Annual report 2006 - Dexia.com

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PUBLIC/PROJECT FINANCE MANAGEMENT REPORT COMPTES CONSOLIDÉS COMPTES SOCIAUX PUBLIC/PROJECT FINANCE AND CREDIT ENHANCEMENT Dexia is the global leader in Public/Project Finance and Credit Enhancement with subsidiaries and branches in more than 30 countries worldwide. The key elements of Dexia’s success on this market, which represent around a half of its net result, are basically its longterm relationship with local players along with its innovation capability. The vast range of products Dexia offers to its public sector clients allows the bank to address all their needs, taking advantage of a multi-product offer: loans or structured loans, capital markets solutions, insurance services, debt management, insurance products... Furthermore, for several years, the bank has been establishing a diversification policy by seeking: • to widen its customer base by developing new franchises in line with cautious underwriting criteria. This diversification in clientele helps to deliver Dexia’s high average margins without impairing the low Group profile (social housing, hospitals, non-profit organizations...); • to expand its geographical scope towards promising markets which in the medium term will play the role of growth relay. In Project Finance business, where Dexia holds a worldwide lead in terms of PPP/PFI, the bank is deliberately focusing on specific sectors where it has a recognized know-how and expertise: transportation, environment, social infrastructure (health, education, etc.), energy (including renewables) and telecoms, and deliberately refraining from operating in all the other sectors such as mining, manufacturing, and so on. For the year 2006, Dexia was ranked by Dealogic (a Euromoney database) as a top 10 lead arranger of project finance loans in both Europe and North America. Dexia is also one of the major players in credit enhancement business, thanks to its American subsidiary FSA, which began its activity in the Eighties and now holds about one quarter of the insured municipal bond market. FSA’s activity outside the United States is also significant and developing rapidly. The expected long-term real growth of the global public finance market (2%-4%) will stem from several factors, like the increase of population and GDP, the decentralization process engaged around the world, an ageing population which will generate new demand, and increasing infrastructure needs in developing countries. Despite this moderate annual growth rate at global level, the total increase of debt over the next ten years is estimated at more than USD 1.5 trillion, i.e. more than three times the total public finance commitments of Dexia today. As global leader in Public/Project Finance, Dexia is best positioned to capture this growth and will maintain its leadership on this market capitalizing on its unique know-how. THE SITUATION REGARDING PUBLIC/ PROJECT FINANCE IN THE EUROPEAN UNION MEMBER STATES As world leader in Public/Project Finance, Dexia likes to share its expertise and knowledge of the European sub-national public sector. Thus, each year the Research Department publishes an economic outlook report concerning Public Finance in the European Union. For the sixth consecutive year, this study (published in French, English and now German) is a reference tool for decision-makers in Europe. It is accompanied by a set of “information sheets” which provide detailed financial data by country and also offer key data on the structural and cohesion funds as well as twinning in Europe. This latter document was prepared in partnership with the Council of European Municipalities and Regions. Both publications are available for download on the www.dexia-creditlocal.fr website. With the use of five indicators (expenditure, investment, fiscal revenue, budget balance and debt), the last edition of the Economic Outlook, published in December 2006, provides an overview of the 25 EU Member States’ subnational public finances over the period 2000-2005 and presents the highlights of the year 2006. Although the situations of the 89,200 local and regional governments vary considerably all over Europe, a certain number of general trends can be identified on the European scale. The strengthening of decentralization, regionalization and municipality merging or grouping Offering a great diversity in terms of territorial and institutional organization, the European territorial landscape is constantly evolving. Three major fundamental trends seem to be emerging: an increase in decentralization, a strengthening of the regional level and the encouragement to inter-municipality cooperation and municipality mergers. 76 | Dexia / Annual Report 2006
PUBLIC/PROJECT FINANCE A regular increase of territorial public expenditure Local and regional authorities occupy an increasingly important position in the European economy. Their expenditure increased in volume by +3.6% per year on average between 2000 and 2005 and by +3.0% in 2005. With a spending amount of EUR 1,374 billion in 2005, it represented 12.7% of the EU GDP and 26.8% of total public expenditure. This momentum is due to a large extent to the deepening of decentralization which led to important transfers of competence in favor of local and regional authorities in various countries of the EU15 (Spain, Italy, etc.) as well as additional competences in several new Member States (Slovakia, Czech Republic, Estonia, etc.). This dynamism also results from the increased weight of current operating expenditure in local and regional