Municipal Guarantee Board Finland

FEBRUARY 6, 2013 SUB-SOVEREIGN CREDIT ANALYSIS Municipal Guarantee Board Finland Table of Contents: SUMMARY RATING RATIONALE 1 RATING OUTLOOK 1 WHAT COULD CHANGE THE RATING -- DOWN 1 COMPANY OVERVIEW 2 KEY RATING CONSIDERATIONS 2 Franchise Value 2 Risk Positioning 3 Financial Position and Performance Liquidity 3 3 Efficiency 4 Capitalisation 4 Asset Quality RATING HISTORY ISSUER RATING 4 5 COMPANY ANNUAL STATISTICS 6 MOODY S RELATED RESEARCH 9 Analyst Contacts: LONDON +44.20.7772.5454 Roshana Arasaratnam +44.20.7772.5302 Vice President - Senior Analyst roshana.arasaratnam@moodys.com David Rubinoff +44.20.7772.1398 Managing Director - Sub Sovereigns david.rubinoff@moodys.com Summary Rating Rationale The Aaa rating of the Municipal Guarantee Board (MGB), with stable outlook, is underpinned by its public-policy mandate and strong franchise value. The rating also reflects:» Its exclusive guarantee of the obligations of Municipality Finance Plc (MuniFin, Aaa stable);» Its adequate financial fundamentals and sufficient liquidity to meet an unlikely call under any of its guarantees;» The guarantee by Finnish local governments of MGB s obligations and the long-term stability of the Finnish municipality sector; Calls under the guarantee will only be triggered if MuniFin is unable to meet its obligations. As MuniFin operates under strict asset-liability management criteria and prudent liquidity guidelines, Moody s currently believes it unlikely that it would need to resort to support from its guarantor. Rating Outlook The rating outlook is stable. What Could Change the Rating -- Down A change in the guarantee or deterioration in the financial strength of Finnish local governments may exert pressure on MGB s rating. Any alterations in the fundamental supportive structure of the local government sector or a downgrade of the sovereign rating could lead to a negative rating action. This Credit Analysis provides an in-depth discussion of credit rating(s) for Municipal Guarantee Board and should be read in conjunction with Moody s most recent Credit Opinion and rating information available on Moody's website.

Company Overview Following its establishment by law in 1996, the MGB took over as guarantor of MuniFin s debt. The primary purpose of MGB is to safeguard and to develop joint funding for Finnish municipalities by providing guarantees for credit institutions owned and controlled by municipalities. MuniFin is the only credit institution owned and controlled by municipalities in Finland. Key Rating Considerations Franchise Value MGB was established with the purpose of safeguarding and developing joint municipal funding by providing guarantees for entities owned or controlled by municipalities, who in turn provide loans to local governments for public-service purposes or social housing. The creation of a new guarantor was deemed necessary due to the expansion of the activities of Municipality Finance Plc (MuniFin). MuniFin remains the only institution benefiting from the MGB guarantee. 1 As of January 1, 2013, MGB s membership included 303 of the 304 local governments in Finland, representing approximately 99.95% of the Finnish population. If a municipal member failed to pay its obligations, other members would be jointly liable up to their share of participation in the shortfall according to the (Finnish) act on MGB. MuniFin a specialised local government lender MuniFin, a specialised lender to Finnish local governments, to entities controlled by local governments and state guaranteed housing entities, was established in May 2001 through a merger between Municipal Housing Finance Plc and Municipality Finance Plc. MuniFin s mandate is to provide local governments and state guaranteed housing entities with advantageous financial services whilst operating efficiently and profitably. MuniFin was able to increase its net profit to almost 51million in 2011 from approximately 43 million in 2010. In recent years, MuniFin has effectively become the sole financing source for Finnish local governments and state guaranteed housing entities, with a market share in excess of 80% in 2012. Commercial banks and other lenders have withdrawn from the market in response to their higher funding costs. MuniFin is owned by Finnish local governments (53.3%, Helsinki the largest at 10.4%) together with Keva (formerly the LGPI; 30.7%), the central government (16.0%) and the Association of Finnish Local and Regional Authorities (1.1%). The only entities permitted to be shareholders in MuniFin without special consent by the Board of Directors of MuniFin are Keva, Finnish local governments or the entities owned by them, and the Association of Finnish Local and Regional Authorities. The Finnish local government sector is a significant component of the economy, making up approximately 20% of GDP and 20% of total employment in the country. 2 MuniFin is supervised by the Finnish Financial Supervisory Authority (FIN-FSA, Finanssivalvonta). 1 MuniFin has within its balance sheet legacy liabilities of the former Municipality Finance Plc and Municipal Housing Finance, Plc. 2 The Association of Finnish Local and Regional Authorities 2 FEBRUARY 6, 2013 CREDIT ANALYSIS: MUNICIPAL GUARANTEE BOARD

