         
GROUP Dec. 31, 2016   Dec. 31, 2015  
Share capital 2,771   2,771  
Reserve for unrealized gains 81   566  
Other equity 4,213   4,072  
Total equity 7,065   7,409  
Deductions 620   1,225  
Total core capital 6,445   6,184 36.5 %
         
Additional capital 0 0.0 % 0 0.0 %
         
Total risk capital 6,445 61.0 % 6,184 36.5 %

 

Risk-weighted balance sheet and off-balance sheet items:      
 
GROUP Dec. 31, 2016 Dec. 31, 2015
(NOK million) Book value Weighted value Book value Weighted value
Loans due from credit institutions 2,251 670 7,053 2,613
Loans due from customers 17,270 4,135 24,462 5,704
Securities 8,822 1,422 24,187 2,276
 of which held for trading 4,423 127 22,292 1,761
Financial derivatives 1,804 1,284 4,293 2,072
Other assets 3,024 948 5,147 903
Total assets on balance sheet 33,171 8,459 65,142 13,568
         
Off-balance sheet items   51   53
Operational risk   588   1,079
Foreign currency exchange risk   0   704
CVA   1,463   1,558
TOTAL RISK-WEIGHTED VALUE   10,561   16,962

 

25CASH 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:

 

PARENT COMPANY     GROUP
Dec. 31, 2016 Dec. 31, 2015 (NOK million)   Dec. 31, 2016 Dec. 31, 2015
701 715 Balances with Norwegian banks   701 718
72 56 Balances with foreign banks   72 56
237 2,053 Bank deposits with maturity less than three months   237 2,053
1,010 2,824 TOTAL CASH AND CASH EQUIVALENTS   1,010 2,827

 

The amounts are included in the balance sheet line item ‘Loans due from credit institutions’.

 

26FINANCIAL RISK MANAGEMENT

 

After the Government’s announcement, in November 2011, to assume responsibility for the state-supported export financing scheme, Eksportfinans will manage its considerable portfolio of outstanding loans until maturity and does not currently anticipate engaging in new lending or funding activities. A new state-owned and state-funded entity granting new loans was set up on 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.

 

109 

 

 

Organization

The Director of Risk Management reports directly to the company’s CEO. Risk Management has responsibility for conducting company-wide compliance with risk management policies, procedures and guidelines such as counterparty credit quality and risk limits, 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 which reports directly to the CFO and is 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 five risk committees.

 

Committees overseeing risk:

 

■The Group of Managing Directors

■The Credit Committee

■The Asset and Liability Committee

■The Product Approval Committee

■The Investment Committee
110 

 

 

27CREDIT RISK

 

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 (Fitch Ratings, 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 any of the three 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:

 

PARENT COMPANY/GROUP    
(Percent) Dec. 31, 2016 Dec. 31, 2015
     
Government guarantees 42.2 38.1
Loans to and guarantees from Norwegian local authorities 1.2 1.4
Public sector borrowers/guarantors 43.4 35.4
Guarantees from Norwegian banks 42.3 45.2
Loans to Norwegian banks 3.8 3.9
Guarantees from foreign banks 10.5 11.4
TOTAL               100.0               100.0
     
Total nominal amount in NOK million (from note 13) 18,289 28,215

 

All guarantees obtained from banks to support Eksportfinans’ loans are unconditional and irrevocable, whereas government guarantees from the Norwegian Guarantee Institute for Export Credits (GIEK) are given subject to certain conditions and limitations.

 

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

 

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 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 have been done with financial institutions with high credit ratings.

 

27.1Credit 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.

 

27.2Risk 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 35. 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. In some of the CSA agreements, the posted collateral will differ from the derivate exposures due to threshold or independent amount. The CSA agreements 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.

 

111 

 

 

The following table shows posted and received collateral from these agreements:

 

(NOK million) Dec. 31, 2016 Dec. 31, 2015
Posted 1,660 3,277
Received (684) (1,889)
NET AMOUNT 976 1,388

 

27.3Credit risk exposure for derivatives per counterparty

 

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 294 million in 2016 and NOK 363 million in 2015 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: 

 

PARENT COMPANY/GROUP    
(NOK million) 2016 2015
Date of max net exposure Jul 31th Mar 31th
MTM of derivatives 295 992
Posted(-) / Received(+) collateral 1 629
Net exposure 294 363
Max 10d VaR at 95% confidence level 218 644

 

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 is approximately NOK 218 million at year-end 2016.

 

27.4Loans past due or impaired

 

Due from credit institutions:    
PARENT COMPANY / GROUP    
(NOK million) Dec. 31, 2016 Dec. 31, 2015
     
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 *) 0 108
Not matured principal on loans with payments    
more than 90 days past due 0 0
     
TOTAL LOANS THAT ARE PAST DUE 0 108
     
Relevant collateral or guarantees received 0 0
Fair value adjustment on loans past due 0 79
Impairments on loans measured at amortized cost 0 0

 

*) NOK 108 million as of December 31, 2015 relates to direct exposure towards Icelandic banks, and were 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 29 million as of December 31, 2015. 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 77 million, the Norwegian Government, through the Guarantee Institute for Export Credit (GIEK), guarantees approximately 90 percent of the amounts in default. The remaining 10 percent are guaranteed by private banks, most of them operating in Norway. Claims have already been submitted in accordance with the guarantees.

