untied loan guarantees

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2 the interministerial committee 0 the development of the export credit guarantees country cover policy business development export guarantee portfolio annex (ufk) 75 in 0 the celebrated their 50th anniversary. they are used more than ever today in order to secure the supply of raw materials on a long-term basis. with a new guarantee volume of 0.8 billion euros, the second best result ever was achieved. there is a remarkably high number of enquiries concerning cover for raw materials projects in numerous countries, too. the focus here continues to be on metallic raw materials such as iron ore and rare earth metals. the guarantees have been further developed in close consultation with the export credit guarantee scheme. a new premium system and a new, improved form of securitization guarantee were introduced at the end of 0.

3 ufk enquiries 0 regional distribution 76 Countries in respect of which UFK enquiries currently exist the year at a glance In 0 a new volume of cover of 835 million euros was approved for Phase II of the Nord Stream project. This made 0, the anniversary year of the Untied Loan Guarantees, the second most successful in the 50-year history of the promotion instrument. No new development bank projects were covered. The maximum liability (exposure) of the Federal Government rose from. billion euros at the end of 00 by 9 % to.7 billion euros at year-end 0..3 billion euros of this was accounted for by raw materials projects in Russia and Mauritania and 0.4 billion euros by development bank projects in Russia and the Ukraine. The guarantee portfolio thus totalled 3 guarantees, consisting of three guarantees for raw materials projects and 9 guarantees for development bank projects. The increasing demand for Untied Loan Guarantees in financing international raw materials projects was particularly noticeable in the increase in the number of enquiries to 37 in all (00: 35). These referred to projects in 5 countries and mostly concerned metallic raw materials here especially iron ore and rare earth metals. The Federal Ministry of Economics and Technology has confirmed the eligibility for cover under the aspect of raw materials supply in the case of four of these projects (one iron ore and two copper mining projects as well as a gas liquefaction plant (LNG terminal). applications were subsequently placed before the end of 0 for two of these projects. There were no enquiries in respect of development bank projects. A statutory maximum exposure for the assumption of Untied Loan Guarantees, investment guarantees, loans by the European Investment Bank and the participation of the KfW in the subscribed capital of the European Investment Fund is laid down annually in the Federal Budget Law. This had stood at 40 billion euros since budget year 00 and was raised as of st January 0 to 50 billion euros, mainly to meet the steep rise in demand for Untied Loan Guarantees. If a guarantee exceeds an amount of billion euros, the budget committee of the Bundestag (German parliament) must be informed.

4 the interministerial committee 0 the development of the export credit guarantees country cover policy business development export guarantee portfolio annex Guarantees for untied loans are also popular in other countries as an instrument for the promotion of financing which is not tied to exports, but is in the strategic interests of the country concerned. This interest focuses as in the case of the Untied Loan Guarantees on the one hand on raw materials projects, but on the other on projects, e.g., for the generation of energy or for environmental protection. An increase in such projects across the board can be observed worldwide. Close consultations take place at the international level between the mainly state insurers at the berne union. PwC, as lead partner in the mandatary consortium for the, represents the interests of the Federal Government there. ufk enquiries 0 distribution among the types of raw materials Metals Raw materials Iron ore Rare earth metals Copper Tungsten Alumina Ferrochromium Molybdenum Tantalum Zinc Number The Untied Loan Guarantees paid for themselves during the year under review from premiums and fees received and thus contributed to the discharge of the Federal budget accounts. There were no claims. An Untied Loan Guarantee was also assumed by the Federal Government in 0, following the decision that it was eligible for cover under the raw materials strategy of the BMWI, for the second line of the Nord Stream natural gas pipeline, which will double the throughput capacity of the pipeline from autumn of 0 to some 55 billion cubic metres of gas a year. Energy raw materials Crude oil Lignite LNG terminal Coal Biomass CO storage Wood Wind energy Other enquiries Total:

5 78 Basic principles of the Untied Loan Guarantees When a bank is involved in the development and financing of a project for the extraction of raw materials abroad, the Federal Government is prepared in principle to provide protection against the political and commercial (credit) risks of loss by means of Untied Loan Guarantees (UFK guarantees). The precondition for the assumption of cover is that the project developer concludes a long-term offtake agreement with a German buyer and that there is an interest in obtaining supplies of the raw material which benefits the economy as a whole. Since the introduction of the guarantee instrument in 96 the Federal Government has used it to promote projects abroad for the supply of, among other materials, oil and gas (including pipeline projects), as well as iron ore, copper, nickel, zinc, tungsten and tantalum. Untied Loan Guarantees can also be assumed to support so-called development bank projects. With a view to promoting the establishment of market-based structures in particular in the transition countries of Central and Eastern Europe the Federal Government assumes Untied Loan Guarantees for foreign banks which employ funds to finance a programme for the promotion of small and mediumsized enterprises. For the assumption of an Untied Loan Guarantee there is an application procedure involving several steps: as a first step a decision is made on the eligibility of the project for cover under the raw materials policy. The decision on whether to assume cover for the project is then made in a second step on the basis of detailed project information. For this, the project must be technically mature and economically sound and the assumption of cover must be justifiable in terms of the risk involved. On top of this there is an audit of the possible environmental and social impacts of the project based on internationally accepted standards such as, e.g., those laid down in the OECD environmental guidelines for officially supported export credits (OECD Common Approaches on the Environment and Officially Supported Export Credits) and the World Bank guidelines (the WB Safeguard Policies among others). An administration fee and a premium are charged for the assumption of Untied Loan Guarantees. The premium, like that of the export credit guarantees, is differentiated according to the risk as a percentage of the loan amount to be covered (without interest). The crucial criteria for determining the premium rate to be charged are the creditworthiness of the borrower, the economic stability of the project, the country risk and the risk horizon. An Interministerial Committee (IMC) decides on approval for granting a guarantee. Besides the Federal Ministry of Economics and Technology as lead ministry, the Federal Ministry of Finance, the Federal Foreign Office and the Federal Ministry for Economic Cooperation and Development are represented on the committee. The Federal Government has mandated a consortium, consisting of PricewaterhouseCoopers Aktiengesellschaft Wirtschaftsprüfungsgesellschaft (PwC) und Euler Hermes Deutschland AG to manage the Untied Loan Guarantees.

