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Rating Action:

Moody's affirms the Inter-American Development Bank's Aaa rating; maintains stable outlook

22 Mar 2019

New York, March 22, 2019 -- Moody's Investors Service ("Moody's") has today affirmed the Inter-American Development Bank's (IADB) long-term Aaa and short-term P-1 issuer ratings, and maintained the stable outlook.

Moody's also affirmed at Aaa IADB's senior unsecured ratings, as well as the senior unsecured MTN (P)Aaa and other short-term (P)P-1 ratings.

The decision to affirm the rating reflects the following key rating factors:

(1) IADB's intrinsic financial strength remains very strong, as evidenced by strong capital adequacy and liquidity indicators, and compares well relative to Aaa-rated peers;

(2) IADB's robust credit profile can absorb arrears from Venezuela, and Moody's expects that preferred creditor status will be retained.

The stable rating outlook reflects the credit quality and support of the Bank's owners and the institution's ample capital base and preferred creditor status, as well as Moody's expectation that these strengths will remain over the course of the outlook horizon.

RATINGS RATIONALE

RATIONALE FOR THE AFFIRMATION OF THE IADB'S Aaa RATING

FIRST DRIVER: IADB'S INTRINSIC FINANCIAL STRENGTH REMAINS VERY STRONG, AS EVIDENCED BY STRONG CAPITAL ADEQUACY AND LIQUIDITY INDICATORS, AND COMPARES WELL RELATIVE TO Aaa-RATED PEERS

The IADB'S intrinsic financial strength is very high. Over the past five years, the IADB has continued to strengthen its risk management framework, which has contributed to a stable and robust capital buffer. According to the IADB's revised Income Management Model, the Bank has built up this capital buffer, which is now in its denominated surplus capital zone. Should IADB's capital ratios decline, the Bank would proactively take measures to reverse the deterioration, including the repricing of the lending spread on its loan portfolio -- this measure has been used in the past and requires Board approval. Moody's assesses the coverage provided by the capital buffer of multilateral development banks (MDBs) by looking at the ratio of equity over the MDBs' development-related assets and other risky assets. This asset coverage ratio was 35.3% in 2018 (33.5% on average in 2014-18), broadly in line with the median for Aaa-rated peers and higher than that of large Aaa-rated peers such as the International Bank for Reconstruction and Development (IBRD, World Bank) and the European Investment Bank (EIB).

The IADB proactively manages potential risks stemming from its region of operation, given an average weighted borrower quality of Ba3. Over 90% of its loan exposures are to sovereign-guaranteed borrowers and the IADB has historically enjoyed a preferred creditor status with its borrowing sovereign members. Additionally, while the IADB's regional focus can lead to concentration risks in its development-related assets, Moody's notes that the IADB exhibits a relatively diversified loan portfolio by country and its participation in an Exposure Exchange Agreement with the IBRD and the African Development Bank (AfDB, Aaa stable) also helps mitigate these risks.

Moody's also considers IADB's liquidity to be very strong. The IADB's liquidity portfolio provides a high coverage of its debt service requirements and Moody's recognizes that the Bank has robust access to international financial markets. This is evidenced by favorable borrowing costs, the diversity of its borrowings in terms of types of investors and the number of currencies in which the Bank can issue debt.

SECOND DRIVER: IADB'S ROBUST CREDIT PROFILE CAN ABSORB ARREARS FROM VENEZUELA, AND MOODY'S EXPECTS THAT PREFERRED CREDITOR STATUS WILL BE RETAINED

IADB placed the Government of Venezuela (C stable) in non-accrual status in May 2018 as the sovereign had missed payments on its loans for over 180 days. This is the first time an IADB sovereign borrower has received that designation since Government of Suriname (B2 stable) in 2000-01. Venezuela's non-payment is a credit-negative development for the IADB, but Moody's expects this episode will not have a material impact on the Bank's credit profile; the rating agency believes that strong policies in place will ensure that the event does not significantly affect its capital adequacy or liquidity metrics.

The IADB has specific guidelines for when sovereign-guaranteed exposures are in arrears. As a matter of policy, the Bank does not reschedule its sovereign-guaranteed loans. Additionally, the Bank can take different actions depending on how long the sovereign has been in arrears. After a sovereign borrower is late for more than 180 days, the Bank cannot undertake any lending activities with the borrower until arrears are cleared (disbursements are suspended after repayments are in arrears for 30 days as per IADB's policy).

As per the IADB's treatment of sovereign-guaranteed loans in arrears, its full exposure to Venezuela ($2,011 million) was placed in nonaccrual status. However, as of end-2018 only $227 million were overdue more than 180 days. Even if Moody's take the full exposure amount, Venezuela only accounts for 2.1% of total loans and 6.1% of equity.

Notwithstanding Venezuela's arrears, IADB's nonperforming loans (NPL) ratio declined in 2018 to 0.4% of total loans, from 0.5% in 2017. Historically, IADB's NPLs stemmed from its private sector exposures. The NPL ratio averaged 0.4% in 2014-18.

The IADB's extraordinary repayment record has been supported by its preferred creditor status with its borrowing members. Historically, borrowing countries have been less likely to default on IADB loans than on their financial obligations with commercial or private creditors -- in prior cases of sovereigns going into arrears with the IADB, these governments fully repaid the amounts past due without restructuring. Moody's baseline scenario considers that (1) while the Venezuelan crisis continues and the government remains in nonaccrual status, the IADB's credit metrics will remain very strong and (2) when the crisis is ultimately resolved, the IADB will receive a preferred creditor treatment from the government of Venezuela, as was the case in previous instances of sovereign nonaccruals, minimizing the potential financial impact on the Bank's credit profile.

RATIONALE FOR STABLE OUTLOOK

The outlook on the rating is stable, reflecting Moody's expectation that the IADB's robust financial metrics will be maintained over the coming years. Additionally, Moody's considers that the Bank's shareholders will continue to support the IADB's role as a promoter of economic and social development in Latin America and the Caribbean, and that its borrower members will continue to provide the IADB with preferred creditor treatment.

WHAT COULD CHANGE THE RATING DOWN

Downward pressure on the rating could emerge if (1) asset quality were to deteriorate should a large number of the IADB's sovereign-guaranteed loans go into nonaccrual status, or (2) in the case of severe financial stress, member countries were perceived to be unable or unwilling to provide aid to the Bank in the form of contractual or another extraordinary form of support to preserve its financial health. Moody's considers these low-probability outcomes.

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.

The weighting of all rating factors is described in the methodology used in this credit rating action, if applicable.

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: 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

No Related Data.
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