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Rating Action:

Moody's assigns Baa1 rating to JSC Development Finance Institution Altum

15 Jun 2017

London, 15 June 2017 -- Moody's Investors Service has assigned first-time local currency long- and short-term issuer ratings of Baa1 and Prime-2, respectively, to JSC Development Finance Institution Altum (Altum), a specialized Latvian development finance institution.

The assignment primarily reflects Moody's assessment of Altum's standalone credit profile of ba2, which factors in its improving operating environment, as well as a very high probability of support from the Government of Latvia (LT Issuer Rating, A3 stable).

Altum's standalone credit profile also considers its strong capital position, stable funding profile (through state and EU aid programmes), and its focus on growing businesses in Latvia (with comparatively high problem loans ratio and weak profitability).

Altum is mandated through law to promote economic growth in Latvia providing loans, credit guarantees and insurance for business export deals, as well as investment to venture capital. It also offers non-financial support such as consultations, education and mentoring.

A full list of ratings can be found at the end of this press release.

RATINGS RATIONALE

A primary driver for Altum's long- and short-term issuer ratings of Baa1 and Prime-2 respectively is its standalone credit profile (ba2), which is characterised by its government mandate as a development institution, with high capitalisation, state and EU-sourced funding, and asset risk protection integrated in its funding programmes, as well as low expected profitability.

Another key driver is the assumption of a very high probability of support from its owner, the Government of Latvia; and a very high dependence on the Latvian government, with a very high correlation of default between the two.

STANDALONE CREDIT PROFILE

A key fundamental strenght of Altum relates to its capitalisation. As a result of the government's paid-in capital of EUR205 million, Altum has robust capital buffers to withstand volatility in earnings and support future growth. According to Moody's adjusted ratio of tangible common equity over tangible managed assets (TCE/TMA), Altum's capitalisation has stood at around 32% over the last three years. Capital Adequacy Ratio (CAR) as calculated by Altum (not audited) stood at 41.5%. Moody's forecasts this ratio to fall to 33.7% in 2017 mostly due to the growth in business volumes. Altum's profit cannot be paid out in dividends. Instead it accumulates profits as reserves to ensure financial stability and sustainable operations, and to mitigate programme risks.

Funding and liquidity management is another credit strength because most aid programmes, which are used to fund the institution, are replaced with new ones at maturity and thus funds are in practice not repaid. Altum is funded by the Latvian state and European institutions. Currently, around half of Altum's funding comes from support programme funding and state aid, the amounts and maturity of which are defined by the Cabinet of Ministers before the implementation of each programme. The other 50% of funding is divided between loans from the European Investment Bank, Rural Support Service and Latvian Treasury. However, past 2020, Altum expects that EU structural funds will gradually decrease and it will want to replace this funding with market funding.

A high number of problem loans, with a problem loans over gross loans ratio of 21.5% at end of 2016, is credit negative but the credit costs related to these are largely mitigated by government-backed asset risk protection (reported as "credit risk cover" by the entity). Under this credit risk cover scheme, the sponsor (the state of Latvia or the EU) takes the first losses within the portfolios of loans, venture fund investments or guarantees (the percentage varies from one programme to another), providing meaningful protection against asset risk.

Additionally, Altum's portfolio is diversified, with the top 20 exposures (including both loans and guarantees) representing a low share of TCE. Based on Altum's business development strategy, Moody's expects moderate growth in the entity's loan book and venture capital funds while the volume of guarantees should grow more rapidly. The Altum-issued guarantees also benefit from government backing of EUR200 million allocated through state budget, allowing other institutions that use the Altum guarantees to lower their risk weighted exposures