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Rating Action:

Moody's affirms CABEI's Aa3 ratings, maintains stable outlook

11 Aug 2021

New York, August 11, 2021 -- Moody's Investors Service ("Moody's") has today affirmed the Central American Bank for Economic Integration's (CABEI) Aa3 senior unsecured bond and long-term issuer ratings and maintained the stable outlook. CABEI's senior unsecured medium-term note program has also been affirmed at (P)Aa3 and CABEI's short-term issuer rating and commercial paper rating have been affirmed at P-1.

The ratings affirmation balances:

1. Strong financial results, continued member support, and solid access to capital markets with;

2. Challenges deriving from its exposure to low rated sovereigns

The stable outlook reflects Moody's expectation that adequate capital buffers, consistent profitability, and prudent lending practices will continue to balance the risks associated with a regionally concentrated lending portfolio.

The following ratings/assessments are affected by today's action:

Ratings Affirmed:

..Issuer: Central American Bk for Economic Integration

.... LT Issuer Rating, Affirmed Aa3

.... ST Issuer Rating, Affirmed P-1

.....Senior Unsecured Medium-Term Note Program, Affirmed (P)Aa3

....Commercial Paper, Affirmed P-1

....Senior Unsecured Notes, Affirmed Aa3

Outlook Actions:

..Issuer: Central American Bk for Economic Integration

....Outlook, Remains Stable

RATINGS RATIONALE

STRONG FINANCIAL RESULTS, CONTINUED MEMBER SUPPORT, AND SOLID ACCESS TO CAPITAL MARKETS

CABEI benefits from strong financial ratios that have shown stability across time and compare well with peers. CABEI's leverage ratio shows a stable but slightly improving trend reflecting rising equity levels even as the bank increased lending to support member nations coping with the pandemic. CABEI particularly benefits from very low levels of non-performing loans reflecting improvements in its private sector loan portfolio in the last 5 years.

Last year CABEI increased its lending to support member's responses to the worldwide pandemic. Gross loans rose 6.5% in 2020 compared to a 5% average increase in 2013-2019. Leverage ratios were mostly unchanged because usable equity rose even faster last year, slightly over 7%. Development assets represented 223% of usable equity in 2020 down from 270% in 2012 and on par with the 218% median of Aa-rated MDBs. Moody's estimates that the leverage ratio will rise in 2021 and 2022 but remain close to 230%.

Regular capital increases are evidence of continued member support. In 2020 CABEI approved and implemented its 8th general capital increase, raising authorized capital by 40%, from US$5 billion to US$7 billion.

Despite operating in a region with a long history of financial, economic, and political shocks CABEI has historically maintained very low levels of non-performing loans. Non-performing assets (NPA) were less than 0.01% of all loans in 2020 compared to a record-high of 3.2% registered in 2010. Since then NPAs have fallen due to a mixture of favorable resolutions regarding non-performing loans to some private sector borrowers and proactive management of other troubled loans. All NPAs are for private sector loans and no loans to sovereign borrowers are delinquent.

CABEI also benefits from a diversified funding base and ample access to funding. In 2020 CABEI issued $1.5 billion of debt in the capital markets, including a record-high issuance of a $750 million bond.

CHALLENGES DERIVING FROM ITS EXPOSURE TO LOW RATED SOVEREIGNS

CABEI's lending is highly geographically concentrated and its founding members (Guatemala, El Salvador, Honduras, Nicaragua, and Costa Rica) are all speculative grade rated sovereigns. An expanded membership has allowed the bank to diversify lending beyond the original founding nations, but the five Central American nations still comprise more than 80% of the bank's loan book.

CABEI has expanded its membership both to reduce geographic concentration and to increase the average shareholder rating. The addition of the Republic of Korea in 2019 as a member followed the signing of a free trade agreement between the Republic of Korea and the Central American countries in 2018 and reflected the country's efforts to expand its presence in Central America. As of December 2020 the Republic of Korea had a 9.0% share in CABEI's capital, the second-largest share by a non-regional member after Taiwan's 11.1% stake, increasing the bank's capital buffers.

Several of the countries CABEI lends to face significant credit pressures as reflected by the bank's low weighted average borrower rating (WABR) of B1. Moody's considers the low WABR a structural operating feature that is unlikely to change materially.

CABEI's history of low NPAs indicates the bank's preferred creditor status, prudent lending policies, and limited exposure to private sector borrowers have placed it well to manage the credit impact of low rated borrowers. But almost 90% of CABEI's loans are in countries rated below investment grade and a potentially even lower WABR due to multiple downgrades of borrowing nations represents a key credit challenge for the bank.

RATIONALE FOR THE STABLE OUTLOOK

The stable outlook reflects Moody's expectation that conservative liquidity management, adequate capital buffers and prudent lending will continue to balance the risks associated with a regionally concentrated lending portfolio and a difficult operating environment. Additionally, Moody's considers that the bank's shareholders will continue to support CABEI's role as a promoter of economic and social development in Central America and that its borrower members will continue to provide CABEI with preferred creditor treatment. CABEI remains the largest MDB lender in Central America.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

Environmental considerations are not material for CABEI's rating.

Social considerations are not material for CABEI's rating although social risk affects the credit profile of countries in which it lends, some of which are affected by social and political unrest, low wealth levels, income disparity and low voice and accountability scores.

Governance is strong, and while we do not make any adjustments in our scorecard for the quality of governance, it remains supportive of CABEI's rating.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Upside rating potential could result from the addition of more highly rated non-regional members with shareholder stakes significant enough to strengthen member support.

A significant deterioration in the credit quality of Central American borrowing sovereigns would put downward pressure on CABEI's rating. Borrower quality poses a potential credit challenge to CABEI as loans to Panama, Colombia, and Mexico, the bank's sole investment-grade borrowers as of year-end 2020, accounted for only 11.6% of total loans.

The principal methodology used in these ratings was Multilateral Development Banks and Other Supranational Entities Methodology published in October 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1232238. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288435.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

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

Alejandro Olivo Villa
MD-Sovereign/Sub Sovereign
Sovereign Risk Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

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

No Related Data.
© 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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