WORKING TOGETHER TO SHAPE OUR DESTINY

Transcription

1 Capital Money working for people

2 MANAGEMENT S DISCUSSION AND ANALYSIS We are pleased to present our financial report for the fiscal year ended December 31, 2008, which focuses on Capital Desjardins inc. s financial position and results. Capital Desjardins inc. (the Company ) is a whollyowned subsidiary of the Fédération des caisses Desjardins du Québec (the Fédération ), and was established to issue securities on capital markets and to invest the proceeds of such issues in subordinated notes issued by the Fédération s member caisses. The financial statements in this report were prepared in accordance with Canadian generally accepted accounting principles and all figures are expressed in thousands of Canadian dollars unless otherwise specified. On January 1, 2008, the Company adopted the new accounting standards of the Canadian Institute of Chartered Accountants (CICA) entitled Capital Disclosures (Section 1535), Financial Instruments Disclosures (Section 3862) and Financial Instruments Presentation (Section 3863). Section 1535 specifies minimum disclosure requirements to help financial statements users assess an entity s objectives, policies and processes for managing capital. Sections 3862 and 3863 supercede Section 3861 Financial Instruments Disclosure and Presentation, and specifically concern the type of disclosures to be provided. The application of these standards has no impact on the Company s results and financial position. Notes 2, 10 and 11 to the financial statements detail the impact of these new standards on the financial statements. BALANCE SHEET (in thousands of dollars) Financial position As at December 31, 2008, the Company s total assets stood at $760,309 compared to $760,599 as at December 31, These assets consist primarily of subordinated notes issued by the Desjardins caisses totalling $750,000. As at December 31, 2008, the subordinated notes of the Desjardins caisses were comprised of: Series C subordinated notes issued by the Desjardins caisses for $300,000, maturing June 1, 2017, bearing interest at an annual rate of 6.502%, payable in equal semi-annual instalments for the first ten years and at an annual rate equal to the 90 day bankers acceptance rate plus 1.05%, payable quarterly, for the following five years. The Company may, at its option, demand repayment of the subordinated notes in whole or in part in order to call the Series C senior bonds. However, for calls occurring prior to June 1, 2012, the Company must obtain the prior approval of the Autorité des marchés financiers (the Authority ). Accrued interest on these notes amounted to $1,695 as at December 31, Series D subordinated notes issued by the Desjardins caisses for $450,000, maturing March 17, 2014, bearing interest at an annual rate of 4.117%, payable in equal semi-annual instalments for the first five years and at an annual rate equal to the 90-day bankers acceptance rate plus 1.05%, payable quarterly, for the following five years. The Company may, at its option, demand repayment of the subordinated notes in whole or in part in order to call the Series D senior bonds. However, for calls occurring prior to March 17, 2009, the Company must obtain the prior approval of the Authority. Accrued interest on these notes amounted to $5,301 as at December 31, On January 28, 2009, the Company called all the Series D subordinated notes to be repaid on March 17, As at December 31, 2008, the Company s total liabilities amounted to $757,298, relatively unchanged from last year. The Company s liabilities consist mainly of senior bonds totalling $748,666 as at December 31, 2008 compared to $747,794 as at December 31, This increase is entirely attributable to the interest capitalized using the effective interest method. As at December 31, 2008, the Company s senior bonds were comprised of: Series C senior bonds totalling $298,813 (par value of $300,000), bearing interest at an annual rate of 6.322%, payable in equal semi-annual instalments for the first ten years and at an annual rate equal to the 90-day bankers acceptance rate plus 1%, payable quarterly, for the following five years and maturing on June 1, The Company may, at its option, call these bonds. These bonds are secured by a first hypothec on the subordinated notes. Accrued interest on these bonds amounted to $1,581 as at December 31,