 

112 

 

 

Due from customers:

 

PARENT COMPANY / GROUP    
(NOK million) Dec. 31, 2016 Dec. 31, 2015
     
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 30 87
Not matured principal on loans with payments    
more than 90 days past due 47 322
     
TOTAL LOANS THAT ARE PAST DUE 77 409
     
Relevant collateral or guarantees received 77 409
Fair value adjustment on loans past due 0 0

 

113 

 

 

27.5Credit 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 (securities and repurchase receivable in the balance sheet):

 

  December 31, 2016
(NOK thousands) Treasury bills or
equivalent		 Trading
securities *		 Other
securities		 Total
amount		 Total in %
AAA 0          3,837 0          3,837 43%
AA+ to AA- 0          1,989 0          1,989 23%
A+ to A- 0             615             851          1,466 17%
Lower than A- 0          1,218             182          1,399 16%
No international rating 0 0             131             131 1%
TOTAL 0          7,659          1,164          8,823 100%
           
  December 31, 2015
(NOK thousands) Treasury bills or
equivalent		 Trading
securities *		 Other
securities		 Total
amount		 Total in %
AAA 0 8,983 0 8,983 37%
AA+ to AA- 0 2,912 0 2,912 12%
A+ to A- 0 7,507 864 8,371 35%
Lower than A- 0 2,037 906 2,943 12%
No international rating 0 853 125 977 4%
TOTAL 0 22,292 1,895 24,187 100%

 

*) 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. 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.

 

Securities that are expected to be settled after more than twelve months from the balance sheet date amount to NOK 2,807 million as of December 31, 2016 (NOK 4,901 million as of December 31, 2015).

 

114 

 

 

Credit quality of loans

 

   December 31, 2016
  Export lending Municipal lending Other1) Total Total
(NOK millions) Exposure Exposure Exposure amount in %
AAA 7,462 221 0 7,684 39%
AA+ to AA- 1,495 639 1 2,134 11%
A+ to A- 7,809 556 1,012 9,378 48%
Lower than A- 2) 162 0 0 162 1%
No international rating 3) 0 152 12 164 1%
TOTAL 16,929 1,568 1,025 19,521 100%

 

1) Includes depo and employee loans.

 

2) Consist of NOK 111 HSH Nordbank (BBB-) exposure, NOK 49 Danmarks skibskreditt (BBB) NOK 1 Bank of India (BBB-), NOK 0,9 Unicredit (BBB

 

3) NOK 152 with "No international rating" is exposure to Sparebanken Telemark

 

   December 31, 2015
  Export lending Municipal lending Other1) Total Total
(NOK millions) Exposure Exposure Exposure amount in %
AAA 10,378 413 0 10,791 34%
AA+ to AA- 1,908 686 39 2,634 8%
A+ to A- 14,355 563 2,788 17,706 56%
Lower than A- 2) 210 0 0 210 1%
No international rating 3) 0 153 21 174 1%
TOTAL 26,851 1,815 2,849 31,515 100%

1) Includes depo and employee loans.

 

2) Consist of NOK 142 HSH Nordbank (BBB-) exposure, NOK 60 Danmarks skibskreditt (BBB) NOK 3 Unicredit (BBB), NOK 2 Belfius Bank (BBB+) NOK 1 Bank of India (BBB-)

 

3) NOK 153 with "No international rating" is exposure to Sparebanken Telemark (with shadowrating BBB+)

 

Credit quality of loans, based on credit rating of the guarantors:

 

27.6Concentration of credit risk

 

Credit risk concentration may arise from trading, investing and financing activities, and may be affected by economic, 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.

 

115 

 

 

27.7Effects 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:

 

PARENT COMPANY/GROUP    
(NOK million) Dec. 31, 2016 Dec. 31, 2015
Maximum exposure to credit risk of loans and receivables 8,693 16,557
Change during the period in fair value of loans and receivables    
attributable to changes in credit spread 44 (146)
     
Accumulated change in fair value of loans and receivables attributable    
to changes in credit spread 0 (44)

 

Financial liabilities as at fair value through profit and loss:

 

PARENT COMPANY/GROUP    
(NOK million) Dec. 31, 2016 Dec. 31, 2015
Amount contractually required to pay at maturity 12,725 39,119
Accrued interest (18) 4
Adjustments to fair value 1,663 3,025
Carrying amount of the financial liabilities at fair value 14,370 42,148
Change during the period in fair value of financial liabilities attributable    
to changes in credit spread 825 676
     
Accumulated change in fair value of financial liabilities attributable to    
changes in credit spread (804) (1,630)

  

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.

 

28MARKET 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.

 

28.1Market 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 price value of a basis point 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.

 

28.2Foreign 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.

 

116 

 

 

The tables below set forth a summary of Eksportfinans’ total exposure to currencies other than NOK:

 

PARENT COMPANY/GROUP        
        Amount of net
  Balance sheet     position covered by
(NOK million) assets/(liabilities) Derivatives Net position *) 108 Agreement items
December 31, 2016        
CAD (28) 28 0 0
JPY (5,877) 5,877 0 0
SEK (134) 134 0 0
EUR 2,943 (2,941) 2 0
DKK 996 (996) 0 0
USD 630 (615) 15 9
Other currencies (4,723) 4,722 (2) 3
TOTAL (6,193) 6,209 16 12

 

PARENT COMPANY/GROUP        
        Amount of net
  Balance sheet     position covered by
(NOK million) assets/(liabilities) Derivatives Net position *) 108 Agreement items
December 31, 2015        
CAD (1) 2 1 1
JPY (7,969) 7,970 1 0
SEK (209) 210 0 0
EUR 5,878 (5,833) 45 46
DKK 1,721 (1,721) (0) 0
USD (9,667) 10,312 645 646
Other currencies (9,006) 9,007 1 5
TOTAL (19,254) 19,946 692 698

 

* 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. The below tables show currency exposure through 2015 and 2016, including peaks, and excluding the exposure from subsidized lending and for liabilities in contracts covering leases and maintenance. These exposures constitute what we define as our currency exposure, and as described do not equal the above tables for total currency positions.

