New York, April 26, 2019 -- Moody's Investors Service ("Moody's") has today
affirmed Corporacion Andina de Fomento's (CAF) long-term
Aa3 issuer rating, and maintained the stable outlook.
Moody's also affirmed CAF's Aa3 senior unsecured foreign currency
rating, the (P)Aa3 senior unsecured MTN and senior unsecured shelf
ratings, as well as the (P)P-1 other short-term rating,
the P-1 commercial paper short-term rating, the P-1
other short-term rating, and the P-1 backed commercial
paper rating.
The key drivers underpinning the ratings affirmation and stable outlook
are:
1) CAF's intrinsic financial strength remains robust with solid
asset quality, robust capital buffers, improved profitability
and liquidity, despite high leverage ratios.
2) Exposure to Venezuela continues to be prudently managed as Venezuela
remains current on all payments to CAF despite severe economic stress.
RATINGS RATIONALE
RATIONALE FOR THE AFFIRMATION OF CAF'S Aa3 RATING
FIRST DRIVER: CAF'S INTRINSIC FINANCIAL STRENGTH REMAINS ROBUST
WITH SOLID ASSET QUALITY, ROBUST CAPITAL BUFFERS AND AMPLE LIQUIDITY
CUSHION, DESPITE HIGH LEVERAGE RATIOS
CAF's intrinsic financial strength is high, which reflects
prudent risk management and demonstrated shareholder commitment via steady
capital increases. Moody's assesses CAF's capital adequacy
as "High" and its liquidity position as "Very High".
In 2018, non-performing loans (NPLs) decreased to 0.45%
from 0.58% in 2017, reflecting improving credit quality
and continued growth in CAF's lending portfolio. As economic
conditions continue to improve within CAF's operating region Moody's
expects that NPLs will remain broadly steady-to-improving
and contained well below 2% of total loans. Overall net
income nearly tripled to $223.5 million in 2018 from $76.4
million in 2017 benefitting from lower provisioning. Accordingly,
return on average assets (ROA) and return on equity (ROE) rose to 0.6%
and 1.9% in 2018, from 0.2% and 0.7%
in 2017, respectively. Higher profitability will continue
to buffer capitalization given that all profits are retained.
Capitalization ratios have remained relatively steady over the past five
years, reflecting sustained lending activity that has grown at a
compound annual rate of 7% in 2014-18. Moody's
expects capitalization ratios will improve marginally as incoming capital
payments under the 2016 general capital increase program will outpace
loan portfolio growth, and support continued increases in liquid
assets. Liquid assets cover 55.4% of total financial
liabilities, substantially decreasing rollover risk. CAF's
liquidity policy mandates that it hold at least 12 months net cash requirements
(defined as debt service and committed disbursements less repayments),
but in practice the institution holds 24 months of net cash requirements,
a level that compares favorably with 'Aa' peers, making
CAF one of the most liquid 'Aa'-rated multilateral
development banks.
Debt as a percent of usable equity remains higher than peers, which
constrains CAF's credit profile. In 2018, debt-to-usable
equity stood at 198.5%, compared to the 'Aa'
median of 124.4% as of end-2017.
SECOND DRIVER: EXPOSURE TO VENEZUELA CONTINUES TO BE PRUDENTLY MANAGED
AS VENEZUELA REMAINS CURRENT ON ALL PAYMENTS TO CAF DESPITE SEVERE ECONOMIC
STRESS
CAF's loan exposure to Venezuela (C stable) represented 14%
of the total lending portfolio, the third largest behind Ecuador
(B3 negative) and Argentina (B2 stable). Despite its severe economic,
political, and humanitarian crisis, and its default on all
outstanding market debt, Venezuela remains current on all its obligations
to CAF, including interest and principal on debt service,
and on its capital contribution commitments. Moody's believes
that credit risk from Venezuela remains contained such that a moratorium
on payments to CAF seems unlikely in the near future. The risk
that Venezuela includes CAF loans into a broader restructuring seems to
have a limited probability of occurring given CAF's preferred creditor
status.
Venezuela is one of CAF's three main shareholders (along with Peru
and Colombia). The country's 17% ownership of the
bank serves as an incentive to fulfill its commitments to the institution.
In addition, Venezuela's debt service on CAF lending is expected
to remain smaller that the yearly disbursements that the sovereign receives
from CAF, resulting in a slightly positive net yearly flow of hard
currency to Venezuela which further incentivize the country to stay current
on its obligations to CAF.
RATIONALE FOR THE STABLE OUTLOOK
The stable outlook reflects Moody's expectation that CAF's capitalization
and liquidity levels will remain consistent with its Aa3 rating,
as CAF continues to expand its operations, balancing loan growth
with adequate liquidity and capitalization buffers. The stable
outlook also reflects Moody's expectation that the institution will
be able to successfully manage operating and credit risks from its exposure
to Venezuela and that the sovereign will remain current on its obligations
to CAF.
WHAT COULD CHANGE THE RATING UP
Although unlikely in the near future, upward credit pressure would
develop if CAF meaningfully reduces its exposure to its lowest rated borrowers,
decreases its leverage, and if its capitalization and liquidity
ratios demonstrate significant improvement. The inclusion of new
non-borrowing highly rated members responsible for a significant
amount of callable capital, and that would reduce the correlation
between members and assets, would also support improved creditworthiness.
WHAT COULD CHANGE THE RATING DOWN
The rating outlook would be changed to negative if Venezuela were to be
placed on non-accrual status due to missed payments, as it
would signal the potential for material pressure on the balance sheet
and profitability of the bank over a 12-18 month time horizon.
A subsequent rating downgrade would result if CAF and Venezuela were unable
to quickly resolve the missed payments to limit the negative impact on
CAF's capital adequacy and liquidity metrics. Downward pressure
on CAF's credit profile would also develop if it were to face a
strong deterioration in asset quality due to credit events involving other
borrowers, or if it were to experience an erosion of its capital
and liquidity buffers due to a rapid expansion of its loan book not sufficiently
compensated by additional capital contributions.
The principal methodology used in these ratings was Multilateral Development
Banks and Other Supranational Entities published in September 2018.
Please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
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.
Jaime Reusche
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
