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This summarizes information provided in response to questions asked during a conference call on February 20, 2008, requested by certain investors after SEK’s release of its unaudited results for the financial year 2007.
Peter Yngwe, President of SEK:
Ladies and gentlemen, Most welcome to SEK’s telephone conference in connection with our year-end results published last Friday. We are very happy that so many of you have joined us here today.
My name is Peter Yngwe and I am the President of SEK. Together with me participating in this meeting are Per Åkerlind, CFO; Sven-Olof Söderlund, Executive Director and Head of IT & Risk; Måns Höglund, Executive Director and Head of our Lending activities; Richard Anund, Director and Head of funding; Anna-Lena Söderlund, Director and Head of Accounting; and Johan Winlund whom already has presented himself.
I will start this meeting with a short presentation and then we are open for your questions.
The Swedish economy is very dependent on its exports, in fact more than 50 % of our GDP is derived from our export industry. The Swedish export industry is doing great and the Swedish economy is doing fine. During the recent time of turbulence on the financial markets banks have been very careful with their liquidity positions and thereby decreasing the exporting companies’ possibilities to fund themselves. SEK’s public role and assignment from our owners – the Swedish government – the Swedish State – is to secure access to financial solutions especially for the Swedish exporters – in good times as well as in bad times.
It is of course especially comfortable for the Swedish government and the Swedish export industry to know that there is a financial institution whose business model is designed to cope with a market situation like the one we have today. SEK has over 45 years of experience in providing the export industry with financial solutions, in good times as well as in bad times... And to deliver stable results over time with a low riskprofile --- We have experienced a number of crisis in the financial markets over the years. The worst crisis, for Sweden, was the housing- and bank crisis we had in Sweden in the beginning of the 90-ies. Our business model is designed to cope with different types of crises. If fact, that is what our public role is all about. In our business model we take low credit risk, low market risk and very low liquidity risk. I have personally been managing this business model for more than 20 years and I have a number of colleagues with me today that have been doing the same for more than 15 years.
Our business model includes – among other things - the following:
1) SEK’s lending is always overfunded at all maturities.
2) SEK’s liquidity portfolio has a maturity profile that fits the commitments in the lending activities. That means we don’t have to sell assets in order to fulfil our lending commitments.
3) We are risk averse. A major part of our lending to corporates is covered by ECA guarantees (Export Credit Agencies, i. e. government, guarantees) or covered by Credit Default Swaps. We require collateral agreement from all our swap counterparties. Only 8% of our total exposure is pure corporate risk.
4) Our funding is well diversified, both geographically and in terms of structures. We have access to the benchmark markets, structured borrowing and retail markets.
5) Our liquidity is positioned in such a way that if markets become difficult even for SEK we could stay out of the market for a substantial time period (1 year) and still be able to provide lending to our customers - the export industry.
This is our business model and we are continuing to follow it - as we have always done.
Year 2007 was a another good and prosperous year for SEK. We strengthened our market position. Not only by being a stable and reliable partner in times of turbulence but also by extending our product line to our core export customers and establishing new business areas as well as broadening our customer base.
We achieved high volumes of new customer financial transaction during the first six months though the market was characterized by high liquidity and pressure on margins. And in the second half of the year when the credit market was affected by concern over the US housing market, which in turn led to the liquidity squeeze and turbulence we see today - SEK’s high liquidity and continued stable borrowing enabled us to provide our customers with long-term financial solutions. For SEK it has been business as usual.
Our assets are strong and of high quality and we have no direct exposure to the US-subprime market. However, we have exposures to two ‘AAA’-rated CDO’s, total amount $99million, who have possibility to invest up to 25% in sub-prime ABS’s with initial ratings of at least ‘A’. We are not anticipating any individual loss. Therefore, there are no loss provisions. The assets in the trading portfolio, with an average maturity of less than two years, are considered to be of high quality and no material losses are expected to be realized in the portfolio, though the results have been charged with a Skr 38 million unrealized mark-to-market effect. We are always working very actively with risk reduction and risk elimination and collateral agreements. During these times of turbulence SEK has increased its liquidity to secure that we can be a reliable partner for our customers, a partner with liquidity enough to, if actually necessary, refrain from borrowing for at least one year but still be able provide our customers with financial solutions.
In 2007 SEK presented its result – for the first time – in accordance with IFRS. We disclose two earnings figures; CoreEarnings, and Operating Profit (IFRS). Core Earnings is operating profit before certain market valuations effects. Operating Profit (IFRS) is the operating profit after certain market valuation effects. In our view – based on our experience and knowledge of SEK’s economic hedging (30 years) – we believe that Core Earnings better than Operating Profit (IFRS) reflects the effect of the economic hedge relationships on SEK´s activities and thereby SEK’s real economic position. The reason is that Core Earnings exclude valuation effects on items that according to IFRS have to be accounted for at market value even though they are fully economically hedged.
Our Core Earnings amounted to Swedish kronor 533.6 million and the volume of new customer transactions totalled Swedish kronor 56.8 billion which was the second highest ever. Also our borrowing was highly successful and totalled Swedish kronor 108 billion which was far more than we have ever borrowed during a year before.
Thank you – we are now ready for questions.
Question:
Regarding your overall liquidity portfolio, do you foresee any issues that would impact your liquidity?
Answer by Peter Yngwe:
We have extremely high liquidity. We have probably more liquidity than ever before so we are well positioned for any situation in the market. We have no worries what so ever. We are in command of what we are doing.
What type of investments do you invest in regarding your liquidity portfolio?
Answer by Per Åkerlind, CFO:
We invest in a number of different instruments. First of all, we invest in relatively short-term, highly rated bank FRN-papers. Then we have also invested in only AAA-rated ABS-structures, most of which are RMBS’s. We have no direct exposure on the sub-prime market or the US-mortgage market. The RMBS-structures we have invested in are mostly European-based but we also have some from Australia, all rated AAA.
On top of that we also invest in papers related to our clients and that are corporate papers. Most of those papers are hedged through credit default swaps so we have a negative basis investment, i.e., investment grade corporateand on top of that hedged by bank risk, and that credit default swap is documented under ISDA and we have a collateral arrangement in place which means that we get collateral if the underlying corporate is widening in spread. Those are the main three categories of investments that we have.
You mentioned that you can stay out of the benchmark market if necessary depending on market conditions. Is there any predetermined outline of what you want to do in 2008 regarding the US-dollar benchmark market or for that matter the Euro benchmark market or is that still work in progress?
Answer by Richard Anund, Head of Funding:
We would like to come back to the benchmark market during 2008. Our last entrance was in September 2007. Since then we have concentrated on the structured funding from retail and private placements. As soon as there is a demand situation we think makes sense we will be back in the public benchmark market. We definitely have the ambition to do that. We would like to continue the strategy we have at the moment with a mix of structured transactions to retail and institutions with global benchmark transactions to big institutional investors.
Funding this year is going very well. We are ahead of the funding plan which gives us some comfort waiting for the right opportunity to re-enter the benchmark market.
Have you had any communication with the rating agencies since the year-end release and is there any reason to believe that they would change your rating at this point?
We have had a dialogue with the rating agencies in connection with the results we were presenting last Friday. That is the normal procedure. I have no reason to believe that they would change our rating, but these days you never know what the rating agencies have on their mind.