6 the interministerial committee 0 the development of the export credit guarantees country cover policy business development export guarantee portfolio annex developments on the raw materials markets The fraught situation on the international raw materials markets over recent years has focused attention among the business and political community on the issue of how important it is to secure the supply of raw materials to German industry, which is dependent on them to a high degree. Supply bottlenecks due to insufficient investment in global prospecting and extraction capacity, the hunger for raw materials to drive the industrialization of the emerging economies and distortions of trade in the form of export tariffs and quotas continue to have a negative impact on the supply of raw materials to the German economy. And in fact the prices for industrial metals plummeted, in some cases steeply, at the end of 0 after a dynamic upturn which had lasted since 008. The prices for copper, for instance, fell in the course of the year by up to 3 %. Other industrial metals such as nickel, zinc and aluminium likewise lost more than 0 % of their value. The reasons behind this price deterioration were the fears of recession in the Eurozone generated by the sovereign debt crisis, the muted outlook for economic growth in the USA, and the simultaneous adjustment of growth expectations for the Chinese economy. Demand from them is the main driver of the raw materials markets. In future, too, the raw materials markets will continue to react very sensitively to the prospects for (global) growth and developments on the financial markets. Industrial metals are regarded as a classic barometer of economic developments due to their use in the manufacturing and construction sectors. The downward trend in prices at the end of 0 should not make us forget, however, that the adequate and long-term supply of energy and metallic raw materials is one of the central challenges facing the entire world today. Because growth in the mid and long term in the developing countries and emerging economies, which means their needs for industrial metals to realize infrastructure projects, for residential construction and the electrical and automotive industries will in all likelihood continue to fuel a high level of demand. And that means that competition for global raw material reserves is set to continue. With the new raw materials strategy which it unveiled at the end of October 00, the Federal Government supports German industry in diversifying their sources of raw materials and covering demand for industrial raw materials. The Federal Untied Loan Guarantees as a central pillar of the raw materials strategy facilitate the financing of investment in the energy and mining sector abroad by borrowed capital. 79

7 80 50 years of Over their 50-year history the Untied Loan Guarantees of the Republic of Germany" have developed into an important instrument for German industrial companies in their efforts to secure the supply of raw materials. This anniversary was the occasion for a celebratory event held in September 0 at the Federal Ministry of Economics and Technology in Berlin, attended by representatives of politics, industry and the banking world as well as of the mandatory consortium. Dr. Philipp Rösler, Federal Minister of Economics and Technology, Since the introduction of the in 96, the Federal Government has classified particularly projects which increase the security of raw materials supply as being eligible for support. The focus here in the past was on metals. The highest guarantee volume,.9 billion euros, was assumed in this context for various copper projects, mainly in South America. underlined in his opening speech the importance of political flanking support through the Untied Loan Guarantees on the commodities markets, characterized as they are by distortions of competition and of market forces. This theme was then pursued in depth by Ulrich Grillo, Vice-President of the Bundesverband der Deutschen Industrie (Federation of German Industry), and by the Speaker of the Board of UniCredit Bank AG, Dr. Theodor Weimer, who pointed out the importance of the Untied Loan Guarantees for German industry and the banks. The successful cooperation between the Federal Government and the business community was underscored after this in a panel discussion at which representatives of the banks and industry expressed their appreciation of the decision by the Federal Government to adapt and improve the Untied Loan Guarantees. In addition the current situation on the markets for raw materials was discussed and the role of the state in securing the supply of raw materials for Germany was critically debated. The participants in the discussion were unanimous in emphasizing that the Untied Loan Guarantees will remain a central pillar in securing the supply of raw materials to Germany.

8 the interministerial committee 0 the development of the export credit guarantees country cover policy business development export guarantee portfolio annex principal issues At the end of 0 the premium system for untied loan guarantees was adapted to be in line with the framework for comparable guarantee instruments. One significant new feature refers to the number of buyer and project categories, which will now differ according to country classification. An additional project category SOV+ was also introduced, which will apply to borrowers with a better credit rating than the central bank of the host country for the project. In practice, the basis for calculating the premium rate will continue to be the combination of buyer and country category. When re-working the premium system, care was taken to ensure that the guarantee instrument remains fully competitive. 8 The securitization guarantee for Untied Loan Guarantees was similarly improved, in order to simplify their valuation by banks, investors and rating agencies. The upshot is that the securitization guarantee for untied loans is now equivalent to that for the export credit guarantees. This facilitates the combined deployment of the two promotion tools. Under the securitization guarantee, the refinancing bank now has a legal claim in its own right against the Federal Republic of Germany. The form taken by the securitization guarantee is aligned with that of normal bank guarantees. Otherwise the substance of the securitization guarantee remains unchanged. This applies in particular to the duty of the obligee to release the Federal Government from liability. typical structure of an untied loan guarantee project German Federal Government Untied Loan Guarantee Lender German importers (raw materials) Loan EUR/ foreign currency Escrow account offtake agreement Foreign government Concession Project company/ borrower Mining project () Project execution Mining project () Mining project (N) For further details please contact: Tel.: + 49 (0) 40 / info@ufk-garantien.de