3 Series D senior bonds totalling $449,853 (par value of $450,000), bearing interest at an annual rate of 3.887%, payable in equal semi-annual instalments for the first five years and at an annual rate equal to the 90-day bankers acceptance rate plus 1%, payable quarterly, for the following five years and maturing on March 17, The Company may, at its option, call these bonds. These bonds are secured by a first hypothec on the subordinated notes. Accrued interest on these bonds amounted to $5,005 as at December 31, On March 17, 2009, the Company will call the Series D senior bonds. Funding sources On June 30, 2008, the Company renewed its permanent borrowing program on the Canadian market allowing it to issue senior bonds for a maximum amount of $2,000,000 by filing a short form prospectus. This 25-month program will end July The professional fees incurred for the program are presented on the balance sheet under Deferred charges, at unamortized cost. These fees will be amortized using the effective interest method from the date of the next issue of senior bonds on the markets. Rating agencies The Company, as the issuer of Desjardins Group, enjoys favorable credit ratings from credit rating agencies. Its ratings are among the best of the major Canadian financial institutions. The rating agencies recognize Desjardins Group s very high level of capitalization, the stability of its surplus earnings, its prominence in its local markets and the quality of its assets. Credit ratings of Capital Desjardins inc. CREDIT AGENCY RATING Standard & Poor s A+ Moody s Investors Service Aa2 Dominion Bond Rating Service AA (Low) Additional information Financial Stability Forum (FSF) In April 2008, the FSF issued a report following a request to this effect by the G7 Ministers and central bank Governors. The FSF recommends enhanced risk disclosure practices as regards financial instruments, which according to the capital markets, entail greater risk. The Company is complying with the FSF recommendations calling for firms to fully disclose their risk exposures, valuation methods and write-downs. However, since the Company holds only low-risk subordinated notes issued by the Desjardins caisses, none of its financial instruments are exposed to significant risk or pose valuation problems. As such, in our view, no additional disclosure is required. RESULTS ANALYSIS (in thousands of dollars) Comparison between the fourth quarters of 2008 and 2007 For the fourth quarter of 2008, the Company recorded a net loss of $157, compared to net earnings of $119 for the same period last year. The $276 drop is primarily due to higher professional fees incurred during the quarter to prepare for the capital market issue, which was not completed in Comparison between fiscal years 2008 and 2007 The Company closed the year with a net loss of $196, down $568 from the net earnings of $372 recorded for This decline stems primarily from higher professional fees incurred during the last quarter, as mentioned earlier, and from the write-off, in the second quarter, of deferred charges relating to the short form prospectus, which expired on June 30, 2008 and pursuant to which no securities were issued. The $144 decline in net interest income was attributable to the redemption on June 1, 2007 of Series B senior bonds in the amount of $500,000, and to the increase in interest expense, calculated using the effective interest method, in connection with Series C and D senior bonds. Financial intermediation income arises from the spread between the interest rate of the subordinated notes and that of the senior bonds, and is used to finance the Company s operating expenses. CRITICAL ACCOUNTING POLICIES The significant accounting policies are described in note 2 on page 12 of the notes to the financial statements. 3