 

Currency exposure:

 

      Other  
(NOK million) EUR USD currencies Total
As of December 31, 2016 2.22 6.11 0.27 8.60
         
Maximum through 2016 * 9.07 7.44 1.53 18.04
Minimum through 2016 * (93.55) (5.86) 0.24 (99.18)
Average through 2016 (6.17) 0.61 0.51 (5.05)

 

As of December 31, 2015 (0.73) (1.22) 1.11 (0.84)
         
Maximum through 2015 * 2.70 2.77 4.64 10.11
Minimum through 2015 * (59.12) (4.72) 1.11 (62.73)
Average through 2015 (3.86) (1.38) 2.74 (2.49)
         
As of December 31, 2014 2.91 (3.04) 3.10 2.97

  

* 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.

 

117 

 

 

The profit and loss effect on Eksportfinans’ balance sheet as of December 31, 2016 due to an adverse change of 10 percent in foreign currency exchange rates is estimated to be NOK 0.9 million compared to NOK 0.3 million as of December 31, 2015. Annualized fluctuation in EURNOK and USDNOK based on 95 percent confidence interval of daily changes through 2016 are 12.6 percent and 18.6 percent respectively, compared to 18.6 percent and 23.4 percent through 2015.

 

28.3Interest 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, 2016 is negative NOK 74,000. 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.

 

Interest rate exposure from a 1 basis point shift of interest rate curves:

 

        Other  
(NOK million) NOK EUR USD currencies Total
As of December 31, 2016 2 (28) (48) 0 (74)
           
Maximum through 2016 *) 13 3 72 1 51
Minimum through 2016 *) (46) (50) (48) (26) (74)
Average through 2016 (13) (16) 15 (2) (16)
           
As of December 31, 2015 (48) (16) 36 (1) (28)
           
Maximum through 2015 *) 48 63 109 2 167
Minimum through 2015 *) (95) (19) (91) (1) (96)
Average through 2015 (13) 15 9 0 11
           
As of December 31, 2014 (37) (5) 23 0 (19)

 

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

 

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 2 million as of December 31, 2016, compared to NOK 3 million as of December 31, 2015.

 

28.4Effects 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 management, 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: 

PARENT COMPANY/GROUP      
(NOK million) 2016 2015 2014
Securities 1)  (23)  (126)  (48)
Other financial instruments at fair value 1)  (268)  34  (4)
Net realized gains/(losses)  (291)  (92)  (52)
       
Loans and receivables1)  110  (68)  (30)
Securities1)  102  74  17
Bond debt 1)2)3)  (818)  (669)  (5,992)
Subordinated debt and capital contribution securities 1)2)3)  -  (13)  (32)
Other financial instruments at fair value1) 1  -  5
Net unrealized gains/(losses)  (605)  (676)  (6,032)
       
Financial derivatives related to 108 Agreement 4)  (7)  (24)  14
NET REALIZED AND UNREALIZED GAINS/(LOSSES)  (903)  (792)  (6,070)

 

118 

 

 

Net realized and unrealized gains/ (losses) on securities:

PARENT COMPANY/GROUP      
(NOK million) 2016 2015 2014
Net realized gains/(losses) on securities1) (23) (126) (48)
Net unrealized gains/(losses) on securities1) 102 74 17
TOTAL 79                   (52) (31)
       
       
(NOK million) 2016 2015 2015
Securities not hedged by PHA1) (9) (19) 25
Securities hedged by PHA1) 190 (192) 326
Portfolio Hedge Agreement (PHA) (102) 159 (382)
TOTAL 79 (52) (31)

 

1)Including financial derivatives with purpose of economic hedging

2)Accumulated net gain on own debt is NOK 810 million as of December 31, 2016, compared to NOK 1,628 million as of December 31, 2015.

3)In the year of 2016, Eksportfinans had an unrealized loss of NOK 818 million (loss of NOK 682 million in 2015) 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.

 

See note 12 for a description of the Portfolio Hedge Agreement (PHA).

 

Interest, and the interest effect on economic 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, 2016 and 2015, the company recorded NOK 1,263 million and NOK 1,802 million, respectively, of interest income on loans due from credit institutions, loans due from customers and securities and NOK 1,622 million and NOK 2,505 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 positive 16 million and NOK negative 26 million, respectively, of interest income on economic hedging instruments and NOK negative 603 million and NOK negative 1,103 million, respectively, of interest expense on economic hedging instruments.

 

29LIQUIDITY 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 26 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 2016 the asset backed securities portfolio makes up approximately 74 percent (72 percent as of year-end 2015) of the liquidity portfolio that is covered by the Portfolio Hedge Agreement (PHA), whereas the PHA portfolio is 13.3 percent (9.8 percent as of year-end 2015) of total assets.

 

29.1Liquidity risk management process

 

Eksportfinans holds a securities portfolio that consists of a liquidity reserve portfolio and the PHA portfolio.

