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Rating Action:

Moody's assigns A3/P-2 foreign currency ratings to Africa Finance Corporation; outlook stable

03 Mar 2014

New York, March 03, 2014 -- Moody's Investors Service has today assigned first-time foreign-currency issuer ratings of A3/P-2 to Africa Finance Corporation (AFC). The outlook on the rating is stable.

Moody's rationale for the AFC's A3 rating is based on:

(1) Sound capital adequacy, low leverage compared to peers, and an absence of non-performing loans (NPLs). Capitalization is also supported by a good profit margin and significant profit retention.

(2) High degree of liquidity, supporting the bank's resiliency to shocks, especially in light of the planned expansion of its balance sheet.

(3) Very low member support, despite the capital allotment of the bank that was fully paid-in at the bank's inception in 2007. The average credit quality of the members themselves is relatively poor, which leads Moody's to assess their ability to support the bank in a timely manner as very low.

RATINGS RATIONALE

The AFC was established in 2007 to participate, as a Pan-African institution, in the financing of critical infrastructure in Africa, which is an area of substantial demand. Structured as a unique form of Public-Private Partnership with commercial banks, AFC is a supranational institution with a private sector majority membership, allowing the bank to maintain some degree of independence from potential political pressure and ensuring the commercial orientation of its business operations. The bank has three types of lending activities: (i) project, corporate, and infrastructure finance loans (accounting for 38% of the bank's development assets at the end of 2012); (ii) structured trade finance operations (accounting for 44%); and (iii) equity/mezzanine investments (accounting for 18%). These activities expose AFC to credit risk, especially so in a region that has experienced economic turmoil and crises. The bank also provides some advisory services.

The first driver of AFC's A3 rating is its sound capital position and asset quality. AFC's asset coverage ratio -- defined as its usable equity as a percentage of development operations (both lending and equity investment) and treasury assets (weighted by credit quality) -- is strong (139% in 2012) and compares favorably with peers. Furthermore, given the short history of the bank, AFC has not recorded any NPLs, and has only one impaired asset (an equity investment made in 2009 that still accounts for 2% of assets). In contrast to most multilateral development banks (MDBs) that benefit from preferred creditor status (de jure or de facto), AFC's balance sheet is only half-exposed to transactions within member countries (Nigeria and soon Ghana). More importantly, however, its preferred creditor status does not apply to most of its portfolio given that only a small share is attributed to sovereign transactions (1.2% of its total balance sheet in 2012) -- most of the portfolio is made up of loans to the private sector.

The main constraint to Moody's assessment of AFC's capital adequacy is the fact that the average quality of its borrowers is B1, which is a relatively low to its A-rated peers. Therefore, the preservation of the strong performance of its assets as it substantially grows its balance sheet over the coming year will remain crucial to Moody's assessment of the bank's creditworthiness. That being said, the rating agency expects some of AFC's capital adequacy metrics -- notably, its capital position and leverage ratio -- to deteriorate gradually as the bank expands its operations. However, even conservative projections of AFC's balance sheet evolution suggest that its overall capital adequacy will remain solid. In particular, Moody's highlights that the bank's capitalization is also supported by a good profit margin (return on assets reached 4.9% in 2012) and significant profit retention.

The second driver of the A3 rating is AFC's high degree of liquidity, which supports the bank's resiliency to shocks, particularly in light of its expected portfolio expansion. At the end of 2012, liquid assets represented 49% of total assets, 179% of total liabilities, and four years of the bank's total commitments. As a result, AFC's debt-service coverage ratio -- defined as the ratio of short-term debt and currently maturing long-term debt as a percentage of discounted liquid assets -- is 9.9%, which is among the lowest in Moody's universe of rated MDBs. The rating agency expects AFC's liquidity position will decline over time as the bank increases its leverage and expands its lending operations. However, should the bank comply with its own strict liquidity policy, it should witness adequate levels of liquidity going forward. The bank's strategy for diversifying its funding sources also supports Moody's high assessment of its liquidity.

The third driver of the A3 rating is the very low ability of AFC's members to support the bank. On the one hand, the institution's start-up capital of $1.1 billion in 2007 was fully paid-in by its members. At the same time, however, the weighted median rating of AFC's members is B2, and AFC lacks the ability to call capital from them. Most of the institution's peers, however, boast members with higher-weighted median ratings and contractual commitments to providing capital in case of solvency or liquidity challenges. Moody's assessment also accounts for linkages between AFC's members and assets, which has implications for the institution's credit risk. Somewhat offsetting this assessment, however, is the fact that AFC's anchor shareholder -- the Central Bank of Nigeria, with a 42.5% stake -- is highly likely to support the bank in case of need. The combined result of these relative considerations is that AFC ranks lower than most of its peers in overall strength of member support, underscoring Moody's current assessment.

RATING OUTLOOK

The outlook for AFC's rating is currently stable.

WHAT COULD CHANGE THE RATING -- UP/DOWN

A continued rise in profitability as AFC expands its balance sheet in the coming years without a deterioration of asset quality could exert upward pressure on the rating.

Downward pressure could develop on AFC's rating should it experience a substantial shock to its capital adequacy, liquidity, or member support. Applicable scenarios could include (1) an excessively rapid expansion in its loan book (or leverage) that results in a sustained spike in NPLs (or increasingly onerous debt service payments); or (2) a sustained deterioration in country or regional economic conditions that materially restricts AFC's access to market funding and/or support from key members, in case of need.

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 .

The Local Market analyst for this rating is Aurelien Mali, +971 (4) 237-9537.

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.

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.

Elisa Parisi-Capone
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

Bart Jan Sebastian Oosterveld
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 assigns A3/P-2 foreign currency ratings to Africa Finance Corporation; outlook stable
No Related Data.
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