4 MANAGEMENT S DISCUSSION AND ANALYSIS (Continued) Future accounting changes In January 2008, the CICA published a new standard entitled Goodwill and Intangible Assets (Section 3064) that will apply to the Company commencing on January 1, The Company has determined that this standard will have no impact on its financial statements. International Financial Reporting Standards In February 2008, the Canadian Accounting Standards Board issued a press release confirming that publicly accountable entities will be required to apply International Financial Reporting Standards (IFRS) in The Company will therefore adopt IFRS on January 1, To this end, it is participating in the Desjardins Group s IFRS conversion project, which began in the summer of 2007 with the setting up of a structure to coordinate the conversion of all the Group s components as well as the employees involved with a view to respecting the established schedule. The IFRS conversion project consists of several phases: identification and feasibility, design, execution and deployment, and post-implementation. The identification phase has been completed, with the result that the Company now knows which IFRS standards are likely to have a material impact on the Company. The feasibility and design phases are currently underway. The impact of IFRS on the Company s accounting and business activities is being studied and a schedule has been established to handle the impact on information systems, internal controls, change management, and to set up a training program for employees affected by the conversion. According to the schedule, the feasibility and design phases should be completed in 2009 while execution and deployment are scheduled for completion in FINANCIAL GOVERNANCE The Company must comply with certain requirements of the Canadian Securities Administrators (CSA) regulation pertaining to continuous disclosure obligations, oversight of external auditors, certification of financial information and audit committees. As a venture issuer, the Company could, according to the latest CSA directives, henceforth use a new certification form called Venture Issuer Basic Certificate containing a Notice to Reader, which does not require representations relating to the establishment and maintenance of disclosure controls and procedures and internal control over financial reporting. However, management has decided to nonetheless file a full certificate as a reporting issuer and as such, certified the effectiveness of the Company s disclosure controls and procedures and internal control over financial reporting as at December 31, Disclosure controls and procedures Pursuant to the CSA directives set out in Multilateral Instrument , the Company s Chief Executive Officer and Chief Financial Officer have designed or are in the process of designing disclosure controls and procedures that are supported by periodic certification of financial information reported in annual and interim filings. The information compiled during the financial governance process is reviewed quarterly and annually by members of the Company s Disclosure Committee and Audit Committee, the latter playing a key role in terms of overseeing and evaluating the effectiveness of the Company s disclosure controls and procedures. As at December 31, 2008, based on the control framework issued by the COSO (Committee of Sponsoring Organizations of the Treadway Commission), management evaluated the effectiveness of the Company s disclosure controls and procedures. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures provide assurance that information required to be filed or reported under Canadian securities legislation is recorded, processed, summarized and presented within the timeframes provided by the relevant rules and forms, thus providing investors with complete and reliable information. Internal control over financial reporting The Company management is responsible for establishing and maintaining adequate internal control over financial reporting so as to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with Canadian generally accepted accounting principles. 4

5 As in the case of the assessment of the disclosure controls and procedures, the design of internal control over financial reporting was evaluated based on the COSO control framework. Due to its inherent limitations, internal control over financial reporting may not prevent or detect misstatements due to error or fraud. As such, management s evaluation of such controls can provide only reasonable, not absolute, assurance that all control issues and instances of material misstatement have been detected. Based on this assessment, the Chief Executive Officer and Chief Financial Officer have concluded that the Company s internal control over financial reporting was effective as of December 31, 2008, and free of material weaknesses. Changes in internal control over financial reporting There were no changes in the Company s internal control over financial reporting since September 30, 2008 that have materially affected, or that are reasonably likely to materially affect, its internal control over financial reporting. Additional information More information on the Company, including the Annual Information Form, is available at or Monique F. Leroux, FCA, FCMA Chair of the Board and Chief Executive Officer Raymond Laurin, CA Chief Financial Officer February 27,

6 EARNINGS COVERAGE RATIOS The following table shows the calculation of the earnings coverage ratio of Capital Desjardins and, for illustrative purposes, of Desjardins Group, based respectively on (i) interest on long-term debt and (ii) interest on total debt. FOR THE TWELVE MONTHS ENDED DECEMBER 31, 2008 AND 2007 (1) Interest on debt and debentures, excluding the accounting effect of the effective interest method on the debentures. (2) Earnings of Capital Desjardins inc. before interest on long-term debt and income taxes. (3) Surplus earnings of Desjardins Group before member dividends, interest on long-term debt, non-controlling interests and income taxes. (4) Earnings of Capital Desjardins inc. before interest on total debt and income taxes. (5) Surplus earnings of Desjardins Group before member dividends, interest on total debt, non-controlling interests and income taxes. (6) Certain prior period ratios were changed to conform to the presentation adopted for the 2008 ratios. Desjardins Group is not a guarantor of the senior bonds. 6

7 SUMMARY OF QUARTERLY RESULTS RESULTS (unaudited, by quarter, in thousands of dollars) BALANCE SHEET (unaudited, by quarter, in thousands of dollars) 7