 

As of December 31, 2016 the liquidity reserve portfolio and the PHA portfolio had market values of NOK 4.4 billion and NOK 4.4 billion respectively, a change from NOK 18.0 billion and NOK 6.2 billion as of December 31, 2015. In addition to liquid securities the company also held cash and cash equivalent assets totaling NOK 1.0 billion as of end of 2016 compared to NOK 2.8 billion as of end of 2015. Total liquidity reserves were NOK 9.8 billion as of December 31, 2016 (NOK 27.0 billion as of December 31, 2015).

 

The primary purpose of the liquidity reserve portfolio was to be a liquidity buffer when funding could not be secured according to plan. 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.

 

Eksportfinans’ three major owner banks have extended a committed liquidity facility of USD 250 million to the company, an Eksportfinans initiated reduction from a former USD 1 billion agreement. The facility has a twelve month maturity with the possibility of extension, and was most recently renewed for another year in the second quarter of 2016. Eksportfinans has not utilized this credit facility.

 

The company monitors 12 months liquidity capacity and the maturity of assets and liabilities. As we are currently not funding in the markets, the main instrument for securing sufficient liquidity at all times is now the liquidity reserve portfolio. The liquidity reserve portfolio is shorter and more liquid than before to be more prepared to manage liquidity risk. Part of the companys existing funding has maturity dates linked to call and trigger options.

 

119 

 

 

Liquidity risk is controlled through active management and frequent assets / liabilities meetings where liquidity under different stress conditions is analysed. Eksportfinans follows the liquidity risk against defined limits and has contingency plans that take effect if needed. The company has a committed liquidity facility with the three largest owner banks that will be used if necessary.

 

29.2Maturity analysis

 

Maturity analysis of financial liabilities based on contractual maturities (including off-balance sheet items):

 

PARENT COMPANY/GROUP            



(NOK million)		 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
3 years		 From 3 year
up to and
including
5 years		 Over
 5 years
December 31, 2016            
Plain vanilla bond debt 0 71 9,202 3,447 2,429 0
Structured bond debt 499 3,398 2,942 651 662 1,441
Cash collateral 684 0 0 0 0 0
Subordinated loans 0 0 0 0 0 0
Derivatives net settled 58 61 236 407 407 28
Derivatives gross settled 1) 774 3,349 2,378 412 127 90
Financial guarantees (off-balance sheet) 103 0 0 0 0 0
Loan commitments (off-balance sheet) 0 0 0 0 0 0
TOTAL 2,118 6,879 14,758 4,918 3,626 1,559
             
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 764 3,344 2,294 388 123 75
             
Cash flows from derivatives on the asset side are shown below:          
Derivatives net settled (net cash inflow) 0 6 482 92 92 357
Derivatives gross settled (paying leg) 2,131 3,641 2,419 3,845 2,221 838
Derivatives gross settled (receiving leg) 2,251 3,792 2,553 4,009 2,157 1,006

 

PARENT COMPANY/GROUP            
    From 1 month From 3 From 1 year From 3 year  
  Up to and up to and months up to up to and up to and  
  including including and including including including Over
(NOK million) 1 month 3 months 1 year 3 years 5 years 5 years
December 31, 2015            
Non-structured bond debt 8 74 27,999 10,426 3,189 2,199
Structured bond debt 643 3,526 2,675 1,530 730 1,782
Cash collateral 1,889 0 0 0 0 0
Subordinated loans 0 0 0 0 0 0
Derivatives net settled 88 75 342 706 706 147
Derivatives gross settled 1) 3,078 5,868 7,289 933 82 119
Financial guarantees (off-balance sheet) 105 0 0 0 0 0
Loan commitments (off-balance sheet) 0 0 0 0 0 0
TOTAL 5,811 9,542 38,305 13,595 4,707 4,246

 

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 2,906 5,752 5,983 769 93 120
             
Cash flows from derivatives on the asset side are shown below:          
Derivatives net settled (net cash inflow ) 0 -16 1,215 240 240 502
Derivatives gross settled (paying leg) 7,054 7,228 17,452 1,548 3,148 2,940
Derivatives gross settled (receiving leg) 7,470 7,505 18,349 1,754 3,378 3,019

 

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.

 

120 

 

 

The company manages its liquidity risk, inter alia, by monitoring the difference between expected maturities of its assets and liabilities.

 

Maturity analysis of financial assets and liabilities based on expected maturities:

 

PARENT COMPANY/GROUP            



(NOK million)		 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
3 years		 From 3 year up to and including
5 years		 Over
 5 years
December 31, 2016            
             
Assets            
Loans and receivables due from credit institutions 258 5 24 61 50 68
Loans and receivables due from customers 799 933 3,916 7,385 4,401 3,221
Securities 2 1,182 2,712 221 661 3,062
Derivatives net settled 0 6 482 92 92 357
Derivatives gross settled (paying leg) (1,975) (3,048) (1,874) (4,035) (2,397) (1,820)
Derivatives gross settled (receiving leg) 2,089 3,189 2,001 4,204 2,341 2,081
Cash collateral 0 1,660 0 0 0 0
TOTAL ASSETS 1,173 3,927 7,261 7,927 5,147 6,968
             
Liabilities            
Plain vanilla bond debt 0 71 9,202 3,447 2,429 0
Structured bond debt 11 1,163 1,350 903 1,054 5,254
Derivatives net settled 58 61 238 401 401 34
Derivatives gross settled (paying leg) 451 1,737 1,380 499 375 2,865
Derivatives gross settled (receiving leg) (447) (1,713) (1,288) (445) (331) (2,771)
Cash collateral 0 684 0 0 0 0
Subordinated loans 0 0 0 0 0 0
TOTAL LIABILITIES 73 2,003 10,882 4,805 3,928 5,383

