Brev | Dato: 26.02.2003
EFTA Surveillance Authority
Rue de Trèves 74
State enterprises- appropriate measures- information on guarantee premiums- request for extension of time limit
Reference is made to the EFTA Surveillance Authority’s decision of 4 December 2002, Dec. No.236/02/COL, to propose appropriate measures to Norway with regard to State aid in the form of guarantees under the Act of State enterprises. Reference is also made to the meeting between representatives of the Norwegian Government and the EFTA Surveillance Authority in Brussels 9 January 2003.
The Norwegian Government was requested to communicate to the Authority the relevant measures it would take to discontinue the aid and to agree to the proposal for appropriate measures within six weeks of receipt of the decision. (16 January 2003)
The Act of State enterprises
The Authority has assessed the guarantee scheme that was abolished 1 January 2003 and found that sections 4, 51 and 53 of Act of 30 August 1991, No. 71, on State enterprises (hereinafter referred to as “the Act”) imply that State guarantees are given to enterprises organized according to the Act (hereinafter referred to as “State enterprises”). The Authority concluded that such guarantees are State aid within the meaning of Article 61 (1) of the EEA Agreement.
The Norwegian Government’s aim has been to neutralize the element of State aid in the form of guarantees. Therefore, as a temporarily measure, a premium to be paid to the State by state-owned enterprises for all loan obligations undertaken under the then current statutory provisions was proposed and adopted in the revised government budget for 2002. 1Regarding Enova and Medinnova, the enterprises have not taken up loans. This was confirmed by the ownership Ministries (Ministry of Petroleum and Energy and Ministry of Health) in letters of December 2002. (Please find the letter from the Ministry of Trade and Industry requesting the information and the letters form the ownership Ministries attached, see attachement1, 2 and 3) Regarding Statsskog, the enterprise has one loan. The loan is between “Grunneierfondet” and Statskog and amounts to 645 000 NOK. This was confirmed by the ownership ministry (Ministry of Agriculture) in a letter of 18 December 2002. (See attachment 4) Thus no guarantee premium was introduced to these enterprises. For further details we refer to our letter of 24 November 2002. The Norwegian Government is of the opinion that the possible State aid element was neutralized by the introduction of the market based premiums. The Norwegian Government note that the Authority does not find this situation satisfactory. Thus, for the pricing and individulizing of the guarantees as of 1 January 2003, we refer to the transitional arrangement described below.
On 25 October 2002 the Government submitted a formal proposal to the Parliament (Stortinget) to amend the Act. The amendments entered into force as from 1 January 2003.
The provisions stipulated in sections 51 and 53 of the Act, which state that the State is liable for the State enterprises obligations if the enterprise is dissolved are repealed. The provision stipulated in sections 4, subsection 2 of the Act, which states no debt-settlement or liquidation proceedings may be opened with regard to State enterprises, is also repealed. The former liability is replaced with a limited participant liability such as that of limited companies.
The Norwegian Government notes that the Authority had not assessed the proposal in detail before adopting the decision to propose appropriate measures. The Norwegian Government is of the opinion that any possible State aid element in the Act of State enterprises regarding future obligations was removed by the amendment of the Act. The Norwegian Government notes that the Authority has assessed the Guarantee scheme that was in force in 2002. Given that this scheme has been abolished as of 1 January 2003, the Norwegian Government presumes that further comments to the mentioned assessment is no longer necessary, and will therefore limit itself to comment on the transitional arrangements in the revised act, cf. point 2 below.
The transitional arrangements
Obligations linked to loans
The Norwegian Government is of the opinion that a marked based guarantee premium will neutralize the State aid element, and hence the guarantee will not constitute State aid within the meaning of Article 61 of the EEA Agreement. This even if the guarantee covers the full amount of each outstanding loan. The Norwegian government notes that the Commission in the EDF- case did not demand a reduction of the existing guarantees to 80%, but demanded the French Authorities to introduce a marked based guarantee premium. 2Aid C 68/2002 (ex E 3/2002 and NN 80/2002) — Advantage enjoyed by Électricité de France (EDF) as a result of the irregular creation of FF 56 866 million provisions for the renewal of the French high-voltage transmission network (Réseau d'alimentation générale (RAG)), see para 82 ii) “en exigeant qu'EDF paie une prime au prix du marché en contrepartie de la garantie existante sur la portion des emprunts obligataires non encore amortie. The Norwegian Government also notes that the Commission did not demand any reduction of existing guarantees in the Landesbanken- case. 3C (2002) 1286 Commission letter of 27.03.2002 State Aid Nr. E 10/2000 – Deutschland Anstaltslast und Gewährträgerhaftung It did not demand any introduction of a marked based guarantee premium. 4Press release IP/03/49 Brussels, 15 January 2003 Mario Monti welcomes the abolition of State guarantees for German public sector banks, last sentence: “Neither form of guarantee is limited in terms of time or amount. Credit institutions do not need to pay a charge for them.”