8 AUDITORS REPORT To Capital Desjardins inc. shareholder We have audited the balance sheets of Capital Desjardins inc. as at December 31, 2008 and 2007 and the statements of earnings, retained earnings and cash flows for the years then ended. These financial statements are the responsibility of the Company s management. Our responsibility is to express an opinion on these financial statements based on our audits. Our audits were conducted in accordance with Canadian generally accepted auditing standards, which require that we plan and perform an audit to obtain reasonable assurance that the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. It also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. In our opinion, these financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 2008 and 2007 and the results of its operations and its cash flows for the years then ended in accordance with Canadian generally accepted accounting principles. PricewaterhouseCoopers LLP/s.r.l./s.e.n.c.r.l. 1 1 Chartered Accountant auditor permit n o Québec (Québec) February 27,

9 BALANCE SHEET AS AT DECEMBER 31 (in thousands of dollars) 9

10 STATEMENT OF EARNINGS YEAR ENDED DECEMBER 31 (in thousands of dollars) STATEMENT OF RETAINED EARNINGS YEAR ENDED DECEMBER 31 (in thousands of dollars) 10

11 STATEMENT OF CASH FLOWS YEAR ENDED DECEMBER 31 (in thousands of dollars) 11

12 NOTES TO THE FINANCIAL STATEMENTS (in thousands of dollars, unless otherwise stated) Note 1 GOVERNING STATUTES AND NATURE OF OPERATIONS The Company, incorporated under Part IA of the Companies Act (Québec), issues its own senior bonds on capital markets and invests the proceeds of such issuances in subordinated notes issued by the Desjardins caisses. The Desjardins caisses are governed by the Act respecting financial services cooperatives and are affiliated with the Fédération des caisses Desjardins du Québec, the parent of Capital Desjardins inc. Note 2 SIGNIFICANT ACCOUNTING POLICIES Use of estimates The preparation of financial statements in accordance with Canadian generally accepted accounting principles requires management to make estimates that affect the amounts of assets and liabilities reported in the financial statements. These estimates also affect the disclosure of contingencies at the date of the financial statements and the reported amounts of revenues and expenses during the year. Actual results could differ from those estimates. Capital management On January 1, 2008, the Company adopted the new CICA standard entitled Capital Disclosures (Section 1535). The purpose of this section is to require the disclosure of information that enables users of financial statements to evaluate an entity s objectives, policies and processes for managing capital. This new standard, aimed specifically at the disclosure of information on capital management, has had no impact on the Company s results and financial position. Financial instruments On January 1, 2008, the Company adopted the new CICA standards entitled Financial Instruments Disclosures (Section 3862) and Financial Instruments Presentation (Section 3863), which together replace Section 3861 Financial Instruments Disclosure and Presentation. Section 3863 carries forward unchanged the presentation standards contained in Section The purpose of Section 3862 is to inform users and enhance their understanding and evaluation of the significance of financial instruments for the entity s financial position and performance, as well as to help them better evaluate the nature and extent of the risks associated with financial instruments and how the entity manages those risks. Since these new standards specifically cover disclosure requirements, they do not affect the Company s results or financial position. Financial instruments - recognition and measurement Since January 1, 2007, the Company has been recording its financial instruments according to the CICA standards Financial Instruments Disclosure and Presentation (Section 3855), Hedges (Section 3865) and Comprehensive Income (Section 1530). Financial assets must be classified in one of the following categories: Held for trading ; Available for sale ; Held to maturity ; or Loans and receivables based on their characteristics and reason for purchase. Financial liabilities must be classified as Held for trading or Other. Financial assets and financial liabilities are initially recorded at fair value. Subsequently, financial assets and financial liabilities held for trading as well as available-for-sale financial assets continue to be recognized on the balance sheet at fair value. Changes in the fair value of financial assets and financial liabilities held for trading are recorded in income for the period, while changes in the fair value of available-for-sale financial assets are recorded in other comprehensive income until they are derecognized. Held-to-maturity financial assets, loans and receivables and financial liabilities other than held for trading are recognized at amortized cost using the effective interest method. Transaction costs related to financial instruments are capitalized and then amortized over the term of the instrument using the effective interest method except when the instruments are classified as Held for trading, in which case these costs must be expensed as incurred. The impact of the transitional adjustments as at January 1, 2007 recorded on the statement of retained earnings and totalling $367, or $531 net of related income taxes of $164, results from: a) the adjustment of transaction costs now amortized using the effective interest method rather than the straight-line method, and (b) the adjustment of deferred charges, comprised of expenses incurred for the permanent borrowing program. Prior to January 1, 2007, such expenses were amortized using the straight-line method over the duration on the authorized program, that is 25 monts. According to the new requirements, these charges must now be amortized using the effective interest method, from the date of the next securities issuance. In the event a new issue is no longer scheduled within the life of the authorized program, these deferred charges will be written off in the quarter during which such event occurs. 12

