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Municipality Finance Plc Interim Report Bulletin

Municipality Finance’s role in financing the local government sector continues to grow in importance

Municipality Finance Plc (MuniFin) strengthened its position in the first half of the year as the most important financier for Finnish municipalities and government–subsidised housing production. During the period, the company acquired EUR 4.9 billion in funds from international investors (1 January – 30 June 2011: EUR 5.1 billion), with total funding now measuring at EUR 22.8 billion (31 December 2011: EUR 20.1 billion). The funding acquired during the first six months of the year represents over 80% of MuniFin’s total funding requirement for the year.
The international financial markets were characterised by a great deal of nervousness during the period, which only served to underline Finland’s position as a safe haven for investors. One of the most positive signs in the first half of the year was the high level of interest in MuniFin’s benchmark issues among central banks, which is indicative of the confidence international investors have in Finland and the Finnish local government sector. Investor confidence in Finland has remained at a good level despite continued uncertainty over whether the eurozone can overcome the crisis it currently faces.
The inaugural Sterling benchmark issue from MuniFin

MuniFin’s largest transactions during the period were the company’s first Sterling benchmark issue of GBP 300 million and the issue of a USD 1 billion benchmark. These highly successful transactions helped MuniFin to acquire significant new investors and increase the geographic diversification of its funding. The company carried out a total of 109 funding arrangements during the period.
MuniFin also developed and issued an innovative new bond with a distinct focus to allow private investors around the world to invest safely in a specific environmental project, namely a Westenergy waste energy power plant in Mustasaari. The interest in the new investment product was so high in Japan that the company issued a total of three bonds, with the second issue following the first by just over a week. The “clean energy bond” is proof of MuniFin’s ability to create innovative new investment products to further diversify the funding base of non–profit projects.
Moderate growth in lending

New lending by MuniFin increased by 7.1% to EUR 1,582 million (1 January – 30 June 2011: EUR 1,476 million) during the first six months of the year. This increase was moderate and there were no significant changes in municipalities’ funding requirements. The housing loan portfolio did, however, grow somewhat faster than in 2011. Lending for renovation projects and the level of refinancing of housing loans increased. Many of the refinancing transactions concerned old state–subsidised housing loans that were refinanced as market loans due to the historically low interest rates. The state’s guarantee liabilities for the housing loans of municipalities and non–profit corporations are diminishing as the loans become guaranteed by the municipalities themselves.
At the end of June 2012, MuniFin’s long–term loan portfolio stood at EUR 14.7 billion (31 December 2011: EUR 13.6 billion).
The Municipality Finance Group’s net operating profit grew 82% to reach EUR 63.7 million (1 January – 30 June 2011: EUR 35.0 million) and net interest income was EUR 67.9 million (1 January – 30 June 2011: EUR 41.0 million). The Group’s risk bearing capacity continued to improve, with capital adequacy at 27.85% at the end of June (31 December 2011: 24.13%) and capital adequacy for Tier 1 capital at 21.66% (31 December 2011: 19.04%).
President and CEO Pekka Averio:

“The financial markets are going through major changes. Banks are increasingly focusing on lending to private sector, while Municipality Finance and similar financial institutions manage the funding of the local and regional government sectors in many European countries. Many of the countries that currently do not have a financial institution of this type are either in the process of establishing one or giving the matter serious consideration.”
”The tighter market regulations stemming from the financial crisis will be an important factor in the future of Municipality Finance, as they will result in increasing costs and capital requirements for the banking sector as a whole, including Municipality Finance. In response to these developments, Municipality Finance is continuing to strengthen its balance sheet to ensure the availability of competitive funding to its customers in the future. Our primary method of strengthening the balance sheet is ensuring the profitability of our operations.”
”We contribute to the local government sector as a whole by funding investments in the maintenance of municipal infrastructure and public buildings. Many schools, hospitals, streets and water supply networks are badly in need of maintenance and renovation. Under the circumstances of uncertainty related to the local government reform and concern over the increasing indebtedness of municipalities, the burden of this maintenance backlog is being shifted to future generations. It would be sensible to proceed with maintenance and renovation investments during the current economic slowdown.”
Municipality Finance Plc
Further information:
Pekka Averio, President and CEO, tel. +358 (0)500 406 856
Esa Kallio, Executive Vice President, Deputy to CEO, tel. +358 (0)50 337 7953