New York, July 13, 2017 -- Moody's Investors Service has today affirmed the Islamic Corporation for
the Development of the Private Sector (ICD)'s long-term Aa3
and short-term P-1 issuer ratings and maintained a stable
outlook.
The ICD is a multilateral development institution and the private-sector
branch of the Islamic Development Bank (IsDB) Group. The ICD provides
loans and equity investment to the private sector in its 53 member countries,
mobilizes capital in the international financial markets, and provides
advisory services to business and governments.
Moody's decision to affirm the rating reflects the following factors:
1. Sound capital buffers against very weak but improving asset
quality, reflecting a challenging operating environment and low
borrower quality
2. Solid liquidity profile, supported by quantitative and
qualitative enhancements to the treasury portfolio
3. Continued support from its shareholders, including IsDB
(Aaa stable) and Saudi Arabia (A1 stable)
The maintenance of a stable outlook reflects the expectation that the
balance of credit strengths and challenges is unlikely to shift over the
outlook horizon.
Concurrently, Moody's affirmed the backed senior unsecured
and the backed senior unsecured MTN ratings of Hilal Services Ltd,
at Aa3 and (P)Aa3, respectively. Hilal Services Ltd is a
special purpose vehicle set up by ICD for its 2016 sukuk issuance.
The stable outlook for this entity was also maintained.
RATINGS RATIONALE
SOLID CAPITAL BUFFERS AMID VERY WEAK ASSET QUALITY
The first key factor informing Moody's decision to affirm the ICD's
Aa3 rating is Moody's view that capital adequacy is moderate, which
balances a strong capital position with very weak asset quality.
The ICD has a solid capital base, representing more than one third
of assets. The corporation's leverage has deteriorated mildly in
the past year following the ICD's first sukuk issuance in April
2016 but remains very low relative to other multilateral development banks
(MDBs). A large expansion in the ICD's balance sheet is expected
this year and next year, funded by additional equity injection from
its shareholders and new debt issuance.
Paid-in capital is expected to double between 2017 and 2020.
The ICD's board of directors announced a general capital increase
of $1 billion in December 2014, which was approved by the
general assembly of shareholders in 2015. The capital increase
will be paid in four yearly instalments of $250 million,
from 2017 onwards. ICD received new capital subscriptions of $70
million in the first quarter of 2017, and we expect paid-in
capital to increase at the same pace. This illustrates the continued
commitment of the ICD's shareholders and is key to maintaining the
Corporation's strong capital structure.
Set against this, the ICD's asset quality continues to be
much weaker than peers, as reflected by the ICD's history of high
non-performing loans (NPLs) on its terms finance portfolio,
which averaged 20.2% over the past ten years. Nonetheless,
this ratio has started to come down, at 14.5% as of
2016, and we expect asset quality to improve gradually because of
(i) the ongoing expansion in the financing asset portfolio, with
the new assets primarily composed of commodity placements through financial
institutions, for which NPL is still zero; (ii) ICD's
credit approval process has been tightened in 2015 to improve asset performance,
and brought in line with MDB peer practices. Despite this,
the sticky legacy NPL portfolio and new impairment should keep the NPL
ratio elevated over the next years. Credit risks stemming from
weak asset quality are somewhat offset by the large size of reserves,
which exceed the size of non-performing assets.
Even though the financing asset portfolio is relatively small, accounting
for one third of assets, it is no less risky as they are composed
of equity participations, with a volatile track record of profitability.
ICD's operations are diversified by geography and by sector,
and the share of top 10 exposure, which accounted for 46%
of total exposure in 2016, should decline over time.
SOLID LIQUIDITY PROFILE SUPPORTED BY A REPLENISHED TREASURY PORTFOLIO
The second key driver of the Aa3 rating affirmation is Moody's assessment
of high liquidity, supported by low short-term debt exposure
and a large treasury portfolio that displays moderate but improving credit
quality.
Moody's assessment of the debt service coverage ratio (the sum of
short-term debt and currently maturing long-term debt divided
by liquid assets declined in 2016 because of a larger liquidity portfolio
and an improvement in the debt structure.
The nominal amount of ICD's treasury assets was large at end-2016
(31% of total assets, up from 21% at the end of 1436H);
the treasury portfolio was replenished following the recent debt issuance
and is expected to maintain a high level of liquid assets. Although
the ICD's treasury portfolio has a moderate weighted average credit
rating of A3, it has improved from Baa2 two years ago and Moody's
expects it to continue to improve over time as liquid, highly-rated
sukuk become available.
