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Credit Risk

Credit risk is defined as the risk of loss in portfolio value owing to the downgrade or default of an institution or security issuer.

NZDMO is exposed to credit loss when the issuer of a debt instrument defaults on interest or principal payments, or when a counterparty in a transaction such as a swap agreement defaults on an obligation. Credit-related loss in the value of the portfolio also occurs when the market value of a debt instrument falls owing to an increase in credit risk.

Financial instruments that subject NZDMO to credit risk include bank balances, advances, investments, interest-rate swaps, currency swaps, FX options and FX forward contracts.

NZDMO manages credit risk through the credit screening of counterparties, use of credit exposure limits and counterparty collateral obligations. Credit exposures are maintained only with highly rated institutions for which the probability of default is low. To diversify credit exposure, NZDMO limits its exposure to any one institution. The creditworthiness of counterparties is monitored daily. Credit risk is further controlled by incorporating credit support annexes into master swap agreements with swap and FX counterparties.

NZDMO lending to government entities, and to entities to which NZDMO is exposed as a matter of government policy, is not managed under the credit policy.

Credit Risk Management
2011
$m		 Credit Risk Management 2012
$m
29,926 Total NZDMO Financial Assets 26,062

Less:
20,114 Crown-related balances 16,295
9,812 Total Credit Exposure for Financial Assets 9,767

Concentration of Credit Exposure as at 30 June 2012

Concentration of Credit Exposure as at 30 June 2012 by Credit Rating
By Credit Rating AAA
$m		 AA
$m		 A
$m		 Other
$m		 Non-rated
$m		 Credit
Exposure
$m
Foreign cash and cash equivalents -  976 1 -  -  977
Debtors and receivables -  231 1 -  -  232
Advances to non-Crown -  58 -  -  67 125
Marketable securities 2,448 2,113 18 -  -  4,579
External deposits -  130 -  -  -  130
Derivatives in gain -  709 766 -  -  1,475
IMF financial assets -  -  -  -  2,249 2,249
Total Credit Exposure by Credit Rating 2,448 4,217 786 -  2,316 9,767
Concentration of Credit Exposure as at 30 June 2012 by Industry
By Industry Sovereign
Issuers
$m		 Supra-
National
$m		 NZ Banking
Sector
$m		 Foreign
Banking Sector
$m		 Other
$m		 Credit
Exposure
$m
Foreign cash and cash equivalents 898 -  77 2 -  977
Debtors and receivables -  -  231 1 -  232
Advances to non-Crown -  -  -  -  125 125
Marketable securities 1,141 338 1,108 792 1,200 4,579
External deposits -  -  130 -  -  130
Derivatives in gain -  -  704 706 65 1,475
IMF financial assets -  2,249 -  -  -  2,249
Total Credit Exposure by Industry 2,039 2,587 2,250 1,501 1,390 9,767
Concentration of Credit Exposure as at 30 June 2012 by Geographical Area
By Geographical Area United States
of America
$m		 Europe
$m		 Japan
$m		 Australia
$m		 NZ
$m		 Supra-
National
$m		 Other
$m		 Credit
Exposure
$m
Foreign cash and cash equivalents 899 -  -  1 77 -  -  977
Debtors and receivables -  -  -  1 231 -  -  232
Advances to non-Crown -  -  -  -  125 -  -  125
Marketable securities 18 2,606 270 238 1,109 338 -  4,579
External deposits -  -  -  -  130 -  -  130
Derivatives in gain 254 512 -  5 704 -  -  1,475
IMF financial assets -  -  -  -  -  2,249 -  2,249
Total Credit Exposure by Geographical Area 1,171 3,118 270 245 2,376 2,587 -  9,767

The Crown has agreed to make available to the Auckland Council, a loan facility to enable the Council to develop the Auckland metro rail network. The loan facility amount is $500 million of which $440 million is undrawn as at 30 June 2012. The loans drawn are included in Advances to non-Crown above.

The Crown has also agreed to make available to LGFA a New Zealand-dollar revolving credit facility to meet exceptional and temporary liquidity shortfalls affecting LGFA. The 10-year facility (to February 2022) is for $500 million with the potential for this to be increased to a maximum $1,000 million by February 2015. As at 30 June 2012 the facility has not been utilised.

Concentration of Credit Exposure as at 30 June 2011

Concentration of Credit Exposure as at 30 June 2011 by Credit Rating
By Credit Rating AAA
$m		 AA
$m		 A
$m		 Other
$m		 Non-rated
$m		 Credit
Exposure
$m
Foreign cash and cash equivalents 1,356 104 1 - - 1,461
Debtors and receivables - 504 32 - - 536
Advances to non-Crown - - - - 151 151
Marketable securities 1,294 1,835 - - - 3,129
External deposits - 115 - - - 115
Derivatives in gain - 1,633 588 - 31 2,252
IMF financial assets - - - - 2,168 2,168
Total Credit Exposure by Credit Rating 2,650 4,191 621 - 2,350 9,812
Concentration of Credit Exposure as at 30 June 2011 by Industry
By Industry Sovereign
Issuers
$m		 Supra-
National
$m		 NZ Banking
Sector
$m		 Foreign
Banking Sector
$m		 Other
$m		 Credit
Exposure
$m
Foreign cash and cash equivalents 1,356 - 88 17 - 1,461
Debtors and receivables - - 493 43 - 536
Advances to non-Crown - - - - 151 151
Marketable securities 481 489 1,188 686 285 3,129
External deposits - - 115 - - 115
Derivatives in gain - - 1,427 692 133 2,252
IMF financial assets - 2,168 - - - 2,168
Total Credit Exposure by Industry 1,837 2,657 3,311 1,438 569 9,812
Concentration of Credit Exposure as at 30 June 2011 by Geographical Area
By Geographical Area United States
of America
$m		 Europe
$m		 Japan
$m		 Australia
$m		 NZ
$m		 Supra-
National
$m		 Other
$m		 Credit
Exposure
$m
Foreign cash and cash equivalents 1,356 - - 1 89 - 15 1,461
Debtors and receivables - 11 - 32 493 - - 536
Advances to non-Crown - - - - 151 - - 151
Marketable securities 56 743 202 451 1,188 489 - 3,129
External deposits - - - - 115 - - 115
Derivatives in gain 280 436 - 78 1,458 - - 2,252
IMF financial assets - - - - - 2,168 - 2,168
Total Credit Exposure by Geographical Area 1,692 1,190 202 562 3,494 2,657 15 9,812
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