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Rating Action:

Moody's affirms Fondo Latinoamericano de Reservas (FLAR) rating at Aa2; outlook remains stable

 The document has been translated in other languages

28 Aug 2015

New York, August 28, 2015 -- Moody's Investors Service has today affirmed the Aa2 issuer rating of Fondo Latinoamericano de Reservas (FLAR). The outlook remains stable. Concurrently, Moody's has affirmed the short-term P-1 rating.

The key drivers for today's affirmation are:

1. FLAR's exceptionally high intrinsic financial strength, with very high capital adequacy and liquidity indicators.

2. Strength of member support remains low in Moody's view, despite the addition of Paraguay in December of 2014, given that extraordinary support from members is constrained by a lower weighted median shareholder rating compared to other Aa-rated multilateral development banks.

RATINGS RATIONALE

RATIONALE FOR AFFIRMATION OF Aa2 RATING

--FIRST DRIVER: EXCEPTIONALLY HIGH INTRINSIC FINANCIAL STRENGTH

Exceptionally high financial strength is evident in both capital adequacy and liquidity indicators, which have remained very strong through economic cycles. In line with its mission as a regional lender of last resort and asset manager for central banks, FLAR maintains high quality, liquid assets comprised predominantly of money market instruments. Around half of the institution's assets are invested in securities with a P-1 rating and 60% are in the United States.

FLAR currently has only one loan outstanding to Ecuador (B3 stable). As a result, its asset coverage ratio calculated as usable equity to loans is exceptionally high, at 424%. This capital adequacy ratio far exceeds that of any other Aa-rated Multilateral Development Bank (MDB), for which the median is around 65%.

FLAR does not provide long term loans to its members and it currently has no debt outstanding; its only liabilities are in the form of mostly time deposits. Even if FLAR increases its leverage to the maximum allowed, for example, to provide liquidity to a member in a balance of payments crisis, the institution's leverage policy establishes that indebtedness cannot exceed 65% of paid-in capital. Under this extreme case scenario, debt to equity would come to 59%, still consistent with a 'very high' capital adequacy score and below the 63% median for Aa-rated peers. FLAR's liquidity position would also still be assessed 'very high' given the percentage of highly-rated liquid assets (90% of the total compared to 30% of most MDBs). The institution's conservative risk management practice, which assigns priority to preserving high liquidity and accessibility of funds, support this assessment.

Finally, even if FLAR's lending to members increases to the maximum allowed by its credit limits, the asset coverage ratio would still be 'very high', given FLAR's high paid-in capital (72% of total subscribed) and very conservative lending limits.

Moody's does not foresee any material changes to FLAR's capital adequacy or liquidity policies that would point to a deterioration in its intrinsic financial strength.

--SECOND DRIVER: MEMBER SUPPORT REMAINS LOW

The increase in subscribed capital by 40% in 2012 and the incorporation of Paraguay in December 2014 do not change Moody's assessment of low strength of member support for FLAR. Even though the former demonstrates the members' willingness to continue to recapitalize retained earnings, the ability of FLAR's members to provide extraordinary support continues to be constrained by the non-investment grade rating of most of its members, compared to other Aa-rated MDBs that have higher-rated country members and/or a much larger member base. This is reflected in a lower weighed median shareholder rating: FLAR's is Ba1 whereas Aaa- and Aa-rated MDBs have, on average, a weighted median shareholder rating of A1.

RATIONALE FOR A STABLE OUTLOOK

The stable outlook incorporates Moody's assessment that conservative risk management practices will continue, supporting the continuation of strong capital and liquidity indicators.

The expectation of moderate future debt issuance supports the stable outlook as well.

WHAT COULD CHANGE THE RATINGS - UP

The incorporation of new highly-rated countries as shareholders, resulting in a higher weighted median shareholder rating, could put upward pressure on the rating.

WHAT COULD CHANGE THE RATINGS -- DOWN

The rating could come under negative pressure if (1) there is a material change in risk management policies and guidelines that are expected to lead to a deterioration in capital and liquidity indicators, (2) a rapid increase in deposits and/or lending activities that lead to an asset-liability maturity mismatch and/or (3) a simultaneous and protracted balance-of-payments crisis in several of FLAR's members.

The principal methodology used in this rating was Multilateral Development Banks and Other Supranational Entities published in December 2013. Please see the Credit Policy 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 rating action on the support provider and in relation to each particular 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 rating action, and whose ratings may change as a result of this 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 following information supplements Disclosure 10 ("Information Relating to Conflicts of Interest as required by Paragraph (a)(1) (ii)(J) of SEC Rule 17g-7") in the regulatory disclosures made at the ratings tab on the issuer/entity page on www.moodys.com for each credit rating:

Moody's was not paid for services other than determining a credit rating in the most recently ended fiscal year by the person that paid Moody's to determine this credit rating.

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.

Ariane Ortiz-Bollin
Analyst
Sovereign Risk Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Anne Van Praagh
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's affirms Fondo Latinoamericano de Reservas (FLAR) rating at Aa2; outlook remains stable
No Related Data.
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