13 Policies used by the Company The subordinated notes issued by the Desjardins caisses and the accrued interest meet the definition of Loans and receivables and are therefore classified in this category. As a result, they are recorded at cost. Senior bonds are classified as Other liabilities. They are therefore recorded at amortized cost, with transaction costs capitalized and amortized. Transaction costs comprise expenses incurred for the issue of securities on capital markets. These expenses will be amortized at the effective interest rate over the non-redeemable term of the issue, which ends in May 2012 for Series C and in March 2009 for Series D. Income taxes The Company uses the tax liability method to record income taxes. Under this method, future income tax assets and liabilities are established taking into account taxable and deductible temporary differences between the book value and tax value of assets and liabilities, using enacted or substantively enacted tax rates that will be in effect when the differences are expected to reverse. Comparative figures Certain comparative figures have been reclassified to conform to the presentation adopted in Note 3 FUTURE ACCOUNTING CHANGES Goodwill and intangible assets In January 2008, the CICA issued a new standard entitled Goodwill and Intangible Assets (Section 3064), which will come into effect on January 1, This standard reinforces an approach based on principles and criteria to recognize costs as assets and clarifies the application of the matching principle in order to eliminate the practice of recognizing as assets items that do not meet the definition of an asset or the criteria for asset recognition. This standard will have no impact on the Company s financial statements. International Financial Reporting Standards On February 13, 2008, the Canadian Accounting Standards Board issued a news release confirming that publicly accountable entities will be required to apply International Financial Reporting Standards (IFRS) in The Company will therefore adopt IFRS on January 1, 2011 and to this end began the conversion process in the summer of Credit risk and the fair value of financial assets and financial liabilities On January 20, 2009, the Emerging Issues Committee published EIC-173 Credit Risk and the Fair Value of Financial Assets and Financial Liabilities. This abstract states that an entity s own credit risk and the credit risk of the counterparty should be taken into account in determining the fair value of financial assets and financial liabilities, including derivative instruments. The Company will apply this accounting treatment retrospectively without restatement of prior periods to all financial assets and financial liabilities measured at fair value in its interim financial statements as at March 31, The Company has determined that this EIC will have no impact on the financial statements. Note 4 SUBORDINATED NOTES ISSUED BY THE DESJARDINS CAISSES Series C subordinated notes Series C senior bonds were used by the Company to purchase Series C subordinated notes issued by the caisses, in proportion to the average assets of each caisse, for a total of $300 million, maturing on June 1, 2017 and bearing interest at an annual rate of 6.502%, payable in equal semi-annual instalments for the first ten years and at an annual rate equal to the 90-day bankers acceptance rate plus 1.05% payable quarterly for the following five years. The Company may, at its option, demand repayment of the subordinated notes in whole or in part in order to call the Series C senior bonds. However, for calls prior to June 1, 2012, the Company must obtain prior approval from the Authority. Series D subordinated notes Series D senior bonds were used by the Company to purchase Series D subordinated notes issued by the caisses, in proportion to the average assets of each caisse, for a total of $450 million, maturing March 17, 2014, and bearing interest at an annual rate of 4.117%, payable in equal semi-annual instalments for the first five years and at an annual rate equal to the 90-day bankers acceptance rate plus 1.05%, payable quarterly for the following five years. The Company may, at its option, demand repayment of the subordinated notes, in whole or in part, to call the Series D senior bonds. However, for calls prior to March 17, 2009, the Company must obtain prior approval from the Authority. On January 28, 2009, the Company called all the Series D subordinated notes to be repaid on March 17,

