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ANNUALREPORT2008
2
Contents
Danish Ship Finance at a Glance 4
Key Figures 5
Activities During the Year 6
Profit and Loss Account and Balance Sheet 8
Outlook 9
Organisation and Management 10
Regulation 12
Risk Management and Capital Adequacy 14
Credit Risks 16
Financial Risks 22
Operational Risks 24
Bonds 25
Statement by the Management Board and the Board of Directors w w 26
Independent Auditors’ Report 27
Directorships 29
Accounting Policies 30
Profit and Loss Account 34
Balance Sheet 35
Statement of Changes in Capital and Reserves 36
Notes 38
• Danish Ship Finance is a ship finance institute,whichusesasimpleandeffectivebusinessmodelforfinancing ships against afirstmortgage.The com-pany is supervisedby theDanishFinancial Super-visoryAuthority.
• Danish Ship Finance provides financing for Dan-ish shipowners and for selected non-Danish ship-owners.
• Danish Ship Finance must comply with a balanceprinciple, which ensures that its loans are fundedthroughbond issuancethroughout thematurity.Tothat end, the companyhas secured sufficient fund-ingtofinancetheexistingportfolioofloansandloanoffersuntil2020withouthavingtoissuenewbonds.Future lending activitieswill require new bond is-sues.
• Since2007,DanishShipFinancehashadtheopport-unity to issuecoveredbonds.Thisopportunityhasnotyetbeenutilised.
• In2003,DanishShipFinanceacquiredtheexclusiveright toofferCIRRloansforvesselscontractedbe-foretheendof2012andbuiltinDenmarkuntiltheendof2015.
• BondsissuedbyDanishShipFinanceupholdanAa3ratingbyMoody’sInvestorsService.Thecompany’sIssuerRatingisalsoAa3.
• At31December2008,DanishShipFinancehadloansofDKK51.0billion,totalassetsofDKK81.6billionand capital and reserves ofDKK8.9 billion beforedividends.Thecompanyhas64employees.
• TheprofitaftertaxfortheyearwasDKK37.0mil-lion.Theprofitisconsideredacceptableinayearofunrestinthefinancialandmaritimemarkets.
• DanishShipFinancehasasolvencyratioof13.0%afterproposeddividends.Thecompany’scorecapi-tal(Tier1)ratioisalso13.0%.
DanishShipFinanceataGlance
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2008 2008 2007 2006 2005 2004
Net interest income from lending operations 48 256 174 174 161 182
Net interest income from financing operations 89 470 443 411 369 411
Total net interest income 137 726 617 585 530 593
Net interest and fee income 151 796 659 630 568 615
Market value adjustment (72) (378) (160) (123) (148) (23)
Staff costs and administrative expenses (17) (92) (86) (80) (80) (74)
Losses and writedowns on debtors (38) (200) 104 176 56 772
Net profit before tax 24 128 519 606 399 1,293
Profit for the year 7 37 394 443 286 907
Loans 9,658 51,044 42,690 37,746 37,200 35,445
Due from credit institutions 284 1,503 10,550 6,150 1,591 2,734
Bonds 5,081 26,851 21,394 16,893 22,334 20,021
Capital and reserves 1,680 8,879 9,177 9,158 8,966 9,486
Total assets 15,446 81,632 76,660 62,542 62,534 59,907
Solvency ratio *) 13.0 13.0 15.3 17.9 18.6 22.2
Return on equity 0.4 0.4 4.3 5.0 3.3 10.4
Returnonequityiscalculatedastheprofitfortheyearasapercentageoftheaveragecapitalandreservesfortheyear.Theguaranteecapital,whichamountedtoDKK300millionuntil12July2005,wasnotpaidupandisthereforenotincludedinthecalcula-tionofaveragecapitalandreservesforuseincalculatingreturnonequity.
*)Thesolvencyratiofor2004wascalculatedinaccordancewiththeexecutiveorderonDanishShipFinance(DanmarksSkibskreditfond),whichwasinforceuntil1July2006.
AspartoftheconversionofDanmarksSkibskreditfondtoDanmarksSkibskreditA/Sin 2005, a total of DKK 1,610 million was repaid to the Danish government andDanmarksNationalbank.Therepaymentaffectedthecapitalandreservesrecognisedat31December2005.Thecomparativefiguresfor2004havenotbeenrestated.
KeyFiguresDanishShipFinance
(DanmarksSkibskreditfond)
DKKmillion
DanishShipFinanceA/S(DanmarksSkibskreditA/S)
DKKmillionUSDmillion
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2008 was a year of many challenges. This applies to the financial sector as well as to large parts of the maritime sector. In light of this, Danish Ship Finance had an acceptable year in 2008.
The company recorded a continuing positive trend inlending operations before writedowns. However, theglobaleconomiccrisishashadadirect impactonde-mandforseatransport.Slowingeconomicgrowthandin certain countries outright recession combinedwiththe delivery of many new vessels from the shipyardshavetriggeredaglobaldeclineinfreightratesandshipprices.Thedeclineinratesandpriceswasparticularlystrong in thedrybulkandcontainersegments,whereratesdeclinedatanunprecedentedpacetoverylowlev-els.Thisaffectedsomeofthecompany’scustomersandis the reason for the increase in thecompany’swrite-downs.Thecompanydidnotrecordlossesonloansin2008.
Danish Ship Finance has retained a consistent andprudentcreditpolicyduringtheeconomicboomofthepast fewyears.A very large number of loan requestshavebeenrejectedbecausetheyfailedtocomplywiththe company’s requirements for factors such as loan-to-value ratio, financial standing of the borrower oremploymentofthevessel.DanishShipFinancehasfo-
ActivitiesDuringtheYear
cusedoncustomerswhoareassessedtoberesilienttoaneconomicdownturn, forexamplebymaintainingaportfolioofvesselsacquiredoveranumberofyearsandatreasonableaverageprices.Eveninviewofrecenteco-nomicdevelopments, the companygenerally retainsasatisfactorycreditqualityinitsportfolioofoutstandingloanoffersanddisbursedloans.
Thecompanyhassufferedlossesonitssecuritiesport-folio due to the financial crisis.The spread betweenmortgagebondsandgovernmentbondswidenedinthecourseof2008.Asmostofthesecuritiesportfolioisin-vestedinDanishmortgagebonds,thecompanyhasnotbeenabletogeneratethesamereturnasthatachievedby similar investments in Danish government bonds.Thecompanyalsoincurredlossesonitsequityinvest-ments owing to thehistorical decline in global equityindicesin2008.
LoandisbursementsamountedtoDKK12.9billion,anincreaseofDKK1.1billionrelativeto2007.Newlend-ingisdistributedonDanishaswellasforeignshipown-ersandwasachievedthroughloanstonewcustomersandanincreaseinlendingtoanumberofexistingcus-tomers.
In2008,DanishShipFinance’scustomersacceptedloanoffersintheamountofDKK15.1billion.Theloanswill
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bedisbursedduringtheperiod2008-2012.Shipownersfully or partly controlled byDanish interests accountforalittleover54%ofacceptedloanoffers.Theremain-ing46%areofferstoalargegroupofshipownersdomi-ciledoutsideDenmark,whichisconsistentwithDanishShipFinance'spolicyofactiveriskdiversification.Loanofferstoforeignshipownerswerealmostevenlydistrib-utedbygeographicareas,with thehighestnumberofacceptedoffersbeingacceptedbyUS,GreekandGer-manshipowners.
Theshippingmarkets
Thecontainermarketstruggledwithexcesscapacityin2008.As a result of this,many shipownershad to layuptonnage,andfreightratesandshippricesdeclinedthroughouttheyear.
Thetankermarketwasmarkedbytheprospectofaglo-baleconomicdownturn.Freightratesstayedathighlev-elsin2008,butshippriceshavestartedtocomedown.
Thedrybulkcarriersenjoyedagoodfirsthalfin2008characterisedbyhighratesandstrongdemand.Thesup-plyoftonnageroseinthesecondhalfoftheyear,anddemandwasdown, causinga sharpdecline in freightratesandshipprices.
Forthethirdyearrunning,demandforoffshoresupply
vessels remained strong. In spite of consistently highfreightrates,shippricesfellduringthelastfewmonthsoftheyear,partlybecauseofalargeorderbook,partlybecauseofmuchloweroilprices.
ThemostrecentShippingMarketReview,whichisavail-ablefromthewebsitewww.shipfinance.dk,providesanin-depthdescriptionoftheshippingmarkets.
Bondissuance
Theneedforissuingnewbondsin2008wasrelativelysmallfollowingtheissuanceinthesecondhalfof2007ofsufficientvolumestocoveralldisbursementsintheexistingportfolioof loanoffers. In2008, thecompanyissuedbondsworthDKK5.5billion,ofwhichDKK1.7billionwasissuedinDKKwithanaveragematurityofjustunder4.5years.TothisshouldbeaddedissuanceofbondsundertheCIRRloanschemeinforeigncurrencyforDKK3.8billionwithamaturityof12years.Giventheunstablemarketinwhichthebondswereissued,thetermsforraisingnewfundingweresatisfactory.
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millionUSD
millionNOK
Shipvaluesbysegment
Dry bulk: Capesize, 170,000 DWT, 5 year old
Container: Post-Panamax, 6,600 teu, 5 year old
Tanker: VLCC, 300,000 DWT, 5 year old Offshore: AHTS, 12,240 BHP, 5 year old
Source: Clakson, Platou, Danish Ship Finance
Profitfortheyear
TheprofitfortheyearaftertaxamountedtoDKK37.0millioncomparedwithDKK394.4millionin2007.
NetinterestandfeeincomerosefromDKK658.6mil-lionin2007toDKK795.5millionin2008,ofwhichnetinterestandfeeincomefromlendingoperationsrecord-edanincreaseofDKK94.3milliontoDKK308.1mil-lion in2008,up fromDKK213.8million in2007.Dueto developments inmarket interest rates, net interestincome from financing operations rose by DKK 27.9millionfromDKK442.6millionin2007toDKK470.5millionin2008.
Marketvalueadjustmentsofsecuritiesandforeignex-changeamountedtoalossofDKK377.8millioncom-pared with a loss of DKK 160.0million in 2007. Thesecurities portfolio consists primarily of Danish gov-ernmentbondsandmortgagebondsorbondsofasimi-larsecurityandafewminorequityinterests.Thereturnonequityinvestments(unittrustcertificates)amountedtoalossofDKK232.8millionagainstaprofitofDKK28.3millionin2007.
Staff costs and administrative expenses amounted toDKK91.9millionin2008,againstDKK85.9millionin2007,anincreaseofjustunder7%.Lossesandwritedownsondebtorsamountedtoanetex-penseofDKK199.7millioncomparedwithanetincomeofDKK103.7millionin2007.WritedownsincreasedfromDKK730.8millionin2007toDKK932.4millionin2008,andattheendoftheyearmadeup1.9%oftotallending,whichisinlinewithlastyear’spercentage.Movementsinwritedownsin2008andwritedownsbrokendownbycountriesarespecifiedinnote12totheaccounts.
TaxfortheyearamountedtoDKK91.3millionagainstDKK124.1millionin2007.For2008,thisequalsanef-fectivetaxrateof71.2%,whichisduetothefact thatthenegativereturnonequityinvestmentsin2008isnotincludedinthetaxableincome.
Total assets increased to DKK 81,631.6 million fromDKK76,659.9millionat31December2007.
