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Rating Action:

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

11 Apr 2017

New York, April 11, 2017 -- Moody's Investors Service has today affirmed the Aa2 issuer rating of Fondo Latinoamericano de Reservas (FLAR). The outlook remains stable. Moody's also affirmed the short-term P-1 rating.

The key drivers of today's rating affirmation are the following:

1. FLAR's intrinsic financial strength remains very strong, reflected in very high capital adequacy and liquidity indicators;

2. But strength of member support is lower than for other Aa-rated peers due to a lack of callable capital and a low weighted median shareholder rating, which may limit members' ability to support FLAR in times of severe stress.

RATINGS RATIONALE

RATIONALE FOR AFFIRMATION OF Aa2 RATING

--FIRST DRIVER: VERY STRONG INTRINSIC FINANCIAL STRENGTH

FLAR has maintained exceptionally high financial strength as reflected in its capital adequacy and liquidity indicators. Its mission is to operate as a regional lender of last resort for central bank members and an asset manager for official financial institutions in the region. Since FLAR's members can request credit for liquidity support and a large portion of its liabilities involve clients deposits, FLAR maintains highly liquid assets in its balance sheet to ensure resource availability to meet potential requests for loans or deposit withdrawals.

As of end-2016, FLAR had two outstanding balance-of-payments support loans, one to Ecuador (B3 stable) for $231.6 million and another to Venezuela (Caa3 negative) for $482.5 million. The concentration risk suggested by FLAR's lending to just two sovereigns is mitigated by the relatively small size of these loans that together represent only about 10% of total assets. Additionally, even though average borrower quality has been low over the years, FLAR has had no non-performing loans, a condition that confirms its preferred creditor status. Moreover, FLAR's asset coverage ratio, calculated as equity to loans, is very high. It was 438% in 2016 and averaged 579% between 2009 and 2016. FLAR's asset coverage ratio is the highest ratio among all Multilateral Development Banks (MDB) rated by Moody's.

A key factor that differentiates FLAR from other MDBs is that FLAR does not have outstanding loans or bonds. FLAR's policies limit borrowings to 65% of its paid-in capital. Even if borrowings were at the maximum limit, FLAR would continue to score 'Very High' in terms of leverage metrics because of its low leverage ratio. Even if FLAR's deposit liabilities were to be incorporated in the calculation of its debt-to-equity ratio, at 123% in 2014-16 that ratio would be in line with the median for Aa-rated MDBs (104%).

Moody's assesses FLAR's liquidity to be 'Very High'. Its debt service coverage ratio is zero due to lack of debt. FLAR shares this characteristic with the European Investment Fund (EIF) and the International Development Association (IDA), both Aaa-rated. FLAR holds highly liquid assets in its treasury portfolio. Almost three quarters of treasury assets are rated Aaa/P-1. Liquid assets provide ample coverage of its deposit liabilities, which were equivalent to 61% of liquid assets in 2014-16.

Moody's does not foresee changes to FLAR's capital adequacy or liquidity policies that could materially affect its intrinsic financial strength.

--SECOND DRIVER: STRENGTH OF MEMBER SUPPORT REMAINS LOW

Unlike most MDBs, FLAR lacks callable capital. Consequently, in times of severe stress, FLAR would have to rely on its members' ability and willingness to provide extraordinary support. Members have shown high willingness to support, as exemplified by (i) the general capital increase agreed in 2012, (ii) members' decision to recapitalize retained earnings, and (iii) Costa Rica's (Ba2 negative) decision in 2015 to pre-pay its full subscribed capital at the time and to double this subscribed capital.

However, members' ability to support FLAR is constrained by their own credit profiles. FLAR's weighted median shareholder rating in 2016 was Ba2, down from Ba1 in 2015. This compares with an average of Aa3 for Aa-rated MDBs. In this respect, FLAR is comparable to the Black Sea Trade and Development Bank (A2) and the Central American Bank for Economic Integration (A1), that have a Ba1 weighted median shareholder rating. FLAR's weighted median shareholder rating is lower than that of the Corporacion Andina de Fomento (Aa3) and the Caribbean Development Bank (Aa1), both with weighted median shareholder ratings of Baa2, and much lower than other Aa1-rated MDBs, such as the Council of Europe Development Bank and Eurofima, with weighted median shareholder ratings of A2 and Aa2, respectively.

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 stable outlook also contemplates the possibility that FLAR may issue debt over the medium term, with borrowing constrained by FLAR's own borrowing limit.

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. Upward rating momentum could also emerge should current members provide the Fund with a significant capital increase, or if a number of Latin American countries -- particularly large economies -- joined the Fund, as this would enhance FLAR's economic importance for the region.

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 could lead to a deterioration in capital and liquidity indicators, (2) the emergence of a significant asset-liability maturity mismatch either due to change in deposits and/or lending activities and/or (3) simultaneous and protracted balance-of-payments crises in several of FLAR's members that increased calls on resources from FLAR while also affecting members' capacity to support FLAR.

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.

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.

Renzo Merino
Asst Vice President - 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

Atsi Sheth
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

No Related Data.
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