14 NOTES TO THE FINANCIAL STATEMENTS (Continued) (in thousands of dollars, unless otherwise stated) Note 5 SENIOR BONDS Series C senior bonds Under the terms of a purchase and resale agreement reached on May 9, 2002, the Company agreed to issue, for a consideration of $300 million (book value of $299 million as at December 31, 2008 and 2007), Series C senior bonds, maturing in June 2017, bearing interest at an annual rate of 6.322% for the first ten years and at an annual rate equal to the 90-day bankers acceptance rate plus 1% for the following five years. The Company may, at its option, repay these bonds. These bonds are secured by a first hypothec on the Series C subordinated notes described in note 4. These bonds also contain certain negative pledge clauses, namely, limiting the additional debt the Company can issue and prohibiting the Company from giving new security on the collateral. Series D senior bonds Under the terms of a purchase and resale agreement reached on March 9, 2004, the Company agreed to issue, for a consideration of $450 million (book value of $450 million as at December 31, 2008 and $449 million as at December 31, 2007), Series D senior bonds, maturing in March 2014, bearing interest at an annual rate of 3.887% for the first five years and at an annual rate equal to the 90-day bankers acceptance rate plus 1% for the following five years. The Company may, at its option, repay these bonds. These bonds are secured by a first hypothec on the Series D subordinated notes described in note 4. These bonds also contain certain negative pledge clauses, namely, limiting the additional debt the Company can issue and prohibiting the Company from giving new security on the collateral. On March 17, 2009, the Company, will call the Series D senior bonds. Note 6 LOANS Subordinated term loans payable from Caisse centrale Desjardins 6.25%, payable in semi-annual instalments, including principal and interest, in the amount of $155 until maturity in June 2012 $ 964 $ 1, %, payable in semi-annual instalments, including principal and interest, in the amount of $335 until maturity in March ,292 2,167 Less : Current portion $ 709 $ 1,292 Annual principal instalments payable over the next four years amount to $583 in 2009, $271 in 2010, $288 in 2011 and $150 in Payment of interest or principal on these loans is subordinated to the payment of any interest or principal owed on Series C and D senior bonds issued by the Company. Note 7 STOCK Authorized Unlimited number of shares, without par value Common shares, voting and participating Class A, non-voting and non-participating, preferred shares with no dividend rights, redeemable at the paid-up capital amount Class B, non-voting and non-participating, preferred shares with no dividend rights, redeemable at the paid-up capital amount Issued and fully paid ,000 common shares $ 10 $ 10 1,000,000 Class A preferred shares 1,000 1,000 $ 1,010 $ 1,010 14