Lending, calculated at hedged values, rose by DKK8,515.5millionbeforewritedowns fromDKK43,420.5millionin2007toDKK51,936.0millionin2008,anin-creaseof19.6%.Overthecourseoftheyear,therewas
a net increase in new loans ofDKK 12,897.2million,againstanincreasein2007ofDKK11,760.3million.Forfurtherdetailsonmovementsinlending,seenote10totheaccounts.
ThebondportfoliorosefromDKK21,394.4million in2007toDKK26,851.2millionat31December2008.Theincreasecomparedwith2007wasprimarilyduetoanincreaseintheproportionoftheloansgranted,butstillnotdisbursed,whichisinvestedinshort-termbondsun-tiltheloansaredisbursed.Thebondportfolioisspeci-fiedinnotes13and14totheaccounts.
Issuedbondsamounted toDKK62,519.8millionat31December2008comparedwithDKK64,962.3millionatyear-end2007.Asaresultofstrong liquidityresourc-es, in 2008 newbonds issued amounted to onlyDKK5,524.2 million, as compared with issuance of DKK24,021.3 million in 2007. Movements in issued bondsandaspecificationofbondtypesaresetoutinnote19totheaccounts.Includingtheprofitfortheyear,thecompany’scapitalandreservesamountedtoDKK8,879.1millionascom-paredwithDKK9,177.2millionat31December2007.DividendsofDKK5.6millionhavebeenproposed forthefinancialyear.Theproposeddividendisincludedincapitalandreservesbutisexpectedtobedisbursedaftertheapprovalbytheshareholdersattheannualgeneralmeeting inApril 2009, and the amount has thereforebeendeducted incapitalandreserves in thesolvencycalculationbelow.
Thesolvencyratiostoodat13.0%at31December2008,ascomparedwiththeminimumrequirementof10%asstipulatedintheexecutiveorderonashipfinanceinsti-tute.Asfrom1January2009,therequirementisloweredto8%.Usingthesamecalculationmethod,thesolvencyratiostoodat15.3%at31December2007.Thedeclin-ingsolvencyratioduringtheyear isespeciallyduetothe increase in the loanportfolio (weightedassetsnotincludedinthetradingportfolio)andthefactthatitemsinvolvingoperationalrisksareincludedinthecalcula-tionofthesolvencyratioasfrom2008.Note23providesaspecificationofthecompany’ssolvency.
No events have occurred after thebalance sheet datethathaveamaterialeffectonthecompany’sannualac-counts.
ProfitandLossAccountandBalanceSheet
8
Duetotheeconomicdownturnandthecontinuingtur-moilinthefinancialmarkets,thecompanyexpectsanincreaseinthenumberofloansinvolvingahigherriskof default in 2009, and itmay prove necessary to in-creasethecompany’swritedowns.Asinpreviousyears,pricedevelopmentsinthesecuri-ties portfoliowill also affect the company’sfinancialperformance.
Likeothercredit institutions,DanishShipFinance iscovered by the Danish parliament’s credit package,whichisoftenreferredtoasSecondBankPackage.Itremains to be decidedwhether the companywill ex-ploit thepossibilities foracapital injection fromSec-ondBankPackage.Regardlessof thepossibilitiesof-feredbySecondBankPackage,DanishShipFinancewillpursuenormalandselectiveloanofferactivities.From1January2009,DanishShipFinanceiscoveredbytheexecutiveorderonfinancialreportinginfinan-cialinstitutions.Onthesamedate,thecompany'snewexecutiveorderentersintoforce,andtherulesonau-ditcommitteesandobligationstoreportoncorporatesocialresponsibilitywilltakeeffect.DetailsaboutthenewrulesareprovidedinRegulation.
Danish Ship Finance has resolved to continue recentyears’policyofnot issuingquarterlyreports in2009.The company currently publishes full-year and half-yearreports. It isbelievedthatmorefrequentreportswouldnotaffectthepricingofthebondsissued.
Outlook
Shippinghasalwaysbeenacyclicalindustryinwhichfluctuations in supply and demand for vessels are anaturalcomponent.Atthemoment,theoutlookischar-acterisedbyaverylargeorderbookandmanydeliver-iesofnewvesselsfromtheshipyards,whilstdemandisslowingdownduetotheglobaleconomiccrisis.
Tosomeextent,theindustrywillcontributetoreducingsupplybyincreasingtheproportionofvesselsthatarescrapped.Duringthepastfewmonths,therehasbeena sharp increase in scrapping activity. At the sametime,theslowingdemandhastriggeredrenegotiationsofmanyshipbuildingcontractsalreadysignedwithaviewtocancellingsuchcontractsorpostponingthede-liverydate. In the short term,however, these supply-reducingmeasures are unlikely to suffice to balanceouttheslowingdemand.
Itisstilltooearlytodeterminewhatconsequencestheglobaleconomiccrisiswillhavefortheshippingmar-kets.Sofar,especiallythedrybulkandcontainermar-ketshaveexperiencedunusualfluctuations.Theothersegments are expected to be affected to some extentas well. Many countries have taken steps to restoregrowth,butitremainstobeseenwhensuchmeasureswillhaveafavourableimpactondemandforseatrans-port.
Although theoutlook for thevarious segments isnotunequivocal, the shipping markets are generally ex-pectedtofaceaverychallengingyear.
Sofar,thechallengesfacedbythefinancialsectorhaveresultedindemandforfundingexceedingsupply.Theresultisasharpincreaseincreditmargins.Inspiteofthe heavy demand, Danish Ship Finance will retainits cautious lending policy and continue to focus onshipownerswhoare considered tohave thebest pre-conditionsformakingitthroughthecurrenteconomicdownturn.
Basedonthevolumeofloanoffersalreadymadeandaccepted, lending in 2009 is expected to remain un-changedortobeslightlyhigher, inUSD-terms.At31December 2008, 87% of lendingwas denominated inUSD.Earnings from lendingoperationsbeforewrite-downs, also measured in USD, are expected to rise.MovementsintheexchangerateoftheUSDwillaffectthesizeoflendingandearningsinDKK-terms.
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ObjectiveandVisionTheobjectiveofDanishShipFinanceistoprovideshipfinancing inDenmark. Inaddition, thecompanypro-vides ship financing in the international market, solongas suchactivities donot unnecessarily limit thecompany’sDanishoperations.
DanishShipFinanceprovidesshort-termandlong-termloancapitalforshipownersinallstagesoftheshippingcycle and it endeavours to be a competent and trust-worthybusinesspartnertoitscustomersandfinancialcounterpartiesaswellasotherstakeholders.
DanishShipFinanceaimstoobtainsatisfactoryfinan-cial results for its owners and is therefore dedicatedtocreatingvalue,whichissecuredthroughcontrolledgrowthinlendingwhilefocusingonhighcreditqualityandappropriatediversificationintheloanportfolio.
DanishShipFinanceismanagedonthebasisofthefol-lowingvision:
Danish Ship Finance is the leading provider of ship fi-nancing in Denmark and is to be regarded by the inter-national market players as one of the five most recog-nised and leading lenders by 2010.
ShareholdersinDanishShipFinance
Thecompany'sambitionistogenerateareturnthatissatisfactorytoitsshareholders.TheBoardofDirectorscontinuallyassesseswhetherthecompany’sshareandcapitalstructureconsistentlycomplywiththeinterestsoftheshareholdersandthecompany.TheBoardofDi-rectorsbelieves that thecompanyhasanappropriateshareandcapitalstructuregivenitslevelofactivity.
The share capital of the company amounts to DKK333.3 million, nominal value, and is divided into A
shareswithanominalvalueofDKK300.0millionandBshareswithanominalvalueofDKK33.3million.Thesharesarenotlistedfortradinginaregulatedmarket.
Theshareholdershavesignedashareholders’agreementthatincludesaprovisiontotheeffectthatthesharesshallnotbefreelynegotiableuntil12July2010.However,theprovisionallowsfortradingintheshareswithinthecor-porategroupofeachindividualshareholder.
The shares in Danish Ship Finance are distributedamongthefollowingshareholdergroups:
Banks 40.5%Danmarks Nationalbank 18.9%Shipyards 14.8%Shipowners 11.7%Den Danske Maritime Fond 10.0%Insurance companies 4.1%
The following of the company’s shareholders hold atleast5%ofthetotalvotingrightsorownatleast5%ofthesharecapital.Theshareholdersarelistedalphabeti-cally:
A.P. Møller-Mærsk A/SDanmarks NationalbankDanske Bank A/SDen Danske Maritime FondNordea Bank AB (publ.)Odense Staalskibsværft A/S
At the annual generalmeeting in 2008, theBoard ofDirectors’ proposal on dividends was adopted. Ac-cordingly,DKK0.92persharewaspaidtoholdersofAshares,andDKK1.7748persharewaspaidtoholdersofBshares.Sinceitsconversion,thecompanyhaspaidtotal dividends of DKK 168.4million to the B share-
OrganisationandManagement
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PursuanttoDanishlegislation,threeemployeerepre-sentativesareelectedfortermsoffouryears.Aftertheannualgeneralmeetingheldon24April2008,ErlingGarrelts,ChiefAccountantandHeadofStaffAdmin-istration,LisbethNavntoftPedersen,AssistantRelation-ship Manager, and Henrik Rohde Søgaard, SeniorRelationshipManager,wereelectedtotheBoardofDi-rectors.
The Board of Directors subsequently elected PerSkovhusasitsnewchairmanandJensThomsenasitsnewdeputychairman.
Management Board: Bo Jagd, Managing Director,steppeddownfromhispositionasmanagingdirectorinApril2008inordertoretirebytheendoftheyear.
ThecompanyappointedtwonewmemberstotheMan-agementBoard;ErikI.Lassenwasappointedaschiefexecutiveofficer,andPerSchnackwasappointedexec-utivevicepresidentandchieffinancialofficerinchargeoftreasury,finance,IT,humanresourcesandotherad-ministrativefunctions.
Management remuneration: The company does nothaveawrittenremunerationpolicy.Theunwrittenre-muneration policy reflects shareholder and companyinterests. The remuneration policy is adapted to thecompany’s specific circumstances, is reasonable rela-tive to thedutiesandresponsibilitiesundertakenandpromoteslong-termbehaviour.
Boardmemberselectedbytheemployeesmaybecom-prisedbyabonusscheme.Thebonusschemesarenotunusualrelativetotherestofthefinancialsector.
Nounusual severanceschemesexist for themanage-ment.
holder,DenDanskeMaritimeFond.ThefundsareusedtodevelopandpromoteDanishshippingandtheDan-ishshipbuildingindustry.
Management
The management structure in Danish Ship FinancereflectstheoveralllegalrequirementsandthespecialstatutoryrequirementsthatfollowfromDanishfinan-ciallegislation.
Additional information about corporate governance inDanishShipFinanceisprovidedonwww.shipfinance.dk.
Managementstructure:ThegeneralmeetingelectssixmemberstotheBoardofDirectors,andtheemployeeselectthree.TheBoardofDirectorsdefinestheoverallprinciplesforthecompany’soperations.TheBoardofDirectorsappointstheManagementBoard,whichisinchargeofthesenior,day-to-daymanagement,andre-portstotheBoardofDirectors.
Annualgeneralmeeting:Thegeneralmeeting shallbethe supreme authority in all company matters. Theshare capital is divided intoAandB shares.EachAshareofDKK1carriestenvotes,andeachBshareofDKK1carriesonevote.Otherthanthis,therearenoprovisionsthatrestrictthenumberofvotesorlimitthenumberofsharesheldbyeachindividualshareholder.
The next annual general meeting will be held on 16April2009.
BoardofDirectors:Attheannualgeneralmeetingheldon 24 April 2008, Peter Schütze, the chairman, andPeterFalkenhamresignedfromtheBoardofDirectors.Michael Rasmussen and Torben Schelde Jørgensenwereelectedasnewboardmembers.