 

121 

 

 

PARENT COMPANY/GROUP            



(NOK million)		 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
3 years		 From 3 year up to and including
5 years		 Over
 5 years
December 31, 2015            
             
Assets            
Loans and receivables due from credit institutions 1,769 302 2,497 66 56 92
Loans and receivables due from customers 1,163 972 5,519 10,195 7,054 4,443
Securities 4 1,503 8,590 1,475 819 3,952
Derivatives net settled 0 (16) 1,215 245 245 502
Derivatives gross settled (paying leg) (8,142) (5,379) (16,983) (1,727) (3,431) (3,701)
Derivatives gross settled (receiving leg) 8,596 5,622 17,892 1,944 3,678 3,886
Cash collateral 0 3,277 0 0 0 0
TOTAL ASSETS 3,390 6,282 18,731 12,198 8,422 9,174
             
Liabilities            
Non-structured bond debt 8 74 27,999 10,426 3,189 2,199
Non-structured bond debt 5 94 1,875 2,321 1,176 5,580
Derivatives net settled 88 75 343 706 706 154
Derivatives gross settled (paying leg) 2,515 4,062 6,416 1,083 193 3,089
Derivatives gross settled (receiving leg) (2,430) (3,981) (5,068) (915) (199) (3,043)
Cash collateral 0 1,889 0 0 0 0
Subordinated loans 0 0 0 0 0 0
TOTAL LIABILITIES 185 2,212 31,564 13,622 5,066 7,980

  

The figures in the above table include principal and interest payable (receivable) at nominal value. 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. 

 

29.3Off-balance sheet items

 

Payment guarantees

 

In addition to the lending activity, the company issued (until November 18, 2011) 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.

 

  PARENT COMPANY/GROUP        
  (NOK million)   Dec. 31, 2016   Dec. 31, 2015
  Notional amount of financial guarantees   103   105

 

Loan commitments

 

In the normal course of the company’s lending business there were until November 18, 2011 outstanding commitments to extend credit that are not reflected in the accompanying financial statements. The following table shows the undrawn loan commitments at the reporting date, based on signed loan commitments. As per February 23, 2015 there are no outstanding loan commitments.

 

  PARENT COMPANY/GROUP          
  (NOK million)   Dec. 31, 2016 Dec. 31, 2015   Dec. 31, 2014
  Loan commitments   0 0   261

 

30FINANCIAL INSTRUMENTS SUBJECT TO NET SETTLEMENTS

 

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.

 

122 

 

 

The following table presents the financial instruments subject to net settlements:

 

PARENT COMPANY/GROUP            
        Amounts not presented net  



(NOK million)		 Financial
instruments		 Financial
instruments that
are set off		 Financial
instruments on balance sheet		 Financial
instruments		 Financial
collateral		 Net amount
December 31, 2016            
 Derivatives assets   1,804 0  1,804  (281)  (587)  936
 Derivatives liabilities   (2,400) 0  (2,400)  405  651  (1,344)
Total  (596) 0  (596)  124  64  (408)
             
PARENT COMPANY/GROUP       Amounts not presented net  



(NOK million)		 Financial
instruments		 Financial
instruments that
are set off		 Financial
instruments on balance sheet		 Financial
instruments		 Financial
collateral		 Net amount
December 31, 2015            
 Derivatives assets   4,293 0  4,293  (1,188)  (1,716)  1,389
 Derivatives liabilities   (4,398) 0  (4,398)  423  1,854  (2,122)
Total  (105) 0  (105)  (765)  138  (733)

 

123 

 

 

31SEGMENT 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 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 management reporting. The chief operating decision maker in the company comprises the management group. The Export lending and Municipal lending segments derive its revenues from interest income on lending to customers in each segment. The Securities segment derives its revenues from interest income and fair changes of bonds. Municipal lending has historically been a separate segment since this lending was organized through a separate subsidiary, Kommunekreditt AS. After the sale of Kommunekreditt, the company retained part of the portfolio and continued to report the lending to municipalities as a separate segment.

 

GROUP Export lending Municipal lending Securities
(NOK million) 2016 2015 2014 2016 2015 2014 2016 2015 2014
                   
Net interest income 1) 181 253 311 3 9 45 76 112 104
Commissions
and income related to banking services 2)		 0 0 0 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)		 (206) 21 (11) 0 2 0 (23) (65) (46)
Income/expenses allocated by volume 4) 126 21 (26) 10 2 (3) 97 23 (19)
Net other operating income (80) 42 (37) 10 4 (3) 74 (42) (65)
Total net income 101 295 274 13 13 42 150 70 39
Total operating expenses 46 58 84 3 3 6 58 80 90
Pre-tax operating profit/(loss) 55 237 190 10 10 36 92 (10) (51)
Taxes (18) 65 49 0 3 9 (2) (3) (13)
Non-IFRS profit for the period from continuing operations excluding unrealized gains/(losses) on financial instruments at fair value 73 172 141 10 7 27 94 (7) (38)

 

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 and the provision regarding the disagreement with Ministry of Trade, Industry and Fisheries (see note 34). 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.