15 Note 8 FAIR VALUE OF FINANCIAL INSTRUMENTS The fair values of cash, accrued interest, other receivables and other accrued liabilities are equivalent to their carrying values given their short-term maturities. As at December 31, the fair value of the other financial instruments is detailed below: Fair value Book value Fair value Book value Subordinated notes $ 759,508 $ 750,000 $ 758,594 $ 750,000 Senior bonds 759, , , ,794 Loans 1,330 1,292 2,171 2,167 The fair value of subordinated notes and loans is determined by discounting future cash flows using rates the Company could obtain at year-end for securities with similar terms and maturities. The fair value of senior bonds is based on market prices. Note 9 RELATED PARTY TRANSACTIONS During the year, in addition to the transactions disclosed elsewhere in these financial statements, the Company entered into the following transactions with the Fédération and Caisse centrale Desjardins. Fédération des caisses Desjardins du Québec Professional fees $ 209 $ 129 Caisse centrale Desjardins Financing expenses and other interest on loans Other income In addition, an amount of $44 paid to the Fédération is included as a deferred charge on the balance sheet as at December 31, All related party transactions occurred in the normal course of business and were measured at the exchange amount, which represents the amount of consideration established and agreed upon by the related parties. As at December 31, 2008, Desjardins Financial Security held $671 in Company bonds (nil as at December 31, 2007). As at December 31, 2008, the Company had accrued liabilities in the amount of $9 ($17 as at December 31, 2007) to Caisse centrale Desjardins and of $49 ($13 as at December 31, 2007) to the Fédération. Note 10 MANAGEMENT The Company seeks to maintain sufficient shareholders equity to ensure the continuity of its operations, which includes regularly paying dividends to its shareholders. As a wholly-owned subsidiary of the Fédération, the Company is not itself bound by regulatory requirements regarding its capital, such conditions applying instead to Desjardins Group as a whole. The Company s assets are consolidated for the purposes of evaluating the composition and adequacy of Desjardins Group s capital, conducted according to the Authority s guidelines on capital adequacy standards. 15

16 NOTES TO THE FINANCIAL STATEMENTS (Continued) (in thousands of dollars, unless otherwise stated) Note 11 MANAGING FINANCIAL INSTRUMENT RISK The Company was created exclusively for the purpose of offering its securities on the financial markets and investing the proceeds thereof in securities issued by the Desjardins caisses to meet their liquidity needs. The Company therefore acts as a link with external investors in order to provide the caisses with easier access to institutional capital. The Fédération s Board of Directors is responsible for guiding, planning, coordinating and overseeing the activities of the Desjardins Group, of which the Company is a part. The Board also has risk management responsibilities with respect to the Desjardins Group and is supported in this area by the Risk Management Commission, the Audit and Inspection Commission and the Board of Ethics and Professional Conduct. During the normal course of business, the Company is exposed to different types of risk, including credit risk, liquidity risk and market risk. Managing credit risk Credit risk is the risk of losses resulting from a caisse s failure to fulfill its contractual obligations as regards the subordinated notes issued to the Company. The securities issued by the caisses to the Company are, in fact, subordinated, as to right of payment, to all the other obligations of the Caisses. However, this risk is considered minimal given that Desjardins Group has implemented certain financial intervention mechanisms designed to help caisses experiencing financial difficulties. Moreover, the Act respecting financial services cooperatives expressly authorizes the Fédération to cover the operating deficit of any caisse whose general reserve is insufficient. Managing liquidity risk Liquidity risk refers to the Company s ability to raise the necessary funds (by increasing liabilities or converting assets) to meet a financial obligation, whether or not it appears on the balance sheet, on the date it is due, or otherwise. The Company carefully manages liquidity risk by matching maturities between senior bonds and subordinated notes. The Company can also require the caisses to pay, in whole or in part, the subordinated notes in order to call senior bonds. Moreover, in order to ensure permanent access to capital markets and thus preserve its liquidity sources, in June 2008 the Company renewed its permanent borrowing program allowing it to issue, over a 25-month period, up to $2,000,000 in senior bonds. Managing market risk Market risk refers to the risk of changes in the market value of financial instruments resulting from fluctuations in the parameters affecting this value, in particular, interest rates and their volatility. The Company is exposed to market risk due to its intermediation operations between the caisses and institutional investors. More specifically, the Company is exposed to interest rate risk, which corresponds to the potential impact of interest rate fluctuations on net interest income and on the economic value of equity. Conservative management is applied in order to optimize net interest income while minimizing the negative impact of interest rate movements. The Company therefore seeks to match the interest rates on senior bonds with those of subordinated notes throughout the term of these financial instruments. In addition, when debt securities are issued, the Company sets a sufficient profit margin to finance its operating costs by fixing an interest rate on the subordinated notes that is a certain number of basis points over the cost of the debt. Moreover, the Company has no trading portfolio. Since cash flows resulting from the Company s operations are matched, the impact of interest rate changes on the economic value of equity is therefore negligible. 16