The debt structure has also improved over time and the maturity profile
is expected to lengthen as the ICD develops its issuance program.
It has proven and available market access and its funding costs remain
low, although they are expected to increase as both the average
maturity and interest rates on US dollar-pegged currencies pick
up. Finally, the ICD maintains a liquidity coverage ratio
of at least one year, per its board-approved liquidity policy.
A MODERATE LEVEL OF SHAREHOLDER SUPPORT BUT LARGE AVAILABLE RESOURCES
The third key factor of the ICD's Aa3 rating is Moody's assessment of
moderate member support. This assessment is on the one hand constrained
by the absence of callable capital, but on the other, supported
by the strong capacity and high willingness of the ICD's main ultimate
shareholders to support it if needed.
The ICD's main shareholder, the Islamic Development Bank (IsDB),
rated Aaa with a stable outlook is supportive of its credit profile as
the two entities share the IsDB Group's infrastructure and risk management
framework. The IsDB held 46% of the ICD's paid-in
capital at end-2016. We expect the IsDB's shareholding to
come down gradually, but membership of the IsDB Group will continue
to underpin support from other entities. Although recourse to the
IsDB's Ordinary Capital Resources is unlikely and such support is
untested, Moody's believes that the IsDB could use reserves
in the Waqf Fund (unrated) or in the Islamic Solidarity Fund for Development
(ISFD, unrated) to support Group members.
Saudi Arabia, (A1 stable) provides 18% of paid-in
capital and Aa-rated governments together represent another 10%
of paid-in capital, and would likely be supportive of the
corporation in times of financial distress. The ICD's weighted
median shareholder rating is Aa2, and Moody's considers that propensity
and priority of shareholder support are high.
A continued increase in paid-in capital and low arrears on capital
payments are illustrations of such shareholder support. Paid-in
capital more than doubled over the past six years and should double again
by 2022 as the board approved a capital increase in 2015, with the
first instalment paid in 2017. Nevertheless, the absence
of contractual callable capital sets the ICD apart from other, higher-rated
MDBs, and acts as a constraint on our assessment of member support.
RATIONAL FOR MAINTAINING THE STABLE OUTLOOK
The stable outlook reflects Moody's expectation that the balance of credit
strengths and challenges is unlikely to shift over the outlook horizon.
The ICD's non-performing assets should remain elevated despite
the strong expansion of its balance sheet and as the Corporation continues
to invest in the relatively risky private-sector financing of emerging
and frontier markets. In Moody's view, strong liquidity
will be underpinned by further sukuk issuances, while the capacity
of shareholders to support ICD is stable.
WHAT COULD CHANGE THE RATING DOWN
We would consider downgrading ICD's rating if we see a large depletion
of foreign reserves in GCC countries, which are among the highest
rated shareholders, a downgrade of the IsDB or a signal that support
from the IsDB Group will not be forthcoming. We would also consider
a downgrade if we see a renewed deterioration in asset quality,
reflective of a return to previously weak investing standards.
WHAT COULD CHANGE THE RATING UP
We would consider upgrading ICD's rating if we see a sustained improvement
in the Corporation's asset-quality track record, with NPLs
ranging well below 10% of total financing assets for several years,
combined with a higher credit quality in the treasury and equity portfolios.
Although unlikely, the introduction of callable capital would also
lead to an upgrade.
The principal methodology used in these ratings was Multilateral Development
Banks and Other Supranational Entities published in March 2017.
Please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
The Local Market analyst for these ratings is Mathias Angonin, +971
4 237 9548.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides certain regulatory disclosures in relation
to the credit rating action on the support provider and in relation to
each particular credit rating action for securities that derive their
credit ratings from the support provider's credit rating.
For provisional ratings, this announcement provides certain regulatory
disclosures in relation to the provisional rating assigned, and
in relation to a definitive rating that may be assigned subsequent to
the final issuance of the debt, in each case where the transaction
structure and terms have not changed prior to the assignment of the definitive
rating in a manner that would have affected the rating. For further
information please see the ratings tab on the issuer/entity page for the
respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Gabriel Torres
VP - Senior Credit Officer
Sovereign Risk Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Yves Lemay
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