budgets (health, education, social aid) and the increasing needs of populations for local public services. The territorial sector remains the driving force in public investment Over the years, local and regional public authorities have consolidated their role as prime public investors. From 2000 to 2005, investment remained solid (+3% per annum on average). It was the new Member States in particular which implemented very dynamic investment policies (+4.2% per year in average). In 2005, EU territorial investment amounted to almost EUR 170 billion, representing 1.6% of EU GDP, 12.3% of the local and regional budgets and, above all, 63.9% of total public investment. That year, local and regional investment regressed in some countries – the result of otherwise augmenting operating expenditure and of stricter budgetary discipline to fulfil the Maastricht criteria. In other countries, the implementation of the 2004-2006 European Union Programs concerning the structured funds (EU10 Member States) and the municipal electoral cycle (Belgium, Slovakia, Greece, Poland, etc.) had a positive influence on investments. Increased fiscal decentralization Transfers of competences to subnational governments have often been accompanied by transfers of State taxation and/or by the creation of new specific local and regional own-source taxes. Between 2000 and 2005, territorial authority fiscal revenues rose by +4.5% per year on average (+3.1% in 2005), although this particularly strong increase is partly to be attributed to the significant fiscal transfers in favor of the Spanish autonomous communities. In 2005, territorial governments’ tax revenues represented 37.8% of total territorial revenues and 4.7% of EU GDP. A number of major tax reforms concerning EU territorial public finances were implemented or voted in 2005 and 2006. Reforms concerning shared taxes such as the increase in the VAT rates in Germany, the revisions of the personal or company income taxes in several countries (Austria, Lithuania, Estonia, Finland, etc.) or the introduction of new shared taxes (France) often had a significant impact on the overall structure of local governments’ financial resources. Reforms also concerned own-source territorial tax system such as in the Netherlands (property tax), France, Latvia, Belgium and so on. Global reforms, completely reshaping the systems of local finance, were voted in Denmark and Slovakia. Sound budgetary health of the territorial public sector Although in the year 2000 the global EU territorial budget balance indicated a slight surplus, a mild erosion has occurred since then. In 2005, the public deficit of local and regional authorities, approximately EUR 25 billion, increased slightly. However, established at 0.23% of EU GDP, it remains very modest compared to that of the public sector as a whole (2.3% of GDP). Local and regional public debt increased by +2.4% per annum in volume over 2000-2005 with a slight acceleration in 2005 (+4.9%) to reach EUR 633 billion. This growth was stronger in the EU10 countries (+13.6% in volume per year on average) because of the impact of EU accession and their investment needs. The debt-to-GDP ratio remains stable over the 2000- 2005 period (5.8% of GDP in 2005 compared to 5.6% in 2000). Again, this debt level, allocated solely to investment finance, remains low compared to total public sector debt (63.2% of GDP in 2005). These indicators have been kept under control with the help of budgetary and prudential rules which provide a framework for local management. These rules have recently been reinforced in several countries which have chosen to associate the subnational sector with the control and governance of public finance, for example through internal stability pacts. THE US MUNICIPAL MARKET IN 2006 The financing market of the local US public sector is characterized by its very strong disintermediation. Indeed, more than 95% of financing is arranged and sold through the US bond markets. After the 2005 record year, 2006 was nevertheless a strong year in terms of volume for the US municipal bond market. Low interest rates during the year encouraged municipalities to continue a relatively high level of new borrowing for a broad range of public services and infrastructure projects. With issuers motivated to tap the market because they anticipated a rise in interest rates, US municipalities issued approximately USD 384 billion of municipal bonds, 6% less than 2005, but 6% more than 2004. The amount of bonds issued exclusively for refunding was 40% less than in 2005, which was however characterized by particularly favorable refunding conditions. Slightly more than two-thirds of the municipal bonds issued in 2006 were general obligation bonds issued by states, counties, cities, school districts and other municipal entities. The rest were primarily revenue bonds in the transportation, health care, utility, housing, education and other sectors. The penetration of bond insurance in this market, which reached 56% in 2005, was down to 50% in 2006. The year was still marked by growing interest in Public Private Partnership (PPP) financing in North America. Indeed, a number of US states, facing budget deficits and huge infrastructure needs, have adopted PPP laws this year, which allow private entities to invest in public infrastructure. MANAGEMENT REPORT COMPTES CONSOLIDÉS COMPTES SOCIAUX Dexia / Annual Report 2006 | 77
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no achievement without commitment
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FINANCIAL HIGHLIGHTS 4 MESSAGE FROM
