The State Guarantee Act, No. 121/1997

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An introduction

The State Guarantee Act replaces earlier legislation on state guarantees and considerably narrows the conditions under which such guarantees can be granted.

• All state guarantees must be authorised by law. Before a guarantee can be granted, an assessment of its risk and need must be made.
• A loan loss account must be established with the State Guarantee Fund to provide for losses from guarantees given.
• A risk premium will be imposed on all guarantee recipients, whereas previously it applied only to foreign debt guarantees. A service charge will be imposed on guarantees at the time they are granted.
• The percentage of a given investment that can be covered by a state guarantee is set at a maximum of 75% and the own resources of the investor must not be less than 20%.

The Treasury may not undertake a guarantee commitment unless authorised by law. The Treasury may not undertake an unconditional guarantee unless specified in the law authorising such a guarantee. In all other respects, the issue of state guarantees takes place in accordance with the provisions of this Act.

The provisions of this Act shall also apply to funds relent by the Treasury, as applicable. However, funds may not be relent to entities other than B and C entities of the Treasury, unless so specified in laws authorising guarantees.

A bill presented by the Minister of Finance regarding the issue of state guarantees shall be accompanied by an appraisal by the State Guarantee Fund, cf. Act No. 43/1990 on the National Debt Management Agency, regarding the following factors:

1. An assessment of the creditworthiness of the borrower.
2. An assessment of the need for loss provision in respect of guarantees undertaken.
3. An assessment of hypothecations offered in respect of the guarantee. The Minister of Finance may set the hyepothecation ratio by Regulation.
4. An assessment of the impact of state guarantees on competition in the relevant area.

The Treasury may not undertake a state guarantee unless the following conditions are met:

1. A state guarantee is authorised by an act of law authorising such guarantees.
2. The need for credit can not be met in the general credit market and the activity in question is considered favourable.
3. The guarantee recipient provides no less than 20% of the total financing of the project.
4. The guarantee recipient provides appropriate guarantees as assessed by the State Guarantee Fund.

The guarantee of the Treasury shall be no higher than 75% of the financing need for which a guarantee is provided.

The Treasury may not provide a guarantee to a party that is in arrears with payments to the Treasury and the State Guarantee Fund.

Any party for which the Treasury undertakes a guarantee, the guarantee recipient, shall, upon receiving the guarantee undertaking, pay a risk premium to the Treasury amounting to O.25-4.00% of the principal amount of the guarantee for each year of the credit period. The risk premium shall be paid at the beginning of the credit period and shall accrue to the Treasury. The risk premium shall be determined by the State Guarantee Fund, based upon the risk of the guarantee and whether the guarantee is a guarantee of collection or an unconditional guarantee.

The guarantee recipient shall pay a service charge in accordance with a schedule of charges set by the Minister of Finance. The charge shall be based upon the cost of establishing the guarantee and the assessment of its risk. The service charge shall accrue to the State Guarantee Fund.

The provider of the credit shall collect the proceeds of the risk premium and the service charge from the guarantee recipient.

The State Guarantee Fund shall keep a loan loss account in respect of guarantees provided. The loan loss account shall at each and every time reflect realistically the estimated loan losses on all of the guarantees of the Fund. As soon as decisions are made to provide guarantees, cf. Article 3, the Fund shall make a provision in the account amounting to the estimated loan loss.

The assessed risk and need for loan loss provisions of the State Guarantee Fund in lieu of guarantees and credits provided shall be assessed at least once a year, and the provision to the loan loss account shall be reassessed on that basis. Should such an assessment reveal that the reserves of the State Guarantee Fund are insufficient to meet its commitments, so assessed, the Minister of Finance shall notify the Althing and propose measures in order to bring the finances of the Fund back into balance.

The State Guarantee Fund shall oversee the operations of entities to which the Treasury has undertaken a guarantee or provided a loan. Guarantee recipients are obligated to provide the State Guarantee Fund with annual accounts and such reports and documents as are deemed necessary for it to perform its overseeing duties. Should the delivery of such requested information be delayed, the Minister is authorised to apply daily fines until such documentation has been delivered. The amount of daily fines shall be further decided in a schedule of charges set by the Minister of Finance. Such daily fines shall be decided by registered letter and may be collected through execution by law.

Banks, credit funds, financial institutions, enterprises and other such entities that according to law enjoy or have enjoyed the guarantee of the Treasury, whether through the ownership of the Treasury or for other reasons, shall pay a guarantee premium on their state-guaranteed commitments. General liabilities as well as pension and annuity commitments shall be exempt from such a premium.

The guarantee premium pursuant to Paragraph 1 of this Article shall amount to 0.0625 per cent for each quarter of the year of the principal of commitments subject to a premium, calculated as an average for each payment period, cf. Article 8. The proceeds of the premium shall accrue to the Treasury.

Credits on which a risk premium has been paid cf. Article 4, commitments in lieu of deposits in deposit accounts of deposit money banks and government-guaranteed export guarantees as well as the Central Bank of Iceland, the Housing Financing Fund and the Student Loan Fund are exempt from payment of the guarantee premium cf. Article 6.

The guarantee premium in lieu of commitments by enterprises that are partially owned by the Treasury shall be calculated in the proportion to the ownership share of the Treasury. The ownership share of the Treasury in entities and enterprises where the guarantee of owners is limited to their ownership share, e.g. in limited liability companies, is not subject to a charge.

The State Guarantee Fund shall calculate, impose and collect the risk premium cf. Article 4 and the guarantee premium cf. Article 6. The guarantee recipient shall provide the State Guarantee Fund with all such information it deems necessary in this respect.

Entities subject to a charge cf. Article 6 shall turn in reports as specified by the State Guarantee Fund where the gross amount of the principal of all commitments subject to a charge is shown on the 10th, 20th and last day of each month in each payments period. The calculation base of the guarantee premium is a simple average of the above amounts.

The guarantee premium cf. Articles 6 and 7 shall be paid quarterly in arrears at the same time as a report cf. Article 2 is turned in. The due date for each quarter is the 15th day of the succeeding month following the end of each payment period. Should the guarantee premium not be paid on time, arrears interest on the unpaid portion shall be paid to the Treasury in accordance with Article 10 of Law no. 25/1987 with succeeding amendments.

The Minister shall by Regulation 237/1998, cf. 557/2001, with subsequent amendments, set further prvisions regarding the implementation of this Act.

This Act enters into force on the 1st of January 1998.

Following the entry into force of this Act, the financial position of the State Guarantee Fund shall be assessed in order to ascertain the risk of the Fund and whether the Treasury shall provide the Fund with funds so that the assets of the Fund will be equal to its commitments. This assessment shall refer to the date at which this Act enters into force.