up.date Funding Activities in 2005 The Role of KfW in the Privatisation of State Enterprises News for Investors. October 2005.

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2 up.date News for Investors. October Funding Activities in 2005 The Role of KfW in the Privatisation of State Enterprises

3 e.ditorial Dear Readers, On September 18, 2005 Germany elected a new parliament, the Bundestag, and thus a new government. For KfW Bankengruppe this means a change in the composition of its Board of Supervisory Directors, whose members are appointed by the German Bundestag, among others, and include several Federal Ministers. The promotional mission of KfW Bankengruppe is clearly defined in the KfW Law, irrespective of who is in government. KfW Bankengruppe will design further promotional programmes on this legal basis and carry on the trustful cooperation with the new government representatives, too. It will also continue to live up to its role as Germany s leading promotional bank. From January until early October KfW has already raised most of the funds it needs to refinance its lending activities in the current year. The instruments range from liquid plain-vanilla benchmark issues to highly structured private placements in a variety of currencies. Below we present the current state of KfW s capital market activities. We also give you an overview of the currencies and instruments in which we have issued. In the past KfW Bankengruppe has regularly supported the German government in the privatisation of its shareholdings in various formerly state-owned enterprises. In this context KfW Bankengruppe used different capital market instruments to place the share packages in the market. In this edition we give you an overview of these activities, which KfW performs as a service for the German government. As always, at the end of this publication you will find the news from the ticker covering current activities of KfW Bankengruppe. Yours faithfully, Dr. Frank Czichowski Treasurer Funding Activities in 2005 Until the beginning of October 2005 KfW had raised more the EUR 42 billion in the capital markets, which is more than 80% of the funding volume of EUR 45 to 50 billion planned for the current year. The total volume was raised under 450 bonds denominated in altogether 14 different currencies, including for the first time a bond in Island kroners. The two main funding currencies of KfW remain the Euro accounting for almost 53% and the US dollar accounting for roughly 23% as of the beginning of October. At 10% of the total funding volume, the British pound is the third most important currency. In the current year KfW has issued three bonds under its D Benchmark Programme and two bonds under its Benchmark Programme in US dollar. Together, these bonds account for about 40% of the funding volume raised in 2005 so far. In the last week of September KfW launched a new 3-year benchmark bond for EUR 5 billion. The lead managers of the transaction were BNP Paribas, Citigroup and Lehman Brothers. Demand for the bond came mainly from European investors. KfW intends to issue one further US dollar benchmark bond in the last quarter of Until the beginning of October 2005 KfW had issued approximately EUR 19 billion (44%) in the segment of public bonds outside the benchmark programmes. Similar to private placements, such bonds are specifically tailored to the market conditions and the needs of investors. In comparison with 2004 the demand for currencies other than the KfW core currencies Euro and US dollar was relatively high. For instance, bonds and notes denominated in Australian and New Zealand dollars accounted for 7% of the funding volume raised in 2005 so far (2004: 3%). KfW attributes the successful placement of bonds denominated in these two and other currencies primarily to the growing number of investors who wish to diversify their portfolios more strongly than in the past. KfW issues private placements in response to demand from individual institutional investors. From January to October 2005 KfW issued approx. 300 bonds in the equivalent of almost EUR 6 billion (14%) in this segment, roughly 250 of which were in Japanese yen. In addition to the bond issue planned under the Benchmark Programme in US dollar KfW will, of course, continue to issue public bonds and notes in different currencies until the end of the year.

4 The Role of KfW in the Privatisation of State Enterprises Since its foundation, and in the context of its tasks, KfW temporarily acquired shareholdings from the German government several times. These included, among others, shares in jointstock companies such as Deutsche Lufthansa, Deutsche Börse, VIAG and Veba. Structure of the Holding Arrangement Share sale Share sale Phase I Phase II In connection with the privatisation of the remaining Lufthansa shares in the year 1997 KfW developed the so-called holding model, which has since then been used as the basic concept for the privatisation of the successor companies of the Bundespost. By splitting the share sale process in two parts the privatisation can be implemented regardless of budget requirements and budget planning, This is one of the major objectives of the concept. At the same time the holding arrangement offers a flexible and enhanced way to take advantage of market windows that open up when capital market conditions are attractive. According to the model the German government in a first step sells its shareholding to KfW and receives a purchase price that is based on the market price. When the shares are sold by KfW in the capital market at a later stage for a higher price, the federal government will re- Government Up-front payment ceive a further payment from KfW (Besserungsschein). The respective proceeds for the government are calculated as the difference between the selling price and the original purchase price less costs incurred plus a fee for KfW. KfW Second payment under debtor warrant Payment of purchase price Capital markets On this basis KfW has acquired shares of Deutsche Telekom AG (DTAG) and Deutsche Post AG (DPAG) from the federal government in several steps since 1997 and placed shares in the market under a number of capital market transactions. Overview of the current state of privatisation of DTAG and DPAG Free Float 62.5% KfW 14.3% KfW (UA+OS) 7.8% Bund 15.4% Deutsche Telekom AG DTAG share capital: 4.2 billion shares KfW-DTAG-shares (in total): million shares (approx. 285 million shares reserved for the EB, approx million shares reserved for the warrants) Free Float 55.3% KfW 34.6% KfW 10.1% (UA+Uridashi) Deutsche Post AG DPAG share capital: 1.1 billion shares KfW-DPAG-shares (in total): million shares (approx. 56 million shares reserved for the EB approx million shares reserved for the Uridashi EB)

