The total exposure in guarantees increased during 2006. Important changes from the previous year include a substantial increase in the exposure to Pakistan, and similarly an increase in the exposure to Swedish companies as a result of counter guarantees. The trend continues, with reduced claims resulting from large amortisations.

The term “risk exposure” includes EKN’s exposure in offers and guarantees, and the claims EKN has taken over in conjunction with indemnifications. The claims also include capitalised interest and unpaid and accrued interest.

Offer volumes and guarantee volumes influence each other, to the extent that offers turn into guarantees. In the current year’s figures, this is clearly visible in the Pakistan transaction for SEK 16 billion. At the end of 2005 this transaction was in the offers’ volume, while by the end of 2006 it was in the guarantees’ volume.

The offers volume fell slightly to just under SEK 60 billion at the end of 2006, from SEK 63 billion at the end of the year before. If the Pakistan transaction is excluded, there has been an increase. The guarantee volume increased to SEK 91 billion at the year-end, compared to SEK 83 billion at the previous year-end. Aside from the Pakistan transaction, the guarantee exposure is less.

In total, offers and guarantees show an overall increase to SEK 151 billion at the end of 2006, from SEK 146 billion at the end of the previous year.

No major changes in types of risk

The spread of EKN’s exposure to various types of risk has been relatively stable in recent years. The trend towards a smaller proportion of pure sovereign risk has continued, and together with other public sector risks, the public sector proportion of EKN’s risks fell to 35 percent from 39 percent. At the same time, the proportion of counter guarantees has continued to increase – once again underlining the significant need met by this type of guarantee.

High concentration of risk in a few countries

EKN’s guarantees cover more and more countries – EKN currently has risks in 127 countries. At the same time, the guarantee exposure is concentrated in just a few countries. In volume terms, South Africa has long been a special case among EKN’s risk countries – but in 2006 it was joined by Pakistan. In exposure terms, both countries are at much the same level. The main difference is that for Pakistan, claims form a small part of the risk exposure.

The diagram also shows the significance that the counter guarantees of Swedish companies now have in EKN’s exposure. Sweden now has EKN’s third largest exposure, up from 10^th place in the previous year.

Monitoring

Once a guarantee has been issued, EKN follows up transactions with a long risk period. Transactions worth more than SEK 300 million are monitored and reviewed twice a year. For these transactions, an assessment is made of expected losses, provisions required, and if needed a strategy for loss-prevention measures. In some cases, more detailed reports are put together on a continuous basis. This normally applies to very large transactions which affect the exposure to a significant degree, or to difficult, risky transactions.

During 2006, 119 transactions, with 50 different debtors were subject to special exposure monitoring. Favourable trends in the world economy, and high levels liquidity in the international money markets have had a knock-on effect in the form of reduced provisions for losses in many cases. Improved country classifications have influenced the provisions for loss, while in certain cases the credit risk in individual transactions has fallen.

Loss prevention in three large transactions

While EKN follows up exposure risks, it is the guarantee holder’s responsibility to pass on information continually about increases in risk in guaranteed transactions. As soon as the risk in a transaction reaches a critical point, EKN takes action. Usually EKN works with the guarantee holder to analyse the situation and decide on the most advantageous action. This way of working means that EKN has increasingly taken action earlier and more vigorously in order to avoid and/or limit indemnification costs.

The most usual actions are to extend the repayment period, to utilize securities, to recover the exported goods or to sue the debtors. Other actions may also be appropriate.

In two major telecom transactions, the problems stemmed from over-optimistic business plans. Negotiations between the debtors and EKN, in collaboration with other risk takers, led to the owners investing additional capital. In this way, indemnifications could be avoided. Another example is the recourse agreements with the exporter for a number of lease contracts for civil aircraft, in which EKN and the exporter share the shortfall in the underlying rental payments. The aim is to avoid indemnification. The costs in this case amounted to SEK 14 million.

The low level of indemnifications for the year indicate that the loss-prevention actions have been successful.

Reinsurance on the private market

During the year just passed, EKN has reinsured individual risks, both medium- and long-term, for Pakistan, Russia and Iran, resulting in a lower risk concentration. The contracts signed relate to very large transactions guaranteed by EKN in the energy, telecom and defence matériel sectors. For the first time, EKN has also reinsured risks for loss on production and guarantees for unfair calling.

The portfolio reinsurance, covering some 20 risks that EKN signed in 2003, has been renegotiated with a new three year contract period. As previously, EKN can continually adjust the contents of the reinsured portfolio, in line with changes in EKN’s own portfolio.

Continued reduction of claims

Claims form a reducing proportion of total exposure. Following the repayment of outstanding debt by Brazil, EKN’s only remaining significant debtor countries among the 15 largest are Pakistan and North Korea.

At the year-end, claims were a nominal SEK 8.3 billion, compared to SEK 10.6 billion for the previous year-end. The explanation for the reduction is mainly the large pre payment made under several Paris Club agreements. Another reason for the reduction is that most of the claims are in US dollars, which has depreciated in relation to SEK in the claims. The third main item in the reduction is the result of the write-offs approved in conjunction with the coming into force of the agreement with Iraq.

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