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Danish Ship Finance is governed by a specific act and executive order (the “Executive Order”). Pur-suant to the Executive Order, the company is gov-erned by parts of the Danish Financial Business Act. In addition, the company is governed by parts of common rules for financial enterprises. The full wording of the act and the Executive Order is pro-vided on www.shipfinance.dk.
In addition to the rules that govern Danish Ship Finance, the company is governed by a set of rules that comply with the provisions of the Danish Pub-lic Companies Act. The company’s in-house activi-ties are also governed by a set of policies that may be more restrictive than the external regulation. These policies have been adopted by the Board of Directors.
Newrulesin2009
Thecompany’snewexecutiveorder:Thenewexecutiveorderonashipfinanceinstitutetookeffecton1Janu-ary2009.Pursuanttotheexecutiveorder,thesolvencyrequirementisloweredfrom10%to8%,whichisinlinewiththegeneralsolvencyrequirementforotherfinan-cialenterprises.
Theexecutiveorderalsocontainsrulesontheissuanceof coveredbonds.Coveredbondsmust be issued in acapitalcentre,andtheexecutiveordercontainsspecificrulestothateffect.
IFRS:Asfrom1January2009,DanishShipFinancewillbepresenting itsaccountsaccordingtotheDanishFi-nancialSupervisoryAuthority’sexecutiveorderonac-counting.ThisorderbuildsoncomponentsoftheInter-national Financial Reporting Standards (IFRS). Likeother financial enterprises, the company will thus becomprisedbytheIFRSrules.
Auditcommittee:Thenewrulesonauditcommitteeswillhaveaneffectaftertheannualgeneralmeetingin2009.TheprimaryroleoftheauditcommitteeistoassisttheBoardofDirectorsinmeetingitsobligationstoensurean independent and objectivemonitoring of the com-pany.Themembersoftheauditcommitteehavenotyetbeenappointed,butthecompanyisconsideringtoletallthemembersoftheBoardofDirectorshandlethecom-mittee’sfunction.
CorporateSocialResponsibility:As from theannual re-port for 2009, Danish Ship Finance will be under anobligationtoreportonthecompany’sCorporateSocialResponsibility(CSR)policy.Thecompanyhasstartedtoprovide CSR information onwww.shipfinance.dk andwillregularlydevelopandimprovethepolicy.
Regulation
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1313
Risk management is given high priority at Dan-ish Ship Finance, because uncontrolled develop-ment of the various risks may have an adverse im-pact on financial performance and solvency and, by extension, materially weaken future business opportunities.
The company is exposed to several types of risk. The company's risk management efforts are ad-justed according to the special characteristics of each type of risk. The company distinguishes be-tween credit risks, financial risks and operational risks, which are considered the most important types of risk.
Riskmanagement
The Board of Directors has the overall responsibilityforensuringappropriateriskmanagementprocedures.Riskmanagementeffortsaredeterminedbytheguide-linesestablishedbytheBoardofDirectorsandthelegis-lativeframework.
Thecompanyisgovernedbyitsownregulation.Pursu-anttotheExecutiveOrder,thecompanyisgovernedbyparts of theDanish Financial BusinessAct.The com-panyisalsogovernedbytheExecutiveOrderonbondissuance, the balance principle and riskmanagement,and,likeotherfinancialenterprises,itissupervisedbytheDanishFinancialSupervisoryAuthority.
Thelimitsforcreditriskmanagementarestipulatedinthecreditpolicy.Thepolicybuildsontheprovisionsinthecompany’sactandexecutiveorder.Theseprovisionsstipulatethattheboardofdirectorsshalllaydownriskdiversificationrules. In itsriskmanagementactivities,thecompanydistinguishesbetweencreditrisksderived
from lendingoperationsandcredit risksderived fromtransactionswithfinancial counterparties.Theday-to-dayresponsibility for thecreditpolicyandfor thepe-riodical risk calculation and reporting rests with thecreditdepartment.
Theguidelines forfinancial riskmanagementare laiddowninthefinancepolicy.Thepolicyisbased,amongotherthings,ontheprovisionsoftheExecutiveOrderonbondissuance,thebalanceprincipleandriskmanage-ment.However, the guidelines for financial risksmaybestricterthansuchexternalrules.Thetreasurydepart-menthas theday-to-day responsibility for thefinancepolicy,while theresponsibilityfor thecurrentcalcula-tionandreportingoffinancialriskslieswithafunctionoutsidethetreasurydepartment.
Writtenin-housebusinessproceduresandcontrolpro-ceduresareinplaceforallsignificantareasandactivi-ties.Theinternalcontrolfunctionregularlyverifiesthatthese procedures are adhered to and reports its find-ingsviatheexternalauditorstotheBoardofDirectors.Danish Ship Finance is not subject to a requirementaboutinternalaudit.
Thebalanceprinciple:DanishShipFinanceisgovernedbythebalanceprincipleandhasresolvedtopursuethespecificbalanceprinciple.Thebalanceprincipleentailsfixed absolute limits for the size of allowable interestrate,foreignexchangeandliquidityriskswhenthereisa differencebetweenpayments on loans and funding.Under these rules, thecompany isprevented fromas-suming any noteworthy interest rate risk, foreign ex-changeriskorliquidityriskinitslendingoperations.
Thecompanymayissuebondsinablockissueonthebasis of loan offers submitted and estimated lendingactivity.
RiskManagementandCapitalAdequacy
14
cyrequirement,aresetoutintheExecutiveOrderonCapitalAdequacy.
Therearenorequirementsontheuseofaspecificme-thodtocalculatetheadequatecapitalbaseandthein-dividualsolvencyrequirement.Themethodselected isacombinationofstresstestsandindividuallyassessedfactorsbelievedtobeofimportanceforthesizeofthecapital basewhich the company, as aminimum,mustmaintain.Acapitalrequirementiscalculatedforeachofthefactors;apositive,negativeorneutralrequirement.Theoverallsolvencyrequirementisthencalculatedasthesumofallcontributionsandexpressedasapercent-ageoftherisk-weightedassets,whicharenotrestated.TheBoardofDirectorsconsidersthechoiceofmethodatleastonceayearandreceivesreportsontheindivid-ualsolvencyrequirementsinconnectionwiththequart-erlyfinancialreporting.
Stress test:The stress test is performed at least onceevery quarter to test sensitivity to shifts in the finan-cialmarketandthecreditqualityoftheloanportfolio.Thestartingpointisthefinancialimpactwithintwelvemonthsandwithinaselecteddegreeofsecurity.
CapitaladequacyCalculationmethod:DanishShipFinanceissubjecttotheprovisionsoftheExecutiveOrderonCapitalAdequacy.The companymay choose between differentmethodsfor calculating its risk-weighted items for each of thethree overall types of risk.The company has not ap-pliedforapermissionfromtheDanishFinancialSuper-visoryAuthoritytoapplyoneof the internalmethods.Accordingly,thecompanyappliesthestandardmethodto calculate the risk-weighted items concerning creditrisks andmarket risks, and uses the standard indica-tormethodtocalculaterisk-weighteditemsconcerningoperationalrisks.
Adequate capital base and the capital requirement:TheDanishFinancialBusinessActusestheconceptsofcap-italrequirementsandadequatecapitalbase.
The capital requirement is the absoluteminimum forthe statutorycapitalbase.Thecapitalbase is the sumofcorecapitalandadditionalcapital.Theratiobetweenthecapitalbaseandrisk-weightedassetsisreferredtoasthesolvencyratio.Until1January2009,theminimumsolvency ratiowas 10%.As from 1 January 2009, therequirement is lowered to 8%.Danish Ship Finance’scapitalbaseconsistsexclusivelyofcorecapital,asthecompanyhasnotissuedanysupplementarycapital.
Anadequatecapitalbasecoverstheminimumamountofcapitalwhich,intheopinionoftheBoardofDirec-tors,isrequiredtoensurethatthebondholdersareonlyexposedtoaminuteriskofsufferingalossincasethecompany becomes insolvent.The individual solvencyrequirementiscalculatedonthebasisoftheadequatecapital base.When calculating the solvency require-mentcurrentandfutureriskfactorsandtheopportu-nities for sourcing fresh capital shouldbe taken intoconsideration.Therulesoncalculationoftheadequatecapitalbaseand,byextension, the individualsolven-
15
CreditRisks
Credit risk reflects the risk of a loss due to default on the part of a counterparty. This applies to coun-terparties in the form of shipowners and financial counterparties.
Creditpolicy
The credit policy defines specific guidelines for theprovisionoffinancingforshipowners.
Thefollowingoverallpoliciesapply:• Anyloanofferbuildsonanindividualcreditassess-mentwhichtakes intoconsiderationtheborrower'sfinancialpositionandtheage,conditionandemploy-mentofthefinancedvessels.
• Loansaresecuredbyafirstmortgageinoneormorevessels.Incaseoffinancingduringconstruction,theshipmortgagemaybereplacedbyassignmentoftheship building contract and a refundment guaranteeprovidedbytheshipyard’sbank.
• Loans are usually established with covenants onmaximum loan-to-value ratios and/orfinancial cov-enants.
• Focuswillbeonthefinancialstandingoftheborrow-er,thetermsoftheloanandontheloan'scontribu-tiontocompliancewiththediversificationrules.
• Theloanportfolioismonitoredinanongoingproc-ess, including an annual classification of each bor-rower’screditquality.
Diversificationrules
Thecompositionoftheloanportfolioisgovernedbyasetofdiversificationrules,whichformpartofthecreditpolicy.Thepurposeofthediversificationrulesistoen-surediversificationbyvesseltype,borrowerandcoun-tryrisk.
Riskdiversificationonvesseltypes:Adequateloanport-folio diversificationmust be in place regarding vesseltypes. No vessel type (tanker, container, etc.) may beprovidedassecurityformorethan50%ofthecompa-
ny’sgrosslending.Withineachvesseltype,nosegment(crudeoil,product,etc.)maybeprovidedassecurityformorethan33%ofthecompany’sgrosslending.
At theendof2008,DanishShipFinance's loansweredistributed on three core segments; container, tankeranddrybulk.Inaddition,thecompanyprovidesloansforvesselsintheoffshoresector,ferries/Ro-Rovessels,LPGvessels and cruise vessels. In 2009, the companywillmostlikelyreceiveamortageinoneormoreLNGvessels and semi-submersible vessels. The latter arefloatingunitsforuseintheoffshoresector.
Risk diversification on borrowers: The composition ofborrowers must be adequately diversified in the loanportfolio.For large loans, thecompanyshouldseek todiversifytheriskonvesseltypeswithintheindividualaccount.Thediversificationruleisrelatedtotheobjectsclauseinthearticlesofassociation:
“TheobjectofthecompanyistoprovideshipfinancinginDenmark.Inaddition,thecompanymayprovideshipfinancing in the internationalmarket, so longas suchactivitiesdonotunnecessarilylimitthecompany’sDan-ishoperations.”
Forfinancingasdefinedinthesecondsentenceoftheobjects clause, the overall account per borrowermaynot,ataconsolidatedlevel,exceed25%ofthecompa-ny'smostrecentlypublishedcapitalandreserves.Therearenoformallimitsonloansizesinrespectoffundingpursuant to thecompany'smainobjective (shipfinan-cinginDenmark).
