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Rating Action:

Moody's affirms CDB's Aa1 rating; maintains stable outlook

20 May 2021

New York, May 20, 2021 -- Moody's Investors Service, ("Moody's") has today affirmed the Caribbean Development Bank (CDB)'s Aa1 long-term issuer and senior unsecured bond ratings, and maintained the stable outlook.

The decision to affirm the ratings and maintain the stable outlook reflects the following:

(1) Strong credit metrics, specifically capital adequacy and liquidity, balance relatively weak asset quality;

(2) CDB's regional mandate and role as key development partner in the Caribbean region drive strong support from regional and non-regional members and donors.

RATINGS RATIONALE

RATIONALE FOR THE AFFIRMATION OF CDB's Aa1 RATING

FIRST DRIVER: CDB's STRONG CREDIT METRICS, SPECIFICALLY CAPITAL ADEQUACY AND LIQUIDITY, BALANCE WEAK ASSET QUALITY

The CDB maintains a strong balance sheet, despite regional concentration and weak credit quality of its borrowing members. Relative to its peers, the CDB continues to record a strong capital position and very high liquidity, supported by conservative risk management policies. CDB's development-related assets averaged 127% of usable equity, a comparatively low leverage for Aa-rated supranational entities. Moody's expects this ratio to increase over the next two to three years as the CDB ramps up lending operations to support the region's economic recovery. Still, leverage will likely remain comfortably below both the Aa and Aaa median ratios.

The CDB's liquidity position is very strong and in line with similarly-rated peers. On average, total liquid assets provided more than four times coverage of short-term and currently-maturing long-term debt since 2015, reflecting a relatively modest debt stock and a favorable maturity profile. The CDB's stock of liquid assets represented about 61% of total debt over the last five years, in line with similarly rated-MDBs. Overall, liquidity has steadily improved since 2016, with liquid assets totaling $633 million in 2020, up from $435 million in 2016. CDB's liquid resources ratio, which is the ratio of high-quality liquid assets to net outflows from ongoing business operations and debt repayment scores at "aaa" and reflects the bank's holding of enough assets to sustain its functioning for more than 18 months.

The strength of the CDB's capital and liquidity positions mitigates the risks stemming from high portfolio concentration and overall weak borrower creditworthiness. The CDB's regional mandate leads to high geographical concentration, where a majority of its borrowing members have experienced shocks and declining creditworthiness over the past year. However, even sovereigns with recent histories of default have consistently remained current on their debt obligations to the CDB, a reflection of the bank's strong role in the region and preferred creditor status. CDB's non-performing assets (NPAs) were very low at 0.1% of the total loan portfolio in 2020, down from 1.1% in 2012. These NPAs stem from two loans disbursed to a private sector entity, where the losses have been gradually recovered over the last few years.

The CDB's weighted average borrowing rating (WABR) improved slightly to Caa1 in 2020, up from Caa2 the year prior, reflecting ongoing portfolio diversification efforts. Despite this modest improvement, the overall credit quality of the CDB's loan portfolio remains low and will likely continue to be constrained by relatively low ratings in the region.

To mitigate concentration risks, the CDB is actively seeking to expand its membership outside the region and reviews its risk management practices on an ongoing basis. We expect portfolio diversification efforts to yield some benefits over the next few years, leading to lower concentration of the banks' loan portfolio.

SECOND DRIVER: CDB'S REGIONAL MANDATE AND ROLE AS KEY DEVELOPMENT PARTNER DRIVE STRONG SUPPORT FROM REGIONAL AND NON-REGIONAL MEMBERS AND DONORS

The CDB plays an important role as key development partner in the Caribbean region and enjoys a high degree of support from its borrowing and non-borrowing members. Moody's pays particular attention to the support provided by non-borrowing members and donor countries, which often partner with the CDB to extend support and enhance the effectiveness of their engagement in the region. In addition, CDB benefits from support from a number of other multilateral development banks such as the European Investment Bank (EIB, Aaa stable) that provide significant credit facilities to the CDB. This dynamic places added weight on the role of the CDB and strengthens members support.

The CDB played an important role in supporting its membership address the impact of the pandemic. Prior to that it provided vital financing and technical assistance to Barbados in the context of its IMF-supported adjustment program, and most recently has stepped up its support for St. Vincent and the Grenadines, following the volcanic eruption on the island, highlighting the Bank's vital role in addressing multiple crisis in the region.