Most of the loans are bonds and similar instruments that are not subject to the 80 %- condition. A presentation of the loans will be made below.
The Norwegian Government also points out that the EFTA Surveillance Authority’s guidelines stress that: “Failure to comply with any one of the above conditions set out in paragraphs 17.4. (2)-(3) does not mean that such guarantee or guarantee scheme is automatically regarded as State aid”.
Presentation of the loans
In relation to Statkraft most of the loans are bond issues and therefore the terms of these loans with regard to the implicit government guarantee in the Act on State Enterprises cannot be altered without this resulting in a default. This is because of the specific nature of a bond agreement, as set forth in the bond indenture. 5Frank J. Fabozzi: Bond Markets, Analysis and Strategies, Prentice Hall (2000), p. 174: “Corporate bonds are debts obligating a corporation to pay periodic interest with full repayment at maturity. The promises of the corporate bond issuer and the right of investors are set forth in the bond indentures.” A single bond is issued to a number of investors, named bondholders. P. 144: “The indenture is made out to a corporate trustee as a representative of the interests of bondholders; that is, a trustee acts in a fiduciary capacity for investors who own the bond issue.” After the issuance, the bonds are normally traded in the secondary market, and the corporate issuer does not have full information on the new bondholders.
Please see attachment 5 for an example of one of the bond indentures Statkraft has.
The loans that are not ordinary bond issues are private placements bonds under Statkraft's Euro Medium Term Note programme, which is a standardised documentation for the European bond market. These loans have the same documentation as other public bond issues in the Euro market and their status regarding guarantees can thus not be altered if a default situation is to be avoided. Because of the nature of its agreement they should be looked upon as similar instruments to the bonds issues. In the textbook by Fabozzi, ref. Footnote 4, private placement bonds are referred to as bonds, which may have different rules for registration etc. (page 156). Statkraft also has issued certificates, which is debt with time to maturity less than 12 months. These instruments work like bonds, but with somewhat different rules 6 Please see attachment 6 with a presentation from Oslo Stock Exchange on bonds..
The only exception to the above would be the long-term loans from the Norwegian State, and the direct loan from Zenkyoren. Statkraft’s total debt at 31 December 2002 is shown in the table below:
% of total debt
41 300 601 306
730 000 000
Direct loan from Zenkyoren
294 770 902
1 700 000 000
44 025 372 208
Statnett's total debt at Jan 1 st> 2003 amounts to totally 6,14 bill NOK. Approximately 80 per cent of Statnett's loans are bond issues or private placements under Statnett's Euro Medium Term Note programme, cf. section 18.104.22.168 of Statkraft.
There are two exceptions to the above. Firstly, long-term loans from the Norwegian State, which at Jan 1 st> 2003 amounts to a total of 800 mill NOK. Secondly, Statnett has a loan from the European Investment Bank (EIB), which at Jan 1 st> 2003 amount to 375 mill NOK. This loan was given from the EIB in connection to investments in a transmission cable between Norway and Denmark, and was regarded as an effort to improve cross border infrastructure in Europe.
A list of Statnett’s total debt is given in the attachment of First Securities ASA’s report on the calculation of the guarantee premium for Statnett.
The state enterprise SIVA is financed with loans and equity capital from the Norwegian State. As per 1 January 2003 the State loans amounted to NOK 870 mill. According to the by-laws of SIVA the company can only take up loans from the State. Hence SIVA has no bank loans, bond issues or other loans from the private capital market. Thus there is no third party who has claims that are guaranteed for under the Act.
Pricing of a benefit
To price the benefit the state owned companies has got from the indirect state guarantee, one should calculate the difference between the actual borrowing cost for the company with this guarantee and the expected cost without a state guarantee.