 

Reconciliation of segment profit measure to total comprehensive income

 

GROUP      
(NOK million) 2015 2015 2014
Export lending (73) (172) (141)
Municipal lending (10) (7) (27)
Securities (94) (7) (38)
Non-IFRS profit/(loss) for the period from continuing operations
excluding unrealized gains/(losses) on financial instruments at fair value		 (177) (172) (130)
       
Net unrealized gains/(losses) on financial instruments at fair value (612) (699) (6,017)
Unrealized losses/(gains) related to the Icelandic bank exposure included above * (71) (12) (7)
Realized (losses) hedged  by the Portfolio Hedge Agreement (0) (62) (0)
Tax effect of the items above (161) (226) (1,566)
Total comprehensive income (345) (351) (4,314)

* Reversal of previously recognized loss (at exchange rates applicable at December 31, 2016, December 31, 2018 and December 31, 2014). 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.

 

124 

 

 

Segment assets

 
GROUP    
(NOK million) 2016 2015
Export lending 16,727 26,421
Municipal lending 1,550 1,774
Securities 9,459 24,957
Unallocated assets 5,435 11,990
Total assets 33,171 65,142

 

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.

 

GROUP                
(NOK million)   Total interest
and related income		     Total
assets		     Investments *
2016                
Norway   796     16,181     0
Other European countries   246     11,176     0
The Americas   27     1,900     0
Other countries   210     3,914     0
Total   1,279     33,171     0

 

2015                
Norway   1,084     33,642     6
Other European countries   321     21,550     0
The Americas   105     3,961     0
Other countries   266     5,989     0
Total   1,776     65,142     6
* Investments made during the year in property, plant, equipment, and intangible assets      

 

 

32RELATED PARTIES

 

The group’s two largest shareholders are considered to be related parties.

 

(NOK million) Acquired loans 1) Deposits 2) Guarantees issued 3) Guarantees received 4) Portfolio Hedge Agreement 6)
Balance January 1, 2016 2,210 971 105 8,317 (419)
Change in the period (2,210) (270) (2) (2,984) (121)
Balance December 31, 2016 0 701 103 5,333 (540)
Balance January 1, 2015 4,311 553 89 14,494 (542)
Change in the period (2,101) 418 16 (6,177) 123
Balance December 31, 2015 2,210 971 105 8,317 (419)

 

1) The company acquired loans from banks. The loans were part of the company’s ordinary lending activity, as they were extended to the export industry. Since the selling banks provided a guarantee for the loans, not substantially all of the risk and rewards were transferred to the company, thus the loans are classified as loans due from 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 28.3. 

4) Guarantees related to the loans described in footnote 1 provided to the company from the related parties. 

6) 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. 

7) Balance at January 1, 2014, has been changed in 2014, due to internal corrections.

 

In addition to the transactions reflected in the above table, Eksportfinans’ three major owner banks have extended a committed liquidity facility of USD 250 million to the company. The facility has a twelve month maturity with the possibility of extension, and was most recently renewed for another year in the second quarter of 2016. When renewed, the amount was reduced from USD billion to USD 250 million. Eksportfinans has not utilized this credit facility.

 

All transactions with related parties are made on market terms.

 

125 

 

 

33REMUNERATION

 

Auditors’ remuneration:

 

PARENT COMPANY / GROUP  
(NOK million) 2016 2015 2014
Audit services 1.8 2.1 1.6
Audit fees related to SEC filing in USA 1.1 1.3 1.5
Total Audit Services 2.9 3.4 3.1
All other 0.2 0.4 0.3
TOTAL 3.1 3.8 3.4

 

Remuneration to the Management Group:

 

PARENT COMPANY / GROUP              
  Salary Incentive scheme paid  Stay on bonus paid 3) Other taxable benefits Pension cost Total   Loans 2)
(NOK thousands) 2016
Geir O. Bergvoll 1)  3,004 0 0 176 70 3,250   0
Hagen, Martine Mills 1,819 0 983 175 666 3,643   0
Feiring, Jens O.  1,728 0 0 175 67 1,970   0
Grøm, Christian 1,576 0 418 207 550 2,751   0
Olsen, Geir Ove  1,519 0 617 206 587 2,929   0
Lindbæk, Elise  1,374 0 553 169 365 2,461   658
TOTAL 11,020 0 2,571 1,108 2,305 17,004   658

 

1) The CEO has a severance package covering salary for 12 months in the event that the employment is terminated by the company within 31. December 2017. The agreed retirement age is 67 years and the CEO is a member of the company’s defined contribution pension scheme. 

2) The loans have the same terms as other loans to employees. 

3) The Stay on bonus program was established in 2012.

 

PARENT COMPANY / GROUP              
  Salary Incentive scheme paid  Stay on bonus paid 3) Other taxable benefits Pension cost Total   Loans 2)
(NOK thousands) 2015
Geir O. Bergvoll 1)  2,740 0 0 175 0 2,915   0
Hagen, Martine Mills 1,714 0 961 175 748 3,598   0
Feiring, Jens O.  1,567 40 437 175 0 2,219   2,172
Grøm, Christian 1,490 58 816 205 595 3,164   0
Olsen, Geir Ove  1,393 76 733 206 582 2,990   0
Lindbæk, Elise  1,299 80 720 204 402 2,705   708
TOTAL 10,203 254 3,667 1,140 2,327 17,591   2,880

 

1) The CEO has a severance package covering salary for 12 months in the event that the employment is terminated by the company within 31. December 2017. The agreed retirement age is 67 years and the CEO is a member of the company’s defined contribution pension scheme. 

2) The loans have the same terms as other loans to employees. 