Riskdiversificationoncountries:Theloanportfoliomustbeadequatelydiversifiedoncountries.Thecountryriskiscalculatedonthebasisoftheborrower’shomecoun-try.LoanstoborrowersinNorway,theUSAandincer-tainEU countries are not subject to restrictions as tocountryrisk.Forloanstoborrowersinothercountries,thecompanyhasdefinedanoveralllimitpercountryofupto20%ofitsgrosslending.
16
Ongoingmonitoring
Aspartof theriskmanagementprocess,all loansareassessed at least twice a year.All loans are assessed,and thecurrentcredit risk isassessedon thebasisofcurrentmarketvaluationsof thefinancedvessels andthemostrecentaccountingdataandbudgetsfromtheborrower.
Inaddition,theloanportfolioismonitoredinanongo-ing process in relation to the borrowers' fulfilment oftheindividualloanagreement,comprising:
• Verifyingtheexistenceofadequate insurancecoveronfinancedvessels.
• Half-yearly updating of themarket values of all fi-nancedvessels.
• Verifyingthatanyothercollateralmeetsthespecifiedminimumrequirements.
• Verifyingcompliancewithallotherloancovenants.
Ifa loan isdeemed toentail increasedrisk, themoni-toring will be intensified to safeguard Danish ShipFinance'sintereststothebestpossibleextent.
Insurance of ship’s mortgages: Borrowers’ insurancesconcerning financed vessels are assigned to Danish
ShipFinance.Asaminimum,theinsuranceincludes:
• Hullandmachineryinsurance,whichcoversdamagetothevesselortotalloss.
• P&I (Protection & Indemnity) insurance, which isa third party liability insurance to cover damageagainstpersonsorequipment.
• WarRiskstocoverdamage,retention,etc.causedbywarorwar-likeconditions.
VesselsownedbymostoftheborrowersarecoveredbyMortgageInterestInsuranceandMortgageeAdditionalPerilsPollutionInsurance.Thisinsurancecoverstheriskinmostsituationswhichtheborrower’sprimaryinsur-ancepoliciesdonotcover.
Inspectionofships:Asasupplement to thehalf-yearlymarketvaluations,physicalinspectionsofthefinancedvesselsaremadeonaspot-checkbasis.Theinspectionmaybeperformedbothduringtheloanperiodorpriortosubmittinganoffertofinancesecond-handtonnage.Whenfinancing second-hand tonnage, focus ison theageofthevesselanditscondition.
(DKKmillion) 31.12.2008 31.12.2007
5 largest loans to shipowners*) 25,850 21,990
Lending, gross, at year-end exchange rate*) 49,126 39,095
Of which loans to financial debtors and the Danish government 102 365
The five largest loans to shipowners at 31 December 2008 are secured by mortgages in 146 vessels comprising 17 vessel types. One of the loans is substantially larger than the rest.
*)Excludingwritedownsandforeignexchangeadjustmentatthehedgeprice.
Movementsinthefivelargestloanstoshipowners
17
18
AssessmentsMarket valuations are regularly sourced from inde-pendentbrokerswhofixapriceforthefinancedves-selsonthebasisofsupplyanddemand.
CIRRloans
DanishShipFinancemaygrantso-calledCIRRloansof up to 80% of the net funding requirements to fi-nancecertaintypesofDanish-builtvessels.Thecom-panyhas theexclusiveright inDenmark forvesselscontracteduntiltheendof2012anddeliveredbeforetheendof2015.CIRRloansgrantedtoborrowersofparticularlygoodcreditstandingaretreatedintermsofsolvencylikeotherloanswithin70%ofthevalueofthefinancedvessels.Borrowerswhoaregivenoneofthethreehighestratingsintheinternalclassificationsystem(outofatotaloftenratings)areconsideredtobeofparticularlygoodfinancialstanding.
Financialcounterparties
Transactionswithfinancial counterparties aremadeinconnectionwithinvestingthecompany’sfundsandexcess liquidity and in transactions with derivativefinancialinstrumentsforriskmanagementpurposes.Whenthetransactionsinvolveacreditrisk,riskman-agementishandledaccordingtoaspecificpolicy.
Thepolicy isdedicatedtominimisingthecreditriskon the counterparties.The policy defines limits forhow large credit risks should be accepted and pro-videsguidelines for theuseof collateral to limit thecounterpartyrisk.
Thecontractualbasis for transactionswithfinancialcounterparties is based primarily on market stand-ardssuchasISDA,whichallowsnettinginthecaseofdefaultonthepartofthefinancialcounterparty.
Lossesandwritedowns
Twiceayear,allloansarereviewedinordertore-as-sessthecurrentneedforwritedowns.Allwritedowns
on loans are made according to individual assess-ments.
Theassessmentofanyneedforwritedownsforthein-dividualloansisbasedontheborrower’spresentandexpectedfuturefinancialpositionandonthevalueoftheshipmortgageandanyothercollateral.
Untiltheendof2008,thewritedownswereclassifiedaseither1or2writedowns.Thiswasmadeinaccord-ancewiththeExecutiveOrderonaShipFinanceIn-stitutedated21June2006,whichappliesforthe2008financialyear.A1writedownindicatesaprobableriskoflossfromtheloanfacility.A2writedownindicatesthatalossfromtheloanfacilityisdeemedinevitable,but that the final loss cannot be calculated yet. Assoonasalosscanbecalculated,itiswrittenoff.
Fromthefinancialyear2009, thecompanywillstarttopresentitsaccountsinaccordancewiththeDanishFinancialSupervisoryAuthority’sexecutiveorderonaccounting,whichbuildsoncomponentsoftheInter-nationalFinancialReportingStandards(IFRS).
In connectionwith the preparation of the accounts,theprinciples forwritedownshavebeenadjustedsothatwritedownsfor2008inallmaterialrespectscom-plywiththenewregulations.
Thetransitiontothenewaccountingrulesisnotex-pectedtoleadtoareductionofthecompany’swrite-downs. Compared with the annual report for 2007,thecompanyhasreviseditsexpectations.Attheendof2007, thecompanyexpecteda reductionofwrite-downsbasedonthecriteriaforobjectiveindicationofimpairment.Givendevelopmentsintheglobalecono-myin2008andexpectationstotheshippingmarkets,based on the same criterion the companyno longerexpectsareductionofitswritedownsunderthenewrules.
19
20
Agedistributionofmortgagedvessels(Percentageoftotallendings)
<2 2-5 5-10 10-15 15-20 20+
CONTAINERPOSTPANAMAX
4040
5050
3030
2020
1010
00
<2 2-5 5-10 10-15 15-20 20+
FERRIES/RO-RO
<2 2-5 5-10 10-15 15-20 20+
CRUDEOIL/PRODUCTTANKERS
40
50
30
20
10
0
<2 2-5 5-10 10-15 15-20 20+
OTHERS
40
50
30
20
10
0
Source: Own f igures
<2 2-5 5-10 10-15 15-20 20+
OFFSHOREVESSELS
40
50
30
20
10
0
<2
TOTALFORALLVESSELCATEGORIES
2-5 5-10 10-15 15-20 20+
40
50
30
20
10
0
Loanportfoliobymortgagedvesselsetc.(Percentageoftotallendings)
Exposureonfinancialcounterpartiesbycreditrating
Deptordistributionbycountryincludingdanishgovernmentrisk(Percentageoftotallendings)
21
Source: Own f igures
Aaa 52.3 %
Aa2 4.0%
Aa3 4.4%
A1 2.6%
A2 1.6%
A3 1.2%
Baa1 0.1%
NR 0.1%
Aa1 33.7 %
Container Post Panamax 29.3%
Dry bulk 8.4%
Gas 6.6%Chemical tankers 6.8%
Crude oil tankers 7.4%
Product tankers 13.7%
Ferries / RO-RO 8.8%
Others 4.2%
Danish government risk 0.2%
Offshore vessels 7.5%Container Panama Transitable 7.1%
Denmark incl. Greenland 47.0 %
Bermuda 3.3 %Cayman Islands 2.0%
Bahamas 2.5 %
Others 10.7 %USA 7.1 %
Schwitzerland 3.2%
Singapore 5.5 %
Marshall Islands 3.0%
Norway 10.2 %
Liberia 3.1 %
Germany 2.4%
Financial risks comprise market risks and liquid-ity risks. Market risk is the risk of a loss due to changes in the fair value of assets and liabilities, Market risks concern fixed income, exchange rate and equity positions. Liquidity risk is defined as the risk of a loss because the current liquidity portfolio is not sufficient to cover the current pay-ment obligations.
FinancepolicyThe company pursues a finance policy tomanage itsmarket risks.The policy lays down clear andmeasur-ablelimitsforinterestrate,exchangerate,equity,liquid-ity,optionandcreditrisks.
MarketrisksInterestraterisks:Interestraterisksareadjustedusingaminimumandamaximumfortheoption-adjusteddu-ration.Thecurrentmaximumadjusteddurationonthesecuritiesportfoliohasbeenrestrictedtosixyears.Theoption-adjusteddurationhasbeencalculatedatapprox-imately2.8yearsattheendof2008.
AccordingtotheExecutiveOrderonbondissuance,thebalance principle and risk management, interest rateriskonthecompany’sassets,liabilitiesandoff-balancesheetitemsmustnotexceed8%ofthecompany’scapi-talbase.
Risinginterestrateshaveanadverseimpactonthemar-ket value of the securities portfolio,whichmay resultinanoverallnegativefinancialperformanceandare-
sultingnegativeimpactonthesolvencyratio.UsingtheDanishFinancialSupervisoryAuthority’sguidelinesforcalculatinginterestraterisks,theriskwascalculatedatDKK389millionat31December2008againstDKK613millionat31December2007.ThecompanyhasoptedtohedgepartoftheinterestrateriskinDKKusinginter-estrateswapsdenominated inEUR. If futurechangesintheDKKratefullymirrorchangesintheEURrate,theabove-mentioned interestrateriskswouldamounttoapproximatelyDKK250millionfor2008andapprox-imatelyDKK393millionfor2007.
PursuanttotheExecutiveOrderonbondissuance,thebalanceprincipleandriskmanagement,theinterestrateriskbetweenfundingandlendingmustnotexceed1%ofthecapitalbase.Thefinancepolicyacceptsinterestrateriskssolelywhencausedbytimingdifferencesindeter-miningthereferenceinterestrate(suchasLIBOR)forvariableratefundingandlending.Thecompanyseekstominimisetheinterestrateriskbetweenfundingandlendingbyapplyingconservativeprinciples,butalossoragainmayariseduetochangesininterestrates.
Foreignexchangerisks:Thefinancepolicydoesnotacceptcurrency risks arising due tomismatch of funding andlending except for inevitable, limited foreign exchangerisks resulting fromtheongoingcashmanagement.Thecompany’slendingmarginiscollectedinthesamecurren-cyinwhichtheloanwasgranted.Accordingly,netinterestincomefromlendingoperationsisaffectedbyexchangerate fluctuations.The primary impact derives from theUSD,whichistheborrowers’preferredlendingcurrency.
The Executive Order on bond issuance, the balanceprincipleandriskmanagementstipulatesthatthecom-
FinancialRisks
22
binedforeignexchangeriskonassets,liabilitiesandoff-balancesheetitemsmustnotexceed2%ofthecapitalbase.Forcertaincurrencypositions,theriskislimitedtoDKK30millionpercurrency.
Equityrisks:Thefinancepolicydefineslimitsfortheeq-uity risk. Equity investmentsmay not representmorethan10%ofthecapitalbase.
Derivatives and structured notes: The finance policyspecifieswhichderivatives the companymayuseandfor which purposes. These are typically transactionsmadetohedgerisksbetweenfundingandlendingandinconnectionwithinvestmentactivities.