Risk Positioning Governance structure brings in central and local governments; affirms low risk tolerance The Ministry of Finance appoints MGB s council of 15 members at the recommendation of the Association of Finnish Local and Regional Authorities. Members serve four-year terms. The council appoints a board of seven members, and the board in turn appoints the managing director for MGB. The MGB has its own auditor as well as one appointed by the Ministry of Finance. By law, MGB must invest its surplus liquidity with considerations of safety, yield, and liquidity; in practice investments are investment grade and held to maturity. The investment policy of MGB allocates 50% of investments to investment-grade debt instruments issued by governments and banks and 50% to other investments, which range from capital secured debt to equities and fund investments. Financial Position and Performance Simple operating model produces stable results It is intended that MGB should be self-financing and should create extra liquidity over the long term through fees on the guarantees it provides. In 2011, MGB reported a profit of 1.15 million compared with 0.67 million in 2010 given an increase in guarantee premium income. The profit was transferred to the fund. 84.74% of MGB s total revenue in 2011 ( 2.00 million) was derived from guarantee fees paid by MuniFin. These fees are priced against the guarantee exposure. The remaining revenue is the yield on its investment portfolio. The fair value reserve in the balance sheet was re-valued downwards from 0.65 million to negative 0.18 million. No impairments were applied against the portfolio. Equity increased from 12.6 million to 12.9 million as of year-end 2011. As of 2011, the annual fee that MGB charges MuniFin was raised from 1.5 million to 2.0 million as a provision for the counterparty exposures on derivatives of MuniFin. The increase of the fee will be passed on to MuniFin s local government members through a rise in borrowing costs as a reflection of these risks. The fee structure and limitations on investment income significantly limit upside to MGB s profitability. Liquidity Several levels of liquidity are in place before an MGB call Were MuniFin to encounter any difficulty in meeting its obligations, a MuniFin investor or a derivative counterparty can immediately claim payments from MGB. Claims by the MGB to its members for their share of contributions to satisfy any calls on the guarantee can be collected without a court order. If the municipal member was unable to pay its share of such a call, other members would be jointly liable in proportion for this shortfall as well, in proportion to their respective population (Section 10 of the Act on the Municipal Guarantee Board, as amended). In addition to providing security by demand for bondholders, MGB has the discretion under its standing orders to provide funds to MuniFin as needed, in advance of a distress scenario crystallising. Moody s understands that the procedures and timing of such financial support has been tested by both MuniFin and MGB. 3 FEBRUARY 6, 2013 CREDIT ANALYSIS: MUNICIPAL GUARANTEE BOARD

To avoid the need for such action, MuniFin and MGB have put in place several layers of protection, before needing to call additional capital under the guarantee. MuniFin holds liquid securities and cash in amounts sufficient to meet at least six months of cash flow needs (new lending included) without access to new funding. MGB also has access to 150 million liquidity facilities to support the timeliness of its guarantee. MGB also has a modest 12.2 million of investments as of December 2011, built up over time from guarantee fees and investment returns. Efficiency MGB has low costs and only three employees. Management s other activities involve promoting the discussions and decisions of the Board, and facilitating policy-related discussion between MuniFin, the MGB members, and government ministries as relevant. Capitalisation The low capital levels (approximately 0.1% of given guarantees) are mitigated by the support mechanisms in place for covering any call on a guarantee, especially the back-up liquidity facility and the relatively rapid procedures for obtaining extra capital from the member local governments. These factors are supported by the low risk profile and the good visibility of MGB s and MuniFin s business. Asset Quality MuniFin s asset quality is the key element in assessing MGB s risk. The Finnish local government sector is regarded as one of the most sound in Europe. MuniFin s lending is limited to the following types of borrowers (with share of lending as of 31 December 2011):» local governments (43% of the total loan portfolio);» entities guaranteed by local governments that are members of MGB, such as municipal companies (13% of the total loan portfolio);» municipal federations (5% of the total loan portfolio); and/or» housing corporations (39% of the total loan portfolio) All local governments and their guaranteed entities are weighted at zero risk by FSA-FIN. Loans granted to municipalities and financed through these bonds are pledged as security to MGB. For a full description of MuniFin s credit, please see the credit analysis on Municipality Finance at www.moodys.com Application of Joint-Default Analysis As a reflection of the application of Moody s Joint-Default Analysis Methodology for Government- Related Issuers, MGB s rating is composed of two principal inputs: a baseline credit assessment (BCA), a very high likelihood of extraordinary support and a high default dependence, mainly reflecting the joint guarantee from its Finnish municipal members. 4 FEBRUARY 6, 2013 CREDIT ANALYSIS: MUNICIPAL GUARANTEE BOARD