3) The Stay on bonus program was established in 2012.

 

Members of the Management Group have individual agreements on pensionable age upon reaching the age of 62-65 years with 70 percent of salaries and are also members of the ordinary pension scheme.

 

126 

 

 

Remuneration to Board of Directors and Audit Committee 4):

 

PARENT COMPANY / GROUP   PARENT COMPANY / GROUP   PARENT COMPANY / GROUP
  2016   2015   2014
(NOK thousands) Board of Directors Audit Committee Remuneration Committee1) Total   Board of Directors Audit
Committee		 Remuneration Committee 1) Total   Board of Directors Audit Committee Remuneration Committee 1) Total
Bergvoll, Geir 0 0 0 0     292   0 11 303     375   0   16  391
Carlsen, Sigurd 361 0 23 384     292   63 6 361     304   56 0  360
Bakker, Tone Lunde 248 49 0 297     240   47 0 287     266    45 0  311
Blystad, Marianne H. 248 25 6 279     240   47 0 287     266    30 5  301
Berg, Christian 289 25 11 325     247   0 17 264     266    -  11  277
Berg, Bjørn 248 65 0 313     60   12 0 72     0   0  -   - 
Hollingsæter, Bodil 0 0 0 0     80   24 0 104     266   45  -  311
Aker, Live Haukvik 0 0 0 0     80   0 6 86     266   20 11 297
Rune Helgeland 2) 248 0 0 248     240   0 0 240     200   0 0  200
Østbø, Tor 3) 0 0 0 0     0   0 0 0     67   0 0  67
Total 1,642 163 40 1,845     1,771   192 39 2,002       2,276     196   43  2,515

 

1) The Remuneration Committee was established in December 2010. The first remuneration paid was in 2012. 

2) In addition to ordinary salary amounting to NOK 1.81 million in 2016 and NOK 1,79 million in 2015. 

3) Remuneration paid in 2016 and 2015 – for work conducted in 2015 and 2014

 

Remuneration to Council of Representative * :

PARENT COMPANY / GROUP  
(NOK thousands) 2016 2015 2014
Alhaug, Frode               87                  63            61
Riise, Sandra               44                  32            31
Lundevik, Gro Elisabeth               30                  27              7
Krokeide, Elisabeth               30                  27            26
Nordli, Peder               17                  27            26
Kapstad, Petter               30                    0            26
Møller, Marius Juul               30                    0            20
Bergskaug, Geir                 9                  20            13
Sture, Eldbjørg               16                    0            26
Vik, Torbjørn               30                  13            26
Tostrup, Trond               30                  13 20
Mellem, Irene N.               20                    7            13
Guttelvik, Ottar B.               37                    0            20
Hongseth, Unni Karlsen                 0                    0              8
Pedersen, Jørn                 0                    0              1
Arntsen, Ingelise                 0                    0              1
Eidesvik, Toril                 0                    0              1
Heiberg, Richard                 0                    0              1
Total             410                316          327

 

Remuneration to Control Committee *: 

PARENT COMPANY / GROUP  
(NOK thousands) 2016 2015 2014
Kapstad, Petter               148               114          110
Sture, Eldbjørg                 98                 75            72
Guttelvik, Ottar B.                 98                 75            72
Møller, Marius Juul                 98                 75            72
Total 440               339          326

 

Remuneration to Election Committee * : 

(NOK thousands) 2016 2015 2014
Alhaug, Frode                 24                 19            19
Utvik, Knut J.                   0                   4              4
Teksum, Leif                   0                   4              4
Bratheim, Ingrid                   8                   4              4
Næss, Bjørn Erik                   8                   0              0
Georg Rabl 4 0 0
Total                 44                 31            31

*) Remuneration paid in 2015 and 2014 – for work conducted in 2014 and 2013

 

127 

 

 

34NUMBER OF EMPLOYEES

 

PARENT COMPANY/GROUP      
  Dec. 31,2016 Dec. 31,2015 Dec. 31,2014
Number of employees 29 44 48
Number of man-years 29 43 48

 

35CONTINGENCIES

 

In light of the fact that the company after November 2011 has made no new government supported loans, Eksportfinans argued that certain historical practices and procedures concerning settlement for prepaid loans made under the 108 agreement no longer were appropriate. In light of the same fact, the Ministry of Trade, Industry and Fisheries asserted that the fixed gross margin which Eksportfinans is guaranteed under the 108 Agreement should be reviewed and reduced. As the ministry and the company did not agree, these matters were, in accordance with the 108 agreement, referred to a court of arbitration. In June 2016, the court of arbitration ruled on these issues. In the matter of the fixed gross margin, the court ruled in favor of Eksportfinans. In the matter of prepayments of government supported loans, the court ruled in favor of the ministry. Eksportfinans is now discussing with the ministry on the financial effects on this ruling. As per December 31, 2016, Eksportfinans has made provisions of NOK 220 million regarding this matter.

 

36REGULATORY FRAMEWORK

 

In 2012, related to regulations concerning the calculation of exposures to a single client, the Norwegian FSA granted extended time limits for loans which would otherwise have been in breach of the regulations. The exemption is no longer remaining, as all loans have reached the regulatory level through scheduled repayments of principal.

 

37EVENTS AFTER BALANCE SHEET DATE

 

There are no events after the balance sheet date materially affecting the financial statements.