Thepolicyalsoincludesguidelinesonstructurednotes.Structurednotesrefertofundingwithconditionsotherthanstandardfixed/floating-rateconditions.Issuesmayonlybestructuredusinginterestrateandexchangerateinstruments, and they must not represent more than10%ofthetotalloanamount.
Thecompanydoesnotpresentlyhaveanyissuedstruc-turedbonds.
LiquidityrisksThe specific balance principle permits a cash deficit,whichisadeficitbetweenissuedbondsandloanspro-vided.Suchacashdeficit–resultingfromthefuturepay-mentsrelatedtobondsissuedbyDanishShipFinance,other fundingandfinancial instrumentswhichexceedthefutureincomingpaymentsonloans,financialinstru-mentsand investments–maynotexceed100%of thecapitalbase.
Pursuanttothecompany’sin-housepolicy,thecompa-nymusthaveoverallpositiveliquiditywithinthefirst-coming18-monthperiod.Thecalculationofthelimitin-cludesthesecuritiesportfolioatmarketvalue,andloanoffersareincludediftheyareexpectedtobedisbursedduringtheperiod.
BondsaretypicallyissuedinDKK,butmostoftheloansaredisbursed inUSD.ThecompanyhassourcedUSDforfundingofallloandisbursementsandformostoftheloanofferssubmitted.Theriskoflackofaccesstocon-vertDKKfunding intoUSD involveshigherfinancingcostsor the lossofbusinessopportunities.Theoppor-tunitiesforsourcingliquidityrelyonaneffectiveswapmarket.Lackofliquidityismanagedasaliquidityriskandformspartofthestresstest.
Stress test: The Board of Directors will consider themethodologyusedinthestresstestatleastonceayear,and theoutcomeof the stress test is reportedat leastonce very quarter to theBoard ofDirectors.A test ismadeofsensitivitytoshiftsinthefinancialmarketandthecreditqualityoftheloanportfolio.Thestartingpointisthefinancialimpactwithintwelvemonthsandwithinaselecteddegreeofsecurity.
InvestmentoffundsAccording to theExecutiveOrder, at least 60%of thecapitalbasemustbeinvestedinthehighestqualityin-vestmentgradesecurities.
23
60
50
40
30
20
10
0
Amortisation loan incl. loan offers and revolving credits
Amortisation debt
Theratiooftheissuedbondsandloansprovided
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
20
18
20
19
20
20
20
21
20
22
20
23
20
24
20
25
BillionDKK
Operational risk is the risk of a loss due to lack of procedures or resources to manage the risks fac-ing the company. The key operational risks relate to credit and finance functions and the use of in-formation technology.
Inthecreditfunction,theriskrelatestothehandlingoffacilityagreementsandsecuritydocumentsandregularfollow-uponloancovenants.Inaddition,theriskrelatestothehandlingofanyship’smortgageswhichitprovesnecessarytotakeoverincasetheborrowerdefaultsonhisloan.
Inthefinancefunction,theriskrelatestotheconclusionandimplementationoffinancialcontracts.
In theareaof information technology, the risk relatestothederivedconsequencesofasystembreakdownorserioussystemerrors.
The company seeks to mitigate each of these risksthroughtheuseofbusinessprocedures,segregationoffunctionsandinternalcontrols.
OperationalRisks
24
The rules governing bond issuance are described in the act, the Executive Order and the Executive Order on bond issuance, the balance principle and risk management. The lending operations are funded through previous issuance of debenture bonds, issuance of ship mortgage bonds, through lending of own funds and through proceeds from loans raised in money markets and capital mar-kets. Individual borrowers have no direct obliga-tions towards the bondholders.
CoveredbondsasdefinedbytheCRD
Like banks and mortgage credit institutions, DanishShipFinancemayissuecoveredbonds.Thetermcover-edbondsisusedtodescribeparticularlysecurebondsissued to finance lending secured by real property,ships or government risks within defined loan limits.Danish Ship Finance can only issue covered bondsagainst ship’smortgages.The riskweight for coveredbondsasdefinedbytheCRDis10%.
Inbondissuanceactivities,theissuerfacesstricterre-quirementstoqualifyforthecoveredbonddesignation.For example, the bondsmust be issued in a separatecapitalcentre,andtheloan-to-valueratiooftheunderly-ingloansmustnotexceed70%.Ifthevalueofthemort-gagedassetdeclines,DanishShipFinancemustprovidesupplementarysecurityintheformofapprovedsecuri-tiesorcashdeposits tokeep the loan-to-valueratioatamaximumof70%.Thevalueof themortgagedassetmustcontinuouslybemonitoredusingupdatedmarketvaluations. Danish Ship Finance has still not used itspermissiontoissuecoveredbonds.
ShipmortgagebondsAs an alternative to covered bonds as defined in theCRD, Danish Ship Finance may issue ship mortgagebonds.
Asforissuanceofcoveredbonds,DanishShipFinancemustcomplywithabalanceprinciplewhenissuingshipmortgage bonds. In other areas, the rules on issuingshipmortgagebondsare less restrictive than thepre-viousrules thatapplytodebenturebonds.There isnorequirementthatthebondsmustbeissuedinaseparatecapitalcentre.
Bondsincirculation
Issued bonds are primarily bullet loans denominatedinDKK.At31December2008,bondsincirculationto-talledDKK62.5billion,nominalvalue,ofwhichbondsissued inDKKaccounted for 84%.Thebondsmaybeunlisted,butthebulkofthebondsarelistedandtradedonNASDAQOMXCopenhagenwith terms tomaturi-tiesrangingfrom1to20years.Theaveragematurityofthebondsexceedstheaveragematurityoftheloans.
Rating
DanishShipFinanceholdsanAa3IssuerRating,whichwasassignedtoitbyMoody’sInvestorsServiceLimitedon14November1998.AnIssuerRatingextendstotheseniordebtoftheentirebond-issuinginstitutionratherthantoindividualbondseries.
Mostofthebondshavesubsequentlybeenallocatedaspecificrating.AratingofAa3hasbeenassignedtoallissuedbondsthatcarryarating.
Bonds
Bondsincirculation
Debenturebonds:Bonds issued before 1 January 2008. By definition, the bonds are covered bonds (as defined by the CRD) until maturity, even though there is no requirement for regular compliance with loan values. The risk weight for debenture bonds is 10%.
Shipmortgagebonds:Bonds issued after 1 January 2008 which do not qualify for the covered bond designation. The risk weight for ship mortgage bonds is 20%.
All bonds issued by Danish Ship Finance are on the European Commission’s list of bonds meeting the gilt-edged requirements of Article 22(4) of the UCITS direc-tive (the “Investment Directive”).
Issued before 2008
Issued in 2008
2% 3% 8%4% 6% CIRRFloating Index
25
20
15
10
5
0
Circulatingbondsbybondtype
25
BillionDKK
The Board of Directors and the Management BoardhavetodayconsideredandadoptedtheannualreportofDanishShipFinanceA/S (DanmarksSkibskreditA/S)forthefinancialyearended31December2008.Thean-nualreporthasbeenprepared inaccordancewith theprovisionsofDanishlegislationonthepresentationofaccounts.
TheManagement’sreviewincludesafairpresentationof the developments in the company’s activities andfinancialpositionaswell asadescriptionof themost
materialrisksandelementsofuncertaintythatmayaf-fectthecompany.
TheBoardofDirectorsandtheManagementBoardcon-sidertheappliedaccountingpoliciestobeappropriatefortheannualreporttogiveatrueandfairviewofthecompany’s financial position at 31December 2008 aswellasofitsactivitiesandcashflowsforthefinancialyear1Januaryto31December2008.
Werecommendtheannualreportforadoptionatthean-nualgeneralmeeting.
ManagementBoard
Erik I. LassenChiefExecutiveOfficer
Per SchnackExecutiveVicePresidentandCFO
BoardofDirectors
Per SkovhusChairman
Jens ThomsenDeputyChairman
Thorkil H. Christensen Flemming Ipsen Torben S. Jørgensen Michael Rasmussen
StatementbytheManagementBoardandtheBoardofDirectors
Copenhagen,5.February2009
26
Erling Garrelts Lisbeth N. Pedersen Henrik R. Søgaard
TotheshareholdersofDanishShipFinanceWe have audited the annual report of Danish ShipFinanceA/S(DanmarksSkibskreditA/S)forthefinancialyearended31December2008,comprisingastatementbytheManagementBoardandtheBoardofDirectors,Man-agement’sreview,accountingpolicies,profitandlossac-count,balancesheet,statementofchangesincapitalandreservesandnotestotheaccounts.Theannualreportispresented in accordancewithExecutiveOrder no. 674dated21June2006onaShipFinanceInstitute.
Management’sresponsibilityfortheannualreportManagementisresponsibleforpreparingandpresent-inganannualreportthatgivesatrueandfairviewinaccordancewithExecutiveOrderno.674dated21June2006onaShipFinanceInstitute.Thisresponsibilityin-cludes:designing,implementingandmaintaininginter-nal controls relevant to thepreparationand fairpres-entationofanannualreportthatisfreefrommaterialmisstatement,whetherdue to fraudorerror;selectingandapplyingappropriateaccountingpolicies;andmak-ingaccountingestimatesthatarereasonableinthecir-cumstances.
Auditor’sresponsibilityandbasisofopinionOurresponsibilityistoexpressanopinionontheannu-alreportbasedonouraudit.WeconductedourauditinaccordancewithDanishStandardsonAuditing.TheseStandardsrequirethatwecomplywithethicalrequire-mentsandplanandperformouraudittoobtainreason-ableassurancewhethertheannualreport is freefrommaterialmisstatement.
Anauditinvolvesperformingprocedurestoobtainauditevidenceabouttheamountsanddisclosuresinthean-nualreport.Theproceduresselecteddependontheau-ditor’sjudgement,includingtheassessmentoftherisksofmaterialmisstatementoftheannualreport,whetherduetofraudorerror.Inmakingthoseriskassessments,the auditor considers internal controls relevant to thepreparationandfairpresentationof theannualreportinordertodesignauditproceduresthatareappropriateinthecircumstances,butnotforthepurposeofexpress-inganopinionontheeffectivenessofinternalcontrols.Anaudit also includes evaluating the appropriatenessofaccountingpoliciesusedand thereasonablenessofaccounting estimates made by Management, as wellasevaluatingtheoverallpresentationoftheannualre-port.
Webelievethattheauditevidencewehaveobtainedissufficientandappropriatetoprovideabasisforourau-ditopinion.
Ouraudithasnotresultedinanyqualification.
OpinionInouropinion, theannualreportgivesatrueandfairview of the company’s assets, liabilities and financialpositionat31December2008aswellasoftheresultsofthecompany’soperationsandcashflowsforthefinan-cialyearthenendedinaccordancewithExecutiveOrderno.674dated21June2006onaShipFinanceInstitute.
Copenhagen,5.February2009
DeloitteStatsautoriseretRevisionsaktieselskab
Søren Dinesen Henrik PriskornStateAuthorisedPublicAccountants
IndependentAuditors’Report
27
28
Directorships–BoardofDirectorsTheinformationrelatestotheoccupationsoftheboardmembers, directorships held in otherDanish and for-eigncompaniesandotherimportantmanagementposi-tionsanddirectorshipsatthedateofthepublicationofthisannualreport.