The cost for a company issuing a bond is fixed at the time of launch, in an auction process in the commercial market. The cost is calculated from the declared annual coupon (fixed or floating interest rate) and the issuance price (which is the market response to the declared coupon), and often named as an all-in-interest rate. This interest rate should then be compared with the same rate without guarantee.
The company’s credit rating is of most importance in the auction for issuance. Without the indirect state guarantee a state enterprise should be expected to have a lower credit rating than otherwise. It is therefore necessary to estimate the cost a state enterprise would have had with a market rating of the debt without an indirect state guarantee. To be able to find this interest rate, one must first estimate what credit rating the company would have without the state guarantee, and then estimate the markets expected reaction to each specific bond issuance.
To estimate how the market would have reacted to the same company without the indirect state guarantee, we compare either with similar companies, or with statistics for rating categories from the bond markets. With use of statistics one can compare the company’s actual cost with the interest rate other bonds are trading at, in the relevant rating category for the state enterprise without the indirect state guarantee. If one can find a similar company with the same rating, as the State Enterprise is estimated to have without state guarantee, one could compare this company’s actual cost to the initial company’s cost.
We agree that the most precise way to price the benefit is to consider each loan individually, allowing for the fact that they are issued at different times, have different maturity etc. Regarding Statkraft and Statnett the work has been finished by the Ministry of Trade and Industry and the Ministry of Petroleum and Energy. The following subsections explains how this has been done.
Pricing of each of Statkraft’s loans
To find the benefit Statkraft has received from the indirect state guarantee, the Ministry of Trade and Industry has ordered a report from First Securities, which is a major company in issuance of new bonds and in trade of existing bonds (secondary markets) in the Norwegian market. Please find the report in attachment 7, the agreement between The Ministry of Trade and Industry and First Securities in attachment 8, and e-mails and telefax regarding the agreement and the process choosing adviser in attachment 9. Translated versions of these attachments will be sent as soon as possible. We have chosen a Norwegian company, after discussions with our financial adviser Dresdner Kleinwort Wasserstein, since most of the actual loans have been swapped into Norwegian or Swedish currency.
First Securities has calculated the benefits resulting from the indirect state guarantee as an interest rate spread between Statkraft’s actual cost and cost for similar bonds with a lower credit rating. The calculations have been done for all the loans individually, considering that they are issued at different times, and have different maturities etc. For all bonds issued until the year 2000, First has considered that Statkraft would have been given an A-rating 7The rating refers to the credit analysis done by different independent commercial rating companies like Standard & Poor’s Corporation and Moody’s Investor Service. Rating category A are called upper medium grade, and BBB lower medium grade. Please see www.sandp.com or www.moodys.com, or Frank J. Fabozzi, Bond Markets, Analysis and Strategies, Prentice Hall (2000), p. 149 for further details., and calculated the premium according to the difference between actual cost and cost for other A-rated companies. For the bonds issued in 2001 and 2002, First has calculated benefit as if Statkraft were rated both A, A-/BBB+, and BBB. Their conclusion is that the most probable rating for 2001/2002 would have been A-/BBB+ without the indirect state guarantee. This corresponds to the actual rating given Statkraft from Standard & Poor, 17 December 2002. The rating is attached in attachment 10. First Securities has also compared Statkraft's cost to that of the Swedish company Vattenfall AB, whish is assumed to be a company that has followed a similar strategy, and with an actual rating around A in previous years, currently rated around A- with a negative watch.
Most of Statkraft’s loans have been swapped into Norwegian or Swedish currency. The all-in-interest rate for Statkraft is calculated after the swaps, because it reflects the actual cost for Statkraft.
First concludes that the 60 basis points that Statkraft pays for guarantee premium is higher than the benefits received from the indirect state guarantee for all the older loans, but lower for the last issued bonds. Statkraft issued NOK 14,5 billion in new bonds in November 2002, at a time where BBB-rated companies were trading at extraordinary high costs. This considerable amount, with extra high benefit, increases the average benefit calculated. The average benefit is calculated at 62 basis points. The calculated benefit for each loan is shown in attachment 11, which is a shorter version of spreadsheet 7 in attachment 7.
New guarantee premium for Statkraft will be based on the report from First Securities, and will be proposed by the Government to the Parliament in the Revised National Budget to have effect from 1 January 2003. The amount of the Guarantee premiums will have to be agreed upon between the Ministries before the proposal is put forward. The Norwegian Government will ensure that the aid element on each loan is neutralized. The basic premium for each loan will be fixed for each loan until maturity, but the average and total guarantee premium in the National Budget will differ each year as a result of old loans being paid off. It is possible that the Government will decide to add extra premium to each loan, in addition to the calculated, so that total premium per loan might differ from year to year as a result of discussions between the Ministries.