 

128 

 

 EX-7.1 2 e73696ex7-1.htm COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES

Exhibit 7.1

 

Computation of ratio of earnings to fixed charges (1)

 

  Year ended December 31,  
  2016 2015 2014 2013 2012 2011
(In NOK thousands except for ratio)            
FIXED CHARGES            
Interests and commissions on debt and capital contribution securities 1,008,161  1,391,932  1,784,789  2,394,050  3,357,380  4,021,021
Other Interest and borrowing expenses 11,955  12,285  17,460  12,104  122,449  63,348
Estimate of the interest within rental expense            
Total fixed charges, as defined 1,020,116  1,404,217  1,802,249  2,406,154  3,479,829  4,084,369
EARNINGS:            
Profit/(loss) for the period from continuing operations (330,418)  (376,040)  (4,273,529)  (4,850,159)  (17,717,401)  30,038,566
Taxes (178,284)  (171,484)  (1,505,808)  (1,995,208)  (6,903,509)  11,682,272
Fixed Charges, as defined 1,020,116  1,404,217  1,802,249  2,406,154  3,479,829  4,084,369
Total Earnings, as defined  511,415  856,693  (3,977,088)  (4,439,213)  (21,141,081)  45,805,207
RATIO OF EARNINGS TO FIXED CHARGES (2)(3)  0.50  0.61  (2.21)  (1.84)  (6.08)  11.21
The amount of coverage deficiency (NOK)  (508,702)  (547,524)  (5,779,337)  (6,845,367)  (24,620,910)  
The amount of coverage deficiency (USD)  (59,078)  (61,838)  (777,503)  (1,125,198)  (4,423,130)  
             

 

1) The ratio computation reflects for all periods presented the effect of the discontinued operations resulting from the sale of Kommunekreditt completed on June 24, 2009.

 

2) For purposes of calculating the ratio of earnings to fixed charges, earnings include profit/(loss) for the year from continuing operations 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.

 

3) The ratio of earnings to fixed charges in the year ended December 31, 2012 had a deficit due to negative earnings of NOK 24,695 million (USD 4,430 million). The negative earnings in the year ended December 31, 2012 were driven by unrealized losses on the fair value of our own debt.

 

 

 EX-12.1 3 e73696ex12-1.htm CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER

Exhibit 12.1

CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER

CERTIFICATION


I, Geir Bergvoll, certify that:

  1.      I have reviewed this annual report on Form 20-F of Eksportfinans ASA;
     
  2.      Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
     
  3.      Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report;
     
  4.      The company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the company and have:
       
    a.      Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
       
    b.      Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
       
    c.      Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
       
    d.      Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting; and
     
  5.      The company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company’s auditors and the audit committee of the company’s board of directors (or persons performing the equivalent functions):
       
    a.      All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the company’s ability to record, process, summarize and report financial information; and
       
    b.      Any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s internal control over financial reporting.

 

   
Date: April 25, 2017 /s/ Geir Bergvoll
  Geir Bergvoll
  Chief Executive Officer

 

 EX-12.2 4 e73696ex12-2.htm CERTIFICATION OF THE CHIEF FINANCIAL OFFICER

Exhibit 12.2

CERTIFICATION OF THE CHIEF FINANCIAL OFFICER

CERTIFICATION


I, Geir Ove Olsen, certify that:

  1.      I have reviewed this annual report on Form 20-F of Eksportfinans ASA;
     
  2.      Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
     
  3.      Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report;
     
  4.      The company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the company and have:
       
    a.      Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
       
    b.      Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
       
    c.      Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
       
    d.      Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting; and
     
  5.      The company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company’s auditors and the audit committee of the company’s board of directors (or persons performing the equivalent functions):
       
    a.      All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the company’s ability to record, process, summarize and report financial information; and
       
    b.      Any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s internal control over financial reporting.

 

   
Date: April 25, 2017 /s/ Geir Ove Olsen
  Geir Ove Olsen
  Chief Financial Officer

 

 

 

 EX-13.1 5 e73696ex13-1.htm CERTIFICATION OF PERIODIC FINANCIAL REPORT CERTIFICATION

Exhibit 13.1

CERTIFICATION OF PERIODIC FINANCIAL REPORT

CERTIFICATION

 

In connection with this annual report of Eksportfinans ASA (the Company) on Form 20-F for the period ended December 31, 2016 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Geir Bergvoll, the Chief Executive Officer of the Company, certify pursuant to 18 U.S.C., section 1350, that to my knowledge:

 

(1)      The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
   
(2)      The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.



Dated April 25, 2017  
/s/ Geir Bergvoll  
Geir Bergvoll  
Chief Executive Officer  

 

 

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

 

The foregoing certification is being furnished solely pursuant to 18 U.S.C. §1350 and is not being filed as part of the Report or as a separate disclosure document.

 

 

 

 EX-13.2 6 e73696ex13-2.htm CERTIFICATION OF PERIODIC FINANCIAL REPORT

Exhibit 13.2

CERTIFICATION OF PERIODIC FINANCIAL REPORT

 

CERTIFICATION

 

In connection with this annual report of Eksportfinans ASA (the Company) on Form 20-F for the period ended December 31, 2016 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Geir Ove Olsen, the Chief Financial Officer of the Company, certify pursuant to 18 U.S.C., section 1350, that to my knowledge:

 

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
   
(2)      The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

Dated April 25, 2017  
/s/ Geir Ove Olsen  
Geir Ove Olsen  
Chief Financial Officer  

 

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

 

The foregoing certification is being furnished solely pursuant to 18 U.S.C. §1350 and is not being filed as part of the Report or as a separate disclosure document.