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FINANCIAL HIGHLIGHTS FINANCIAL HIGH
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MESSAGE FROM THE CHAIRMEN MESSAGE F
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MESSAGE FROM THE CHAIRMEN MESSAGE F
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GROUP PRESENTATION GROUP PRESENTATI
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GROUP PRESENTATION HISTORY OF THE G
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GROUP PRESENTATION MANAGEMENT REPOR
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GROUP PRESENTATION MANAGEMENT REPOR
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GROUP PRESENTATION GROUP ORGANIZATI
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GROUP PRESENTATION Group Executive
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GROUP PRESENTATION MAIN ACTIVITIES
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GROUP PRESENTATION December Opening
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RAPPORT DE GESTION CONSOLIDATED FIN
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4.1.3. Currency risk 4.2. CREDIT RI
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Name Head Office % of Consolidation
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GEOGRAPHIC Eurozone (1) Rest of USA
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PORTFOLIO Number Loan Collateral Ex
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7. NOTES ON THE ASSETS OF THE CONSO
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B. Analysis of quality See note 7.1
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C. Treasury bills and other eligibl
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7.8. SECURITIES HELD TO MATURITY De
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7.10. TANGIBLE FIXED ASSETS A. Net
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7.11. INTANGIBLE ASSETS AND GOODWIL
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A. Other assets Analysis by nature
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Present value of finance lease liab
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8. NOTES ON THE LIABILITIES OF THE
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B. Analysis by maturity and interes
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Convertible non-subordinated debt D
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D. Provisions for pensions and othe
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9. OTHER NOTES ON THE CONSOLIDATED
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Deferred tax coming from assets of
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2. Change in profit sharing reserve
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B. Nonlife contracts B.1. Income an
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9.4. RELATED PARTIES TRANSACTIONS A
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The assets and liabilities disposed
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9.8. SHARE-BASED PAYMENTS STOCK OPT
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9.9. MINORITY INTERESTS - CORE EQUI
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Dec. 31, 2005 Dec. 31, 2006 Banking
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10. NOTES ON THE CONSOLIDATED OFF-B
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11.6. COMMISSION INCOME AND EXPENSE
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(AVERAGE FTE) France Belgium Luxemb
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11.14. IMPAIRMENT ON GOODWILL Nil.
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12. NOTES ON RISK EXPOSURE (IN MILL
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12.2. CREDIT RISKS EXPOSURE A. Anal
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12.3. INTEREST RATE REPRICING RISK:
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12.6. LIQUIDITY RISK: BREAKDOWN BY
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12.7. CURRENCY RISK As of Dec. 31,
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BALANCE SHEET 216 OFF-BALANCE SHEET
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BALANCE SHEET (before income approp
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STATEMENT OF INCOME (in thousands o
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4.2.6. Amounts receivable within on
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RAPPORT DE GESTION COMPTES CONSOLID
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4.6. STATEMENT OF FORMATION EXPENSE
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4.10. SHARE IN THE CAPITAL AND OTHE
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D. Commitments to issue shares Amou
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4.19. OTHER TAXES AND TAXES BORNE B
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6. SOCIAL REPORT 6.1. STATEMENT OF
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6.3. STATEMENT CONCERNING THE IMPLE
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• there have been no transactions
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DEXIA IN THE WORLD RAPPORT DE GESTI
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RAPPORT DE GESTION Kommunalkredit D
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Dexia’s Annual Report 2006 has be
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SDXI 0109-5 03-07
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Annual report 2006 - Dexia.com

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