Rating History Issuer rating Municipal Guarantee Board 12 Aug 2004 Aaa Rating assigned 5 FEBRUARY 6, 2013 CREDIT ANALYSIS: MUNICIPAL GUARANTEE BOARD

Company Annual Statistics Municipal Guarantee Board 30/12/2011 30/12/2010 31/12/2009 31/12/2008 31/12/2007 12/31/2006 Summary Balance Sheet (EUR million) Cash & central bank 0.09 0.11 0.05 0.1 0.1 0.09 Due from banks 0 0 0 0 0 0 Securities 10.07 9.88 8.85 8.9 8.38 7.31 Gross loans 0 0 0 0 0 0 Loan loss reserves (LLR) 0 0 0 0 0 0 Insurance assets 0 0 0 0 0 0 Fixed assets 0.17 0.17 0.18 0.03 0.04 0.03 Other assets 2.75 2.58 2.52 1.04 1.05 1.04 Total assets 13.08 12.74 11.61 10.07 9.57 8.46 Total assets (USD million) [1] 16.68 16.99 16.64 14.01 14.09 11.13 Demand deposits 0 0 0 0 0 0 Savings deposits [2] 0 0 0 0 0 0 Due to banks 0.03 0.02 0 0.02 0.03 0.01 Market funds 0 0 0 0 0 0 Insurance liabilities 0 0 0 0 0 0 Other liabilities 0.13 0.11 0.05 0.04 0.07 0.04 Total liabilities 0.16 0.14 0.06 0.06 0.1 0.06 Subordinated debt 0 0 0 0 0 0 Shareholders' equity 12.93 12.61 11.55 10 9.47 8.4 Total capital funds 12.93 12.61 11.55 10 9.47 8.4 Total liabilities & capital funds 13.08 12.74 11.61 10.07 9.57 8.46 Derivatives - notional amount -- -- -- -- -- -- Derivatives - replacement value -- -- -- -- -- -- Contigent liabilities 17,459.46 15,478.45 13,199.59 10,626.70 7,719.10 6,630.00 Risk weighted assets (RWA) -- -- -- -- -- -- Assets under management (EUR million) [3] -- -- -- -- -- -- Number of employees 2 2 2 2 2 2 Summary Income Statement +Interest income 0.36 0.39 0.41 0.46 0.39 0.32 -Interest expense 0 0 0 0 0 0 =Net Interest income 0.36 0.39 0.41 0.46 0.39 0.32 +Trading income 0 0 0 0 0 0 6 FEBRUARY 6, 2013 CREDIT ANALYSIS: MUNICIPAL GUARANTEE BOARD

Municipal Guarantee Board 30/12/2011 30/12/2010 31/12/2009 31/12/2008 31/12/2007 12/31/2006 +Fees & commissions 2 2 2 2 2 2 +Insurance income (net) 0 0 0 0 0 0 +Other operating income 0 0 0 0 0 0 =Operating income 2.36 1.89 1.91 1.96 2.14 2.07 -Personnel expenses 0.47 0.45 0.39 0.32 0.36 0.28 -Other operating expenses 0.72 0.75 0.77 0.61 0.6 0.46 = Operating funds flow 1.17 0.69 0.75 1.03 1.17 1.34 -Amortisation/depreciation 0.03 0.02 0.01 0.01 0 0.01 (Total operating expenses) 1.21 1.22 1.17 0.94 0.97 0.74 =Preprovision income (PPI) 1.15 0.67 0.74 1.03 1.17 1.33 -Loan loss provisions (LLP) 0 0 0 0 0 0 +Other non operating adjustments [4] 0 0 0 0 0 0 +Extraordinary profit / loss 0 0 0 0 0 0 =Pretax income 1.15 0.67 0.74 1.03 1.17 1.33 -Taxes 0 0 0 0 0 0 =Net income 1.15 0.67 0.74 1.03 1.17 1.33 -Minority interests 0 0 0 0 0 0 =Net income (group share) 1.15 0.67 0.74 1.03 1.17 1.33 Growth Rates (%) Gross loans -- -- -- -- -- -- Total assets 2.67 9.78 15.31 5.18 13.16 18.27 Customer deposits (demand and savings) -- -- -- -- -- -- Net interest income -7.2-4.88-11.85 20 18.93 1.42 Fee and commission income 33.33-0.13 0.13-14.29 0 0 Operating expenses -0.37 3.95 24.98-3.06 29.81 18.78 Preprovision income 71.11-9.23-28 -12.26-12.08-7.85 Net Income 71.11-9.23-28 -12.26-12.08-7.85 Liquidity, Funding & Balance Sheet Composition Avg. liquid assets % avg. total assets 78.06 77.62 82.57 89.01 88.07 89.62 Avg. gross loans % avg. total assets 0 0 0 0 0 0 Avg. customer deposits % avg. total funding 0 0 0 0 0 0 Avg. interbank funds % avg. total funding 100 100 100 100 100 100 Avg. market funds (excl. interbank) % avg. total funding 0 0 0 0 0 0 Avg. sub debt % total funding 0 0 0 0 0 0 Avg. liquid assets % avg. customer deposits -- -- -- -- -- -- Avg. gross loans % avg. customer deposits -- -- -- -- -- -- Avg. market funds reliance [5] -- -- -- -- -- -- Avg. RWA % avg. total assets -- -- -- -- -- -- 7 FEBRUARY 6, 2013 CREDIT ANALYSIS: MUNICIPAL GUARANTEE BOARD