Evidence of strong support to the CDB is reflected in the May 2010 $1 billion general capital increase and the relatively high share of paid-in capital. The 2010 capital increase, the fourth since the bank's creation, increased subscribed capital by 150%. More recently, in February 2021 donor countries increased their concessional funding through the 10th cycle of the Special Development Fund (SDF), the bank's largest pool of concessionary funds (2021-24 period), approving a $383mn program, to fund programs focused on social, economic and environmental resilience. The top five contributors to the SDF replenishment are: Canada, United Kingdom, Germany, Jamaica, and Trinidad and Tobago. Between 1983-2019, the bank's membership has made $1.4 billion available to CDB through the SDF.

In 2018, the UK and Canada, two of the CDB's founding members, both stepped up to provide the bank with about $40 million to help fund recovery efforts in the region following Hurricanes Irma and Maria. We believe that similar support would be forthcoming in future crises given the highly-relevant role the CDB plays in the region's development and crisis response.

CDB's lending programs are highly relevant for the region, which supports Moody's expectations of continued support from donors and members. The Bank's lending focuses on assisting members address climate risk and adapt to climate change; environmental sustainability and climate resilience actions are integrated into CDB's operations. CDB also provides technical assistance from its own resources and in partnership with other MDBs and donors to support the expansion of renewable energy and energy efficiency, such as geothermal exploration and energy efficient lighting. The CDB conducts systematic screening of all investment projects for climate and disaster risks, and finances programs that provide structural and nature based solutions to climate risks, and assists borrowing members develop climate resilience strategies.

RATIONALE FOR THE STABLE OUTLOOK

The stable outlook reflects Moody's assessment that conservative risk management practices and continued compliance with the CDB's internal risk management guidelines will support maintaining the bank's strong capital and liquidity metrics. The stable outlook also reflects CDB's continued efforts to contain portfolio concentration through ongoing diversification efforts, and the slight improvement in the weighted average of the credit quality of its borrowing members. Portfolio concentration is also contained by the Bank's existing single exposure limits, mitigating the credit risk and high regional concentration of its loan portfolio.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

Environmental considerations are material for the CDB's rating. The CDB's lending operations are almost exclusively dedicated to climate-vulnerable sovereigns in the Caribbean, a region known for its seasonal hurricanes, floods, drought and volcanic activity which are poised to increase in frequency and severity in the context of climate change. In an event where a particularly severe hurricane season and/or multiple climate shocks result in extensive damage to several sovereigns in the CDB's lending portfolio, we expect that some governments would likely have diminished repayment capacity. However, as noted above, the CDB has a long history of managing exposures to sovereigns with weak credit profiles, and borrowers have shown strong willingness to remain current on their obligations to the CDB. We believe these mitigating factors will prove resilient during a severe, regional climate shock. In addition, donors have extended support to the region through the CDB at times of severe climate shocks to help reconstruction.

Social considerations are not material for the CDB's rating. Most of the countries in the CDB's portfolio, and in the Caribbean more broadly, are characterized by stable political systems. While high rates of inequality in some countries increase the possibility of a flare-up in social tensions, we do not think this will negatively affect the CDB's lending operations in a material way. Moody's considers the coronavirus outbreak as a social risk. In this context, social considerations are relevant for CDB's ratings given its mandate to support its membership, which has been severely impacted by the pandemic shock.

Governance considerations are material and are an important part of Moody's credit analysis for MDBs. In the case of CDB, governance and risk management practices are appropriate and solid for a business such as CDB's. While we do not make any adjustments in our scorecard for the quality of governance, it remains supportive of the CDB's rating.

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

The rating could be upgraded if the average quality of the CDB's borrowers were to improve materially and the concentration of its loan book were to decline significantly. Given the banks mission to serve the Caribbean, coupled with the economic and financial challenges facing the region, we view this as unlikely in the medium term, notwithstanding management's plans to increase lending to higher rated members.

The rating could face downward pressure if the bank's capitalization and/or liquidity metrics were to deteriorate materially. Such a deterioration could emerge as a result of significant losses or impairments on the bank's loan portfolio, or if the bank fails to comply with or weaken its prudential financial policies. Evidence of waning support from non-regional members and donors would likely also place downward pressure on the rating.

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_1263068.

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.

Samar Maziad
Vice President - Senior Analyst
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
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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