PerSkovhusDanskeBankA/SElectedtotheBoardofDirectorsofDanishShipFinanceon28.04.2003Member of the Board of Directors of:RealkreditDanmarkA/STheDanishBankersAssociation(DeputyChairman)
JensThomsenNationalbankenElectedtotheBoardofDirectorsofDanishShipFinanceon28.04.2003MemberofDetFinansielleVirksomhedsråd
ThorkilH.ChristensenDanskeMaritimeElectedtotheBoardofDirectorsofDanishShipFinanceon19.04.1995Member of the Board of Directors of:DenDanskeMaritimeFond(DeputyChairman)
FlemmingIpsenA.P.Møller-MærskA/SElectedtotheBoardofDirectorsofDanishShipFinanceon28.08.2006Member of the Board of Directors of:44subsidiariesoftheA.P.Møller-MærskA/SGroupinDenmarkandabroad.TheDanishInstituteofArbitration(DeputyChairman)MemberofTheBoardofDirectorsofTheBritanniaSteamShipInsuranceAssociationLimited
Directorships–ManagementBoard
ChiefExecutiveOfficerErikI.LassenMemberoftheManagementBoardsince09.04.2008
ExecutiveVicePrecidentandCFOPerSchnackMemberoftheManagementBoardsince09.04.2008
TorbenS.JørgensenTrygVestaForsikringA/SElectedtotheBoardofDirectorsofDanishShipFinanceon24.04.2008Member of the Board of Directors of:AktieselskabetForsikringensHus
MichaelRasmussenNordeaDanmarkA/SElectedtotheBoardofDirectorsofDanishShipFinanceon24.04.2008Member of the Board of Directors of:NordeaKreditA/S(Chairman)NordeaLiv&PensionDanmarkA/SLRRealkreditA/S
ErlingGarreltsDanmarksSkibskreditA/SElectedtotheBoardofDirectorsofDanishShipFinanceon24.04.2008
LisbethN.PedersenDanmarksSkibskreditA/SElectedtotheBoardofDirectorsofDanishShipFinanceon24.04.2008
HenrikR.SøgaardDanmarksSkibskreditA/SElectedtotheBoardofDirectorsofDanishShipFinanceon24.04.2008
Directorships
29
TheannualreportofDanishShipFinanceA/Sispre-sentedinaccordancewithExecutiveOrderno.674dat-ed21June2006onaShipFinanceInstituteissuedbytheDanishMinistryofEconomicandBusinessAffairs.Theaccountingpoliciesareunchangedfromthe2007financialyear.
The company has changed its accounting estimateconcerningwritedownsondebtors.Asaresultofthischange,objectivecriteriawilltoagreaterextentbeap-pliedwhen calculating the need forwritedowns.Thechangedoesnotaffecttheprofitfortheyear.
Theformatandcontentsoftheprofitandlossaccount,the balance sheet and the notes are prepared on thebasisoftheguidelinesissuedbytheDanishFinancialSupervisoryAuthorityonthepresentationofaccountsbybanks.However,afewadjustmentshavebeenmadeasaresultofDanishShipFinance’slegalframework.
Transitiontonewaccountingrules
The EU has resolved that listed companies mustpresent their consolidated accounts in accordancewith accounting standards (IAS/IFRS) issued by theInternationalAccountingStandardsBoard(IASB)andadoptedbytheEU.
TheRegulationcompriseslistedcompanies,i.e.compa-nieswhosesharesordebtinstruments(suchasbonds)are listed. Furthermore the Regulation allows mem-ber countries to permit or require that other compa-niesmustcomplywiththeapprovedstandardsintheirfinancialreporting.
AccountingPolicies
Witheffectfromthe2009financialyear,DanishShipFinancewill be comprised by theDanish accountingrulesforfinancialenterprisesandexpectstofollowtheDanish Financial Supervisory Authority’s IFRS-con-sistentrulesintheformoftheExecutiveOrderonthePresentationofFinancialStatementsbyBankswithef-fectfortheannualreportfor2009.
Recognitionandmeasurement
Assetsarerecognised in thebalancesheetwhenit isprobable that future economic benefits will flow toDanishShipFinanceandthevalueoftheassetcanbereliablymeasured.
Liabilities are recognised in the balance sheet whentheyareprobableandcanbereliablymeasured.
Oninitialrecognition,assetsandliabilitiesaremeas-ured at cost. Subsequently, assets and liabilities aremeasuredasdescribedbelowinrespectofeach indi-vidualitem,andalladjustmentsarerecognisedintheprofitandlossaccount.
Recognitionandmeasurementtakeintoconsiderationgains, losses and risks that arise before the time ofpresentationoftheannualreportandthatconfirmorinvalidatemattersexistingatthebalancesheetdate.
Incomeisrecognisedintheprofitandlossaccountasearned, including value adjustments of assets and li-abilities. Moreover costs paid to generate the year’searnings, including depreciation and provisions forbadanddoubtfuldebts,arerecognised.
30
Foreigncurrencytranslation
Transactions denominated in foreign currency aretranslatedwhenfirstrecordedattheexchangeratepre-vailingontheentrydate.Exchangedifferencesarisingbetween the exchange rate at the entry date and theexchange rateat thedateofpaymentare recognisedin theprofitand lossaccountunderfinancial incomeandexpenses.
Receivables, payables and other monetary items de-nominated in foreigncurrenciesare translatedat theexchangeratesapplyingatthebalancesheetdate.Thedifferencebetweentheexchangerateapplyingat thebalancesheetdateand theexchangerateat the timewhenthereceivableorpayablearoseorwasrecordedin themost recentannual report is recognised in theprofitandlossaccountunderfinancial incomeorex-penses.
DanishShipFinanceusesderivativefinancial instru-mentstohedgefinancialrisksonanongoingbasis.Re-ceivablesandpayablesdenominatedinforeigncurren-ciesandreturnsthereofarerecognisedintheaccountsat thehedgedvalues to the extent that the exchangerateriskhasbeenfullyhedged.
Derivativefinancialinstruments
Swaps, forward exchange contracts, forward rateagreements andoptions that are entered into for thepurpose of fully hedging exchange rate, interest rateandequityexposureonrecognisedfinancialassetsorliabilitiesarenotstatedinthebalancesheetasseparateitems,but are stated togetherwith thehedged items.Recognitionintheprofitandlossaccountalsofollows
thehedgeditem.Principalamountsandmarketvaluesofthederivativefinancialinstrumentsaredisclosedinanotetotheaccounts.
Apart fromminor interest margins, the net value ofsuch interest and currency swapagreements and theassetsandliabilitieshedgedisnil.
Derivative financial instruments entered into to fullyhedgeexchangerateandinterestrateexposureincon-junctionwithanticipated future transactionsand for-wardsecuritiestransactionsarerecognisedinthebal-ance sheetunderotherassetsorother liabilities andmeasuredatthemarketvalueonthebalancesheetdate.Valueadjustmentsarerecognisedintheprofitandlossaccountundermarketvalueadjustments.However,ac-crual of interest is recognised under interest incomeandexpenses.
Derivative financial instruments not entered into tofullyhedgefinancialrisksorhedgingassetsmeasuredatmarketvaluearerecognisedinthebalancesheetun-derotherassetsorother liabilitiesandaremeasuredatmarketvalues.Valueadjustmentsarerecognisedintheprofitandlossaccountundermarketvalueadjust-ments.However,accrualof interest is recognisedun-derinterestincomeandexpenses.
31
ProfitandlossaccountOtheroperatingincome:Otheroperatingincomeinclu-des rental income less expenses for operating prop-erties.Rent is chargedatmarket rates for theuseofpremisesinthecompany’sownofficebuilding.
Tax:Tax for theyear,comprising income taxpayablefortheyearandmovementsindeferredtax,isrecog-nised in theprofitand lossaccount. Income taxpay-able for the year is calculated at 25% of the pre-taxprofitfortheyear,adjustedforanyincomethatisnotliablefortaxandforexpensesthatarenottax-deducti-ble.Deferredtaxiscalculatedaccordingtothebalancesheetliabilitymethodas25%ofalltimingdifferencesbetweentheaccountingandtaxvalueoftheassetsandliabilities. Deferred tax assets are recognised to theextenttheyareexpectedtoberealisedthroughfutureearnings.
BalancesheetLoans: Loans, including arrears on instalments, areassessed individually and writedowns are made tomeet any anticipated losses, basedon a conservativeassessment. Receivables considered to be irrecover-ablearewrittenoff.Lossesandwritedownsondebtorsare deducted from lending. Provisions for guaranteecommitments andfinancial counterparties are recog-nisedunderotherliabilities.
Securities:Listed securities aremeasured at the offi-ciallyquotedpricesatthebalance-sheetdate.Unlistedsecuritiesaremeasuredatthemarketvalueatthebal-ancesheetdate.
Bonds are recognised at the hedged values if a con-currentswapagreementwitheffectivehedging(assetswap)hasbeenconcluded.
Saleandrepurchasetransactionsandobligationconcern-ingsecurities:Securitiessold,forwhichasimultaneousrepurchaseagreement ismade,are recognised in thebalance sheet as if the securitieswere still held.Theamountreceivedisrecordedasanamountowedtothebuyer,andanydifferencebetweenthebuyingandsell-ingpriceisrecognisedasinterestexpensesintheprofitandlossaccount.Returnsonsecuritiesarerecognisedintheprofitandlossaccount.
Securitiesacquired,forwhichasimultaneousreversetransactionismade,arenotrecognisedinthebalancesheet.Theamountpaidisrecordedunderdebtors,andanydifferencebetweenthebuyingandsellingpriceisrecognisedasinterestincomeintheprofitandlossac-count.
Upontheresaleofsecuritiesboughtinareversetrans-action,theobligationtobuythesecuritiesisrecognisedas a short-term securities portfolio under“Securitiesobligations”andmeasuredatofficiallyquotedprices.Valueadjustmentsarerecognisedintheprofitandlossaccountunder"Marketvalueadjustments".
Issuedbonds:Fixed-rateissuedbondsbothinDKKandinforeigncurrencyarerecognisedinthebalancesheetat nominal values as they are valued together withswapagreements.Index-linkedloansaremeasuredattheyear-endindexvalue.
Floating-rate issuedbonds are recognised in the bal-ancesheetatcost,whichcorrespondstothefairvalueof the proceeds received, net of transaction costs in-curred. Subsequently, floating-rate issued bonds aremeasuredatamortisedcost.
Tangible assets:Tangible assets aremeasured at costlessaccumulateddepreciationandimpairmentlosses.
Assets are depreciated on a straight line basis overtheirestimateduseful liveswithdueconsideration toanyscrapvalue,asfollows
Officeproperty 50yearsOthertangibleassets 3years
However,specialbuildinginstallationsarechargedtotheprofitand lossaccount in theyearofacquisition.OthertangibleassetswithapurchasepriceoflessthanDKK250,000arealsowrittenoffintheyearofacquisi-tion.
CommercialInterestReferenceRate(CIRR):
In 2003,Danish Ship Finance acquired the exclusiveright toofferCIRR loans for vesselsuntil the endof2012.The price of the exclusive right was subject tocontractingvolumesofcertainvesseltypesinDanishshipyardsintheperiodfrom31March2004,calculatedatatotalofDKK225million.
TheDKK225millionpayment to theDanishgovern-mentwas offset by additional earnings from lendingoperations and is charged over the life of the CIRRloans(12years)totheitem“Netinterestincomefromlendingoperations”.Thepartofthepaymentwhichhasstill not been expensed is recognised in the balancesheetunder“Otherassets”.
DanishShipFinance’spaymenttotheDanishgovern-ment fell due as the shipyards started to deliver thevesselsinquestion.TheremainingobligationwaspaidinJanuary2007.