Pricing of each of Statnett's loans
First Securities has also delivered a report to the Ministry of Petroleum and Energy, following the same calculation method as described in section 22.214.171.124 regarding Statkraft. The report is attached in attachment 12 and the agreement between the Ministry of Petroleum and Energy and First Securities in attachment 13. Translated versions of these attachments will be sent as soon as possible.
First has considered that Statnett would have been given a rating of AA+ without state guarantee. This corresponds to the actual rating given Statnett from Standard & Poor, 17 December 2002. The rating is attached in attachment 14.
The benefit is calculated for each individual loan, using the same method as for Statkraft’s loans. The average benefit is calculated at 20 basis points, which is well below the premium of 60 basis points decided by the Parliament.
New guarantee premium for Statnett will be based on the report from First Securities, and will be proposed by the Government to the Parliament in the Revised National Budget to have effect from 1 January 2003. The amount of the Guarantee premiums will have to be agreed upon between the Ministries before the proposal is put forward. The Norwegian Government will ensure that the aid element on each loan is neutralized. The basic premium for each loan will be fixed for each loan until maturity, but the average and total guarantee premium in the National Budget will differ each year as a result of old loans being paid off. It is possible that the Government will decide to add extra premium to each loan, in addition to the calculated, so that total premium per loan might differ from year to year as a result of discussions between the Ministries.
Pricing of SIVA’s loans
SIVA SF has no bonds or bank loans, only loans directly from the State, ref 126.96.36.199. above. Since 1 July 2002 SIVA has paid guarantee premium equal to 60 basis points for these loans, in addition to an administration fee of 40 basis points, on top of the state efficient interest rate.
Since the company was transformed to a State Enterprise in 1991, the company has not been credit rated. The company’s credit worthiness is not considered by the commercial credit marked, because SIVA is not allowed to issue bonds or raise bank loans in the commercial market, according to SIVA’s by-laws. It is therefore not possible to calculate premium for SIVA’s loans individually following the same method used for Statkraft and Statnett.
The Norwegian Government will price the benefit that SIVA has from the loans directly from the State, following other methods, preferably by asking an independent financial institution what interest rate they would charge SIVA if the company only could have debt in the commercial market. If this is not possible to answer, the company probably needs to be rated as a regular commercial company, and the benefit can then be priced following the method used for Statkraft and Statnett.
Obligations not linked to specific loans
The transitional arrangements maintain the old guarantee regime for all obligations existing before the amendment of the Act. There is a need to analyse the enterprises different obligations not linked to specific loans and to what extent the enterprises benefit from the guarantee. The Norwegian Government will based on these analyses ensure that the undertakings does not receive any State aid. Due to the complexity of identifying and classifying these obligations the Norwegian Government has not finalized these analyses.
Extension of time limit to communicate relevant measures and acceptance of appropriate measures
Due to the complexity of obligations not linked to specific loans, the Norwegian Government needs more time to complete its analysis of these obligations and how to ensure that the undertakings does not receive any State aid. Hence, the Norwegian Government is not able to communicate the measures it would take to ensure compatibility with Article 61 EEA Agreement by 16 January 2003.
We hereby ask the Authority to accept that the Norwegian Government will communicate the relevant measures it would take to ensure that the possible aid elements are neutralized and to agree to the proposal for appropriate measures within the 16 February 2003.
Marit Aaberg Bjørnar Alterskjær
Assistant Director General Adviser
- Letter from the Ministry of Trade and Industry requesting information on Statskog, Medinnova and Enova.
- Letter from Ministry of Petroleum and Energy
- Letter from Ministry of Health
- Letter from Ministry of Agriculture
- Example of bond indenture (Statkraft)
- Presentation from Oslo Stock Exchange on bonds
- Report from First Securities (Statkraft)
- The agreement between The Ministry of Trade and Industry and First Securities
- E-mails and telefax regarding the agreement and the process choosing adviser
- Rating Statkraft, Standard & Poor, 17 December 2002
- The calculated benefit for each loan (Statkraft)
- Report from First Securities (Statnett)
- The agreement between the Ministry of Petroleum and Energy and First Securities
- Rating Statnett, Standard & Poor, 17 December 2002.