5 The structure and handling of each transaction reflect the specific market conditions prevailing at the given time. While the sale of DTAG shares (DT3) and the Post IPO in the year 2000 were addressed mainly at retail investors, it was no longer possible to include this investor group after the end of the stock-market boom and in the wake of developments in the capital market since then. In consequence, KfW focused on institutional investors and the development of innovative capital market instruments in order to advance the privatisation process regardless of market trends. The new capital market instruments introduced include, among others, bonds exchangeable into shares of DTAG and DPAG that are designed specifically to suit the prevailing capital market conditions and demand situation in terms of maturity, premium, coupon and dividend payments. In 2003 KfW issued a bond exchangeable for DTAG shares in the nominal amount of EUR 5 billion, which was the largest exchangeable bond placed on the market worldwide until then. In addition, the marketing process for the direct placement of shares was shaped more flexibly. For example, an auction was used for the first time for the sale of DTAG shares in combination with the issue of warrants. The basic transaction had a volume of EUR 3 billion. Due to the issue of the warrants, which were divided into three tranches, further DTAG shares in the amount of EUR 1 bil-lion may be placed in the market at later stages. The options of the first tranche were already exercised by investors and approximately 22.1 million shares worth about EUR million were sold. The remaining two tranches will mature in October 2005 and April 2006, respectively. In January 2005 KfW placed bonds exchangeable for shares in DPAG in Japan, which were exclusively targeted at retail investors. The bond was the first of its kind issued in Japan since it was the first foreign currency exchangeable offered by a non-japanese issuer in the Japanese market (Uridashi format). Altogether bonds worth EUR 1.1 billion were sold to more than 32,000 individual retail investors. Overall, the privatisation approach pursued by KfW up to now has proven to be successful and underlines the innovative strength and efficiency of KfW. Currently KfW holds 22.1% of the share capital of DTAG and 44% of the share capital of DPAG. KfW will continue its strategy and aims at the successive and complete privatisation of both enterprises as and when conditions in the capital market are favourable. Funding January - beg. of October 2005 by currencies. Total 42 bn EUR EUR 53% USD 23% GBP 10% JPY 4% AUD 3% NZD 4% Other 3% Funding January - beg. of October 2005 by instruments. Total 42 bn EUR Benchmark Programmes 40% Other Public Transactions 44% Private Placements 14% Loans 2%

6 STICKER FROM THE NEWSTICKER FROM THE NEWSTICKER FRO HOLDING ARRANGEMENT CONCLUDED BETWEEN KFW AND GERMAN FEDERAL GOVERNMENT. In July, in the context of a further holding arrangement, KfW acquired shares of Deutsche Post (DPAG) and Deutsche Telekom AG (DTAG) from the German government. The transaction covered the remaining shares held by the German government in DPAG, i.e. 7.3% of the share capital of the company, and 7.3% of the share capital of DTAG and had a total volume of EUR 5 billion. KfW now holds roughly 44.7% of DPAG and roughly 22.1% of DTAG KfW Förderbank has already made over 230 loan commitments totalling EUR 120 million. By supporting the use of biomass, geothermics and hydropower the programme does not only make a contribution to protecting the environment and the climate but also to improving the reliability of supplies in Germany through the installation of decentralised energy systems. Promoting investments in renewable technologies creates jobs with a future, expands Germany s role as an international trailblazer in the area of renewable energies and improves the export opportunities for renewable energies. KFW POSTPONES STUDENT LOAN PROGRAMME. KfW has postponed the start of its student loan programme, which had originally been planned for October With this decision KfW wanted to prevent that, in the course of the parliamentary election campaign in Germany, the student loan became the subject of politically motivated discussions on education finance and tuition fees. The programme is now scheduled to be started in the summer term of KFW IPEX-BANK EXPANDS ENVIRONMENTAL AND SOCIAL STANDARDS. With a revised version of its environmental guideline, which had first been presented in the year KfW IPEX-Bank adopts a demanding set of standards that maintains the balance between a bank's environmental and social responsibility and its business partners. For instance, KfW IPEX- Bank will not participate in the financing of projects that entail unacceptable environmental damage or social impacts. In addition, all financings are subject to an internal appraisal process that determines the projects environmental and social relevance at an early stage. Where necessary, KfW IPEX-Bank includes relevant environmental and social covenants and a corresponding monitoring in the loan agreements. The guidelines can be downloaded from the website SIGNIFICANT GROWTH IN SUPPORT FOR RENEWABLE ENERGIES. The Programme of KfW Förderbank (KfW promotional bank) for the Promotion of Renewable Energies, conducted jointly with the German Federal Ministry for the Environment, is showing strong growth. In the period from January to July CKER FROM THE NEWSTICKER FROM THE NEWSTICKER FROM T

7 M THE KfW Bankengruppe Palmengartenstraße 5-9, Frankfurt am Main, Germany Telephone , Fax Investor Relations Dr. Axel Breitbach Telephone , Telefax Press Office Capital Markets: Nathalie Drücke Telephone , Telefax WHAT OUR BONDS STAND FOR. Quality Transparency Liquidity Performance E