33
Note
1 Interestincome
2 Interestexpenses
3 Net interest income
Dividendsonshares
4 Feeandcommissionincome
Feesandcommissionspaid
Net interest and fee income
5 Marketvalueadjustments
Otheroperatingincome
6,7 Staffcostsandadministrativeexpenses
16 Depreciationandwritedownsoftangibleassets
12 Lossesandwritedownsondebtors
Profit before tax
8 Tax
Profit for the year
Proposed allocation of profit
Dividendforthefinancialyear
Retainedearnings
2008
3,394.3
(2,668.3)
726.0
16.9
52.6
0.0
795.5
(377.8)
3.3
(91.9)
(1.1)
(199.7)
128.3
(91.3)
37.0
5.6
31.4
37.0
2007
2,412.9
(1,795.8)
617.1
2.2
41.4
(2.1)
658.6
(160.0)
3.2
(85.9)
(1.1)
103.7
518.5
(124.1)
394.4
335.2
59.2
394.4
ProfitandLossAccount1January–31December
34
AmountsinDKKmillion
asat31December
Note
Assets9 Duefromcreditinstitutionsandcentralbanks10,11,12 Loans13,14 Bonds15 Shares,etc.16 Tangibleassets17 Otherassets Total assets Liabilities, capital and reserves Liabilities18 Duetocreditinstitutionsandcentralbanks19 Issuedbonds20,21 Otherliabilities
Total liabilities22 Capital and reserves Sharecapital Tied-upreservecapital Retainedprofit
Total capital and reserves
ofwhichdividendproposedforthefinancialyear Total liabilities, capital and reserves
23 Solvency24 Guaranteecommitments25 Othercommitments26 Relatedparties27 Notionalprincipalsofoutstandingderivativefinancialinstrumentsasat31December28 Marketvaluesofoutstandingderivativefinancialinstrumentsasat31December200729 Exchangerateriskanduseofderivativefinancialinstrumentsat31December2007i
2008
1,503.251,043.626,851.2444.253.5
1,735.9
81,631.6
8,428.462,519.81,804.3
72,752.5
333.38,343.1202.7
8,879.1
5.6
81,631.6
2007
10,550.442,689.821,394.4679.953.6
1,291.8
76,659.9
1,333.864,962.31,186.6
67,482.7
333.38,343.1500.8
9,177.2
335.2
76,659.9
BalanceSheet
35
AmountsinDKKmillion
Capital and reserves at 1 January 2007
Dividendsdistributed
Profitfortheperiod
Capital and reserves at 1 January 2008
Dividendsdistributed
Profitfortheperiod
Capital and reserves at 31 December 2008
Sharecapital
333.3
-
-
333.3
-
-
333.3
Tied-upreservecapital
8,343.1
-
-
8,343.1
-
-
8,343.1
Profitbroughtforward
106.5
-
59.2
165.7
-
31.4
197.1
Total
9,158.3
(375.4)
394.4
9,177.3
(335.2)
37.0
8,879.1
Proposeddividendsfor
thefinancialyear
375.4
(375.4)
335.2
335.2
(335.2)
5.6
5.6
StatementofChangesinCapitalandReserves
AmountsinDKKmillion
36
InterestincomeInterestfromcreditinstitutionsInterestonloansIndexrevaluationsofindex-linkedloansInterestonbondsOtherinterestincomeDerivativefinancialinstruments Interestratecontracts Foreignexchangecontracts
Total interest income
InterestexpensesInteresttocreditinstitutionsInterestonissuedbondsIndexrevaluationsonissuedbondsOtherinterestexpenses
Total interest expenses
NetinterestincomeNet interest income from lending operationsInterestonloansInterestonbondsInterestonblockissuesincludedininterestduefromcreditinstitutionsInteresttocreditinstitutionsInterestexpensesonissuedbondsOtherinterestexpensesDerivativefinancialinstruments Interestratecontracts Foreignexchangecontracts
Total net interest income on lending operations
Net interest income from financing operationsInterestonbondsInterestonloansInterestduefromcreditinstitutionsexcludinginterestonblockissuesOtherinterestincomeInteresttocreditinstitutionsOtherinterestexpenses
Total net interest income from financing operations
Total net interest income
2008
147.52,188.9
8.71,265.112.5
(243.1)14.7
3,394.3
(149.6)(2,480.1)
(8.7)(29.9)
(2,668.3)
2,197.1712.2
126.2(32.9)
(2,488.8)(29.9)
(243.1)14.7
255.5
553.00.5
21.212.5
(116.7)0.0
470.5
726.0
2007
293.82,204.316.1661.43.3
(775.9)9.9
2,412.9
(47.4)(1,693.2)(16.1)(39.1)
(1,795.8)
2,219.8170.1
294.7(1.9)
(1,709.3)(32.9)
(775.9)9.9
174.5
491.30.7
(1.0)3.3
(45.5)(6.2)
442.6
617.1
Note1
Note2
Note3
Notes
38
AmountsinDKKmillion
FeeandcommissionincomeGuaranteecommissionFeeandothercommissionincome
Total fee and other commission income
MarketvalueadjustmentsMarketvalueadjustmentsofbondsRealisedgains/lossesonredemptionandsalesUnrealisedmarketvalueadjustment
Total market value adjustment of bonds
MarketvalueadjustmentsofsharesExchangerateadjustmentsMarketvalueadjustmentsoffinancialinstruments
Total market value adjustments
StaffcostsandadministrativeexpensesRemunerationfortheBoardofDirectorsStaffcostsOtheradministrativeexpenses
Total staff costs and administrative expenses
Numberofemployees-full-timeequivalentsAveragenumberofemployees-full-timeequivalents
AuditfeesAuditfeesforstatutoryauditFeesforconsultancyservicesandotherprofessionalservices
Total audit fees
2008
2.150.5
52.6
(75.4)38.0
(37.4)
(232.8)38.2
(145.8)
(377.8)
(1.4)(60.2)(30.3)
(91.9)
5857
(0.8)(1.0)
(1.8)
2007
0.041.4
41.4
(12.7)(200.2)
(212.9)
28.34.320.3
(160.0)
(1.1)(54.9)(29.9)
(85.9)
5755
(0.7)(1.0)
(1.7)
Note4
Note5
Note6
Note7
Notes
39
AmountsinDKKmillion
TaxEstimatedtaxontheprofitfortheyearChangeindeferredtaxontheprofitfortheyearAdjustmentduetoloweringofcorporationtaxrateto25%Prior-yearadjustmentsofcurrenttax
Total tax
Duringthefinancialyear,DKK67,8millionwaspaidundertheon-accounttaxscheme.Overpaymentoftaxfor2007amountedtoDKK9,6million.
DuefromcreditinstitutionsandcentralbanksRepo/reversetransactionsOtherdebtors
Total due from credit institutions and central banks
2008
(269.1)179.7
-(1.9)
(91.3)
0.01,503.2
1,503.2
2007
(105.9)(18.0)1.5(1.7)
(124.1)
0.010,550.4
10,550.4
Note8
Note9
Notes
40
AmountsinDKKmillion
LoansAt1JanuaryAdditionsIndexrevaluationsduringtheyearOrdinaryrepaymentsandredemptionsExtraordinaryprepaymentsNetchangeconcerningrevolvingcreditfacilitiesNetchangeconcerningdebentureswithDanmarksNationalbankExchangerateadjustmentofadditionsanddisposalsathedgedexchangerateLossesandwritedownsfortheyear
At 31 December
LoansLoanssecuredagainstaship'smortgageFinancialdebtorsTheFinancialAdministrationAgencyCompensationfromtheDanishStateforinterestsubsidiesandinflationguaranteesDanmarksNationalbank
Gross loans at exchange rates at the balance-sheet date
ExchangerateadjustmentsathedgedexchangeratesAccumulatedwritedowns
Total loans
"Exchangerateadjustmentsathedgedexchangerates"relatetothedifferencebetweenthevalueofloanscalculatedatexchangeratesatthebalance-sheetdateandthevalueofloanscalculatedathedgedexchangerates,asallsignifi-cantforeignexchangerisksarefullyhedged.
2008
42,689.812,897.2
8.7(5,172.0)(1,574.4)2,243.3
(264.2)
416.8(201.6)
51,043.6
49,023.4--
-102.4
49,125.8
2,810.2(892.4)
51,043.6
2007
37,745.711,760.3
16.1(4,156.3)(2,735.5)2,008.2
(334.3)
(1,713.3)98.9
42,689.8
38,730.7-
6.3
0.2358.1
39,095.3
4,325.2(730.7)
42,689.8
Note10
Note11
Notes
41
AmountsinDKKmillion
AccumulatedwritedownsThe following writedowns have been made on debtors1writedownswhichinvolveaprobableriskoflosses2writedownswhichinvolvelossesthataredeemedunavoidable
Total accumulated writedowns
As a percentage of loans and writedowns1writedownswhichinvolveaprobableriskoflosses2writedownswhichinvolvelossesthataredeemedunavoidable
Total accumulated writedowns
Total accumulated writedowns consist ofSetoffagainstloansProvisionsmadeforotherliabilities
Total accumulated writedowns
Movements in accumulated writedownsAt1JanuaryNewwritedownsmadeReversedwritedownsLossescoveredbyprior-yearwritedowns
Total accumulated writedowns
Losses and writedowns on debtorsNewwritedownsmadeReversedwritedownsLossesnotcoveredbyprior-yearwritedownsRecoveredfrompreviousclaimswrittenoff
Total losses and writedowns on debtors
(Note12continuesonthefollowingpage)
2008
816.2116.2
932.4
1.70.2
1.9
892.440.0
932.4
730.8891.7(690.1)
-
932.4
(891.7)690.10.01.9
(199.7)
2007
720.110.7
730.8
1.90.0
1.9
730.70.1
730.8
829.7361.4(460.3)
-
730.8
(361.4)460.30.04.8
103.7
Note12
Notes
42
AmountsinDKKmillion
Writedowns broken down by countries:BermudaCaymanIslandsCypernDenmarkGreenlandHongKongItalyLiberiaLuxembourgNorwaySwitzerlandSingaporeSwedenGermanyUSA
Total accumulated writedowns
BondsBond portfolioNon-callablebondsCallablebonds
Total bonds
BondholdingsspecifiedbytimetomaturityBond portfolioBondswithamaturityofuptoandincluding1yearBondswithamaturityofover1yearanduptoandincluding5yearsBondswithamaturityofover5yearsanduptoandincluding10yearsBondswithamaturityofover10years
Total bond holdings specified by time to maturity
Shares,etc.Shares/unittrustcertificateslistedonNASDAQOMXCopenhagenUnlistedshares/unittrustcertificatesrecognisedatfairvalue
Total shares, etc.
2008
79.764.951.4362.9
-2.611.641.5
-3.895.78.16.2
164.040.0
932.4
18,084.58,766.7
26,851.2
81.9
16,638.5
2,919.57,211.3
26,851.2
255.4188.8
444.2
2007
60.5--
233.24.9
-38.1
-57.697.2
-45.8
--
193.5
730.8
13,511.07,883.4
21,394.4
-
12,743.8
641.18,009.5
21,394.4
445.3234.6
679.9
Note13
Note14
Note15
Notes
43
AmountsinDKKmillion
TangibleassetsOffice propertyPurchasepriceincludingleaseholdimprovements,1JanuaryLeaseholdimprovementsduringyear
Purchase price including leasehold improvements, 31 December
Accrueddepreciation,1JanuaryDepreciationduringtheyear
Accrued depreciation, 31 December
Total office property
TheassetcomprisestheofficepropertyatSanktAnnæPlads1-3,Copenhagen,thepublicvaluationofwhichisassessedatDKK81.0millionat1October2006.