Municipal Guarantee Board Breakdown of Operating Income in % 30/12/2011 30/12/2010 31/12/2009 31/12/2008 31/12/2007 12/31/2006 Net interest income % operating income 15.26 20.55 21.36 23.58 18.06 15.63 Trading income % operating income 0 0 0 0 0 0 Fees & commissions % operating income 84.74 79.45 78.64 76.42 81.94 84.37 Insurance income % operating income 0 0 0 0 0 0 Other operating income % operating income 0 0 0 0 0 0 Profitability Yield on avg. earning assets (%) -- -- -- -- -- -- Cost of interest bearing liabilities (%) -- -- -- -- -- -- Net interest margin (%) 3.61 4.14 4.6 5.36 4.92 4.7 Recurring earning power (PPI % avg. assets) 8.88 5.51 6.81 10.44 12.97 17.04 Risk-weighted recurring earning power (PPI % avg. RWA) -- -- -- -- -- -- Return on average assets (%) 8.88 5.51 6.81 10.44 12.97 17.04 Return on avg. RWA (%) -- -- -- -- -- -- Return on equity (period end) (%) 8.87 5.32 6.39 10.25 12.34 15.82 Net interest income coverage of loan loss provisions -- -- -- -- -- -- Loan loss provisions % preprovision income 0 0 0 0 0 0 Internal capital growth (%) 9.1 5.8 7.38 10.83 13.91 18.67 Dividend payout ratio (%) 0 0 0 0 0 0 Efficiency Cost/income ratio (operating expenses % operating income) 51.41 64.5 61.34 47.75 45.27 35.91 Operating expenses % average assets 9.4 10 10.81 9.55 10.73 9.54 Operating income / employee (EUR thousand) -- -- -- -- -- -- Operating expenses / employee (EUR thousand) -- -- -- -- -- -- PPI / employee (EUR thousand) -- -- -- -- -- -- Total assets / employee (EUR million) -- -- -- -- -- -- Capital Adequacy (Period End) Tier 1 ratio (%) -- -- -- -- -- -- Total capital ratio (%) -- -- -- -- -- -- Shareholders' equity % total assets 98.79 98.94 99.5 99.39 98.95 99.34 Equity participations % shareholders' equity 0 0 0 0 0 0 [1] USD figure uses historical exchange rate against the EUR. [2] Full disclosure may not be available for all years. The amount is then included in "demand deposits". [3] As reported by the bank [4] This may include value adjustments of securities. [5] Avg. [(market funds-liquid assets) % (earning assets-liquid assets)] 8 FEBRUARY 6, 2013 CREDIT ANALYSIS: MUNICIPAL GUARANTEE BOARD

Moody s Related Research Banking System Outlook:» Finland, December 2011 (137801) Banking Statistical Supplement:» Finland, October 2012 (146352) Credit Opinion:» Finland, Government of Rating Methodology:» Government-Related Issuers: Methodology Update, July 2010 (126031) Special Comments:» Government-Related Issuers, May 2007 Update (102945)» Specialised Lenders To Nordic Local Governments, August 2006 (98800) Analysis:» Municipality Finance Plc, December 2012 (147993) To access any of these reports, click on the entry above. Note that these references are current as of the date of publication of this report and that more recent reports may be available. All research may not be available to all clients. 9 FEBRUARY 6, 2013 CREDIT ANALYSIS: MUNICIPAL GUARANTEE BOARD

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