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Rating Action:

Moody's assigns Ba1 ratings to Shelter-Afrique (Kenya)

Global Credit Research - 03 Feb 2011

First-time rating

London, 03 February 2011 -- Moody's Investors Service has today assigned a Ba1 long-term foreign currency issuer rating to the Kenya-based Company for Habitat and Housing in Africa, commonly known as Shelter-Afrique. The rating outlook is stable. This is the first time that Moody's has rated Shelter-Afrique.

RATINGS RATIONALE

Moody's rationale for Shelter-Afrique's Ba1 rating is based on the following factors:

1. Very high support from the African Development Bank (AfDB), rated Aaa by Moody's, as the largest shareholder with 22.6% of the capital. Shelter-Afrique benefits from the support from its other shareholders, as evidenced by the shareholders' unanimous decision to double the bank's capital base in 2009.

2. A moderate level of capital adequacy, with a capital adequacy ratio (in relation to risk assets) at the median compared with that of the rest of the multilateral development banks (MDBs) rated by Moody's. However, Shelter-Afrique has no callable capital and the credit quality of most of its shareholders, with the exception of the AfDB, is very poor, so their ability to support the bank in a timely manner is very low, in Moody's view.

3. The bank displays a moderate resilience to shocks driven by strong liquidity and ongoing efforts to strengthen governance and risk management, which are improving albeit from a very low level.

4. The bank is characterized by weak asset quality, as reflected in the high level of gross non-performing loans (NPLs) at 15% at the end of 2010. However, this is mitigated to a certain extent by a strong capitalization associated with a low leverage ratio.

Shelter-Afrique's mandate is to address the acute housing shortage prevalent in most African countries by offering financing for housing and urban development throughout the continent. In assuming this responsibility, it is also fulfilling one of the key mandates of its largest shareholder, the Aaa-rated African Development Bank.

"Shelter-Afrique's Ba1 rating balances its moderate capitalization and shareholder support, strong liquidity and a low leverage ratio against a lack of callable capital, the poor quality of the loan portfolio and a high level of non-performing loans (NPLs)," says Aurelien Mali, Assistant Vice President in Moody's Sovereign Risk Group. Moody's expects shelter-Afrique's loan book to grow and its capital ratio to fall, while maintaining a ratio loans to equity below the 3:1 ratio of their policy. "The rating, which is forward-looking, takes into account the likely deterioration of Shelter-Afrique's financial metrics as the bank continues its rapid growth over the medium term," Mr. Mali adds.

According to Moody's, Shelter-Afrique's capital position is strong compared with commercial banks given its Basel II risk-weighted capital adequacy ratio of 61% at the end of June 2010. Shelter-Afrique's capital adequacy ratio is relatively similar to ratios of other MDBs rated by Moody's. At the end of 2009, usable equity (the sum of paid-in capital, reserves and net income of the year) represented 100% of the assets held in non-investment-grade or non-rated countries (i.e. the bank's entire portfolio). One significant difference compared to other MDBs, however, is the lack of callable capital in addition to paid-in and subscribed capital, which could be available in the unlikely event of financial difficulties. The bank's owners withdrew their callable capital in 1996.

As evidenced by the high level of gross NPLs (15% at the end of 2010), the average credit quality of Shelter-Afrique's loan portfolio is poor, mainly reflecting the challenging operating environment, both in economic and political terms, in which the bank's operations are located. This is one of the bank's main rating weaknesses. "The continued increase in NPLs following the expansion of the balance sheet since 2005 acts as a constraint on the rating. Nevertheless, Moody's notes that the bank's recent and ongoing efforts to strengthen governance, risk management policies and capabilities have strengthened the bank's resilience to shocks," explains Mr. Mali.

In 2009, the bank's 0.6% return on equity and 0.5% return on assets were particularly weak compared with their previous five-year averages (5.4% and 5.2%, respectively). This low profitability in 2009 was mainly a result of a US$2.8 million provision made on a loan asset and its accrued interest.

Shelter-Afrique is involved in only one type of lending activity: real estate finance with medium-term maturities of typically less than five years. Loans for new housing estates and site infrastructure represented 92% of its lending in 2009. Although the bank's assets are necessarily concentrated in terms of country exposures -- the largest being Kenya followed by Nigeria (with each holding around 20% of total portfolio) -- concentration in terms of projects is low. In the future, the bank also intends to develop trade finance activities related to housing, such as trade finance for building materials.

RATING OUTLOOK AND POTENTIAL TRIGGERS FOR AN UPGRADE/DOWNGRADE

The rating outlook for Shelter-Afrique Bank is currently stable, with the risks to the ratings being equally balanced.

The rating could face downward pressure if the level of NPLs continues to increase.

An increase in profitability alongside a decrease in both relative and nominal terms of NPLs could create pressure for an upgrade. If Shelter-Afrique were to restore a callable capital mechanism, it could certainly prompt a multi- notch upgrade. The callable capital -- a unique characteristic of MDBs, but not of Shelter-Afrique -- is a powerful line of protection for creditors, especially when some of the shareholders are highly rated, at Aaa or Aa.

Shelter-Afrique's ratings were assigned by evaluating factors relevant to the specific characteristics of multilateral development banks, reflecting in particular their dual nature as financial institutions and vehicles of international public policy. MDB rating factors include an assessment of the stand-alone financial strength of the institution (in particular its level of capitalization, liquidity, its risk management framework and the quality of its assets), as well as the multiple forms of support (including in contractual form) provided by the governments that compose its membership. These attributes were compared against other issuers both within and outside of Shelter-Afrique's peer group of multilateral development banks, and Shelter-Afrique's ratings are believed to be similar to other issuers of similar credit risk.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, parties not involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information.

Moody's Investors Service considers the quality of information available on the issuer or obligation satisfactory for the purposes of assigning a credit rating.

The rating has been disclosed to the rated entity or its designated agents and issued with no amendment resulting from that disclosure.

Moody's Investors Service may have provided Ancillary or Other Permissible Service(s) to the rated entity or its related third parties within the three years preceding the Credit Rating Action. Please see the ratings disclosure page www.moodys.com/disclosures on our website for further information.

Moody's adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

London
Aurelien Mali
Analyst
Sovereign Risk Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

New York
Bart Oosterveld
MD-CCO Pub, Proj and Infra Fin
Sovereign Risk Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Investors Service Ltd.
One Canada Square
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United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's assigns Ba1 ratings to Shelter-Afrique (Kenya)
No Related Data.
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