Other tangible assetsPurchaseprice,1JanuaryDisposalsduringtheyearAdditionsduringtheyear
Purchase price, 31 December
Accumulateddepreciation,1JanuaryDisposalsduringtheyearDepreciationduringtheyear
Accumulated depreciation, 31 December
Totalothertangibleassets
OthertangibleassetscompriseacquisitionswithapurchasepriceexceedingDKK250,000.00.
Total tangible assets
OtherassetsInterestreceivableAccrualsrelatedtoCIRRfinancingOn-accountcorporationtaxreceivableDeferredtaxMarketvalueofderivativefinancialinstrumentsMiscellaneousreceivables
Total other assets
2008
59.40.0
59.4
6.60.6
7.2
52.2
2.7(0.7)1.0
3.0
1.9(0.7)0.5
1.7
1.3
53.5
1,418.8133.6
-149.0
-34.5
1,735.9
2007
59.00.4
59.4
6.00.6
6.6
52.8
1.90.00.8
2.7
1.40.00.5
1.9
0.8
53.6
1,013.2163.544.5-
26.244.4
1,291.8
Note16
Note17
AmountsinDKKmillion
Notes
44
DuetocreditinstitutionsandcentralbanksRepotransactionsOthercreditors
Total due to credit institutions and central banks
ISSUEDBONDSAt1JanuaryAdditionsinconjunctionwithnewloansandblockissuesAmortizedcostpriceonfloatersIndexrevaluationsduringtheyearOrdinaryredemptions
At 31 December
Specification of issued bonds
Bonds issued in DKKBulletbondsIndex-linkedloans,nominalvalue
Total nominal valueIndexpremium
Total issued bonds in DKK
Bonds issued in foreign currencyAmortisingCIRRbonds,atyear-endexchangeratesTotal issued bonds in foreign currency
Total issued bonds
2008
8,412.016.4
8,428.4
64,962.35,524.211.68.7
(7,987.0)
62,519.8
52,355.191.5
52,446.6126.2
52,572.8
9,947.0
9,947.0
62,519.8
2007
1,274.259.6
1,333.8
50,039.224,021.3
1.216.1
(9,115.5)
64,962.3
57,488.2255.0
57,743.2334.9
58,078.1
6,884.2
6,884.2
64,962.3
Note18
Note19
AmountsinDKKmillion
Notes
45
OtherliabilitiesInterestpayableIncometaxpayableMarketvalueofderivativefinancialinstrumentsDeferredtaxProvisionguarantees,etc.Miscellaneousliabilities
Total other liabilities
DeferredtaxDeferredtax,1JanuaryEstimateddeferredtaxontheprofitfortheyearAdjustmentduetoloweringofcorporationtaxrateto25%
At 31 December
CapitalandreservesSharecapital:AsharesBshares
Total share capital
Tied-upreservecapitalProfitbroughtforward
Total capital and reserves
ofwhichproposeddividend,cf.allocationofprofit
The share capital is divided into the following denominations:Ashares 300,000,000sharesofDKK1.00eachBshares 33,333,334sharesofDKK1.00each
EachAshareofDKK1.00entitlestheholderto10votesEachBshareofDKK1.00entitlestheholderto1vote
2008
1,429.8201.3118.2
-40.015.0
1,804.3
30.7(179.7)
-
(149.0)
300.033.3
333.3
8,343.1202.7
8,879.1
5.6
2007
1,141.3--
30.70.114.5
1,186.6
14.218.0
(1.5)
30.7
300.033.3
333.3
8,343.1500.8
9,177.2
335.2
Note20
Note21
Note22
46
AmountsinDKKmillion
Notes
SolvencyTier 1 capitalSharecapitalTied-upreservecapitalProfitbroughtforward
Total Tier 1 capital
Deductions in Tier 1 capitalProposeddividendsAdditionalstrainingrelativetotheExecutiveOrderonaShipFinanceInstitute
Total deductions in Tier 1 capital
Tier 1 capital less deductions
Capital base
WeighteditemsnotincludedinthetradingportfolioWeightedoff-balancesheetitemsWeighteditemswithcounterpartyriskoutsidethetradingportfolioWeighteditemswithmarketrisk,etc.WeighteditemswithoperationalriskTotal weighted items
Tier 1 capital less deductions as a percentage of total risk-weighted items
Solvency ratio pursuant to the Executive Order on a Ship Finance Institute(Minimumrequirementfixedat10%)
Weighted items with market risk, etc. consist ofItemswithpositionrisk:DebtinstrumentsItemswithpositionrisk:SharesTotalcurrencyposition
Total weighted items with market risk, etc.
2008
333.38,343.1202.7
8,879.1
5.6
280.2
285.8
8,593.3
8,593.3
52,032.16,024.5
582.96,794.5717.0
66,151.0
13.0
13.0
5,418.9454.1921.5
6,794.5
2007
333.38,343.1500.8
9,177.2
335.2
38.2
373.4
8,803.8
8,803.8
42,069.16,158.2
629.98,808.9
-
57,666.1
15.3
15.3
7,367.01,019.9422.0
8,808.9
Note23
47
AmountsinDKKmillion
Notes
GuaranteecommitmentsIntheordinarycourseofitslendingoperations,DanishShipFinancehasundertakenguaranteecommitmentsof
Intheordinarycourseofitslendingoperations,DanishShipFinancehasundertakenobligationstotakeoverloancommitmentsattheendofsyndicationperiodsexpiringbeforetheloansmatureforanamountof
PaymentguaranteeprovidedtotheDanishSecuritiesCentre
GuaranteesprovidedtotheDanishSecuritiesCentre
Total guarantee commitments
OthercommitmentsAsanormalpartofitslendingoperations,DSFhasundertakenobligationsinconnectionwithunutiliseddrawingrightsonloanswithrevolvingcreditfacilitiesintheamountof
RelatedpartiesRelatedpartiescomprisemembersofthecompany’sManagementandBoardofDirectorsandsubsidiaries.Relatedpartiesalsocompriseshareholderswhoholdmorethan20%ofthesharesormorethan20%ofthevotingrightsinthecompany.
Allrelated-partytransactionsinvolvingdepositsanddebtandtransactionswithfinancialinstrumentsintheformofswapagreements,forwardcurrencyagreements,forwardrateagreementsandforwardsecuritiestransactions,etc.aremadeonanarm’slengthbasis.Inspecialcases,however,thetermsandconditionsaremadeinaccordancewithshipyardsubsidyschemesorinternationalrulesongovernmentparticipationinthefinancingofnewbuildings.
Note24
Note25
Note26
2008
458.8
59.5
3.2
1.5
523.0
1,123.7
2007
380.2
57.1
3.7
1.7
442.7
1,444.5
48
AmountsinDKKmillion
Notes
Notionalprincipalsofoutstandingderivativefinancialinstrumentsasat31December
Swap agreementsSwapagreementshavebeenmadewiththefollowingpartiestohedgetheexchangerateexposureonloansandissuedbonds: DanmarksNationalbank Banks
Swapagreementshavebeenmadewiththefollowingpartiestohedgetheinterestrateexposureonloansandissuedbonds: Debtors Banks
Matchingswapagreementshavebeenmadewithdebtorsandbanksasfollows: Debtors Banks
Swapagreements,forwhichfinancialrisksarenotfullyhedged,havebeenmadewiththefollowingparties: Banks
Forward currency agreementsForwardcurrencysales
Forward interest rate and currency agreementsForwardinterestrateandcurrencyagreementsconcludedtohedgeinterestrateandexchangerateriskhavebeenmadewiththefollowingparties: Banks
Forward securities transactionsBuyingSelling
2008
1,105.348,599.6
654.958,299.2
--
4,387.2
132.1
1,955.8
-
751.8
2007
1,530.038,548.5
444.149,867.1
2.32.3
1,738.4
11.3
394.5
-
830.0
Note27
49
AmountsinDKKmillion
Notes
Marketvaluesofoutstandingderivativefinancialinstrumentsasat31December2008
Swap agreementsSwapagreementshavebeenmadewiththefollowingpartiestohedgetheexchangerateexposureonloans: DanmarksNationalbank Banks
Swapagreementshavebeenmadewiththefollowingpartiestohedgetheinterestrateexposureonloans: Debtors Banks
Swapagreements,forwhichfinancialrisksarenotfullyhedged,havebeenmadewiththefollowingparties: Banks
Forward currency agreementsForwardcurrencysales
Forward interest rate and currency agreementsForwardinterestrateandcurrencyagreementsconcludedtohedgeinterestrateandexchangerateriskhavebeenmadewiththefollowingparties: Banks
Forward securities transactionsBuyingSelling
Netting of exposure valueThepositivegrossfairvalueoffinancialcontractsafternetting,pursuanttoappendix17totheDanishExecutiveOrderonCapitalAdequacy Counterpartywithriskweightof0% Counterpartywithriskweightof20% Counterpartywithriskweightof100%
Valueoftotalcounterpartyriskcalculatedaccordingtothemarketvaluationmethodforcounterpartyrisk Counterpartywithriskweightof0% Counterpartywithriskweightof20% Counterpartywithriskweightof100%
Note28
Positive
205.53,738.2
17.6458.6
41.3
3.3
-
-
0.1
205.51,122.917.6
205.54,241.517.6
Negative
741.9
113.32,640.0
166.8
-
47.9
-
29.3
50
AmountsinDKKmillion
Notes
51
Exchangerateriskanduseofderivativefinancialinstrumentsat31December2008
Thetotalunhedgedforeigncurrencypositionat31December,translatedatyear-endexchangeratesintoDKKamountstoDKK533.4mio.(DKK339.9millionat31December2007).
AllamountsaretranslatedintoDKKattheyear-endexchangerates.Thenetpositionisspecifiedasfollows:
Loansatyear-endexchangeratesForeignexchangeadjustmentathedgepriceProvisionforloans
Loans as per the balance sheet
DuefromcreditinstitutionsandcentralbanksBondportfoliosInterestreceivable,etc.Otherassets
Total assets as per the balance sheet
Issuedbondsatyear-endexchangeratesForeignexchangeadjustmentathedgeprice
Issued bonds as per the balance sheet
DuetobanksInterestpayableOthercreditorsTotalcapitalandreserves
Total liabilities as per the balance sheet
Derivativefinancialinstruments –debtors
Derivativefinancialinstruments –creditors
Total net position(translatedintoDKK)
USD
42,777.7
1,069.90.0
311.40.0
44,159.0
(9,947.0)
0.0(338.4)
(10,285.4)
1,232.9
(35,224.8)
(118.3)
Othercurrencies
4,803.3
186.63,456.8121.215.5
8,583.4
0.0
(0.1)(150.3)
(150.4)
(1,830.3)
(9,611.6)
651.7
Totalforreigncurrency
47,581.0
1,256.53,456.8
432.615.5
52,742.4
(9,947.0)
(0.1)(488.7)
(10,435.8)
3,063.2
(44,836.4)
533.4
DKK
1,544.82,810.2(892.4)
246.723,394.41,004.0781.5
28,889.2
(52,572.8)0.0
(8,428.3)(941.1)(374.5)
(8,879.1)
(71,195.8)
Total
49,125.82,810.2(892.4)
51,043.6
1,503.226,851.21,436.6797.0
81,631.6
(62,519.8)0.0
(62,519.8)
(8,428.4)(1,429.8)(374.5)
(8,879.1)
(81,631.6)
Note29
Notes
Danish Ship Finance A/S(Danmarks Skibskredit A/S)
SanktAnnæPlads3·DK-1250CopenhagenKT:+4533339333·F:+4533339666·[email protected]
CVR-no.:27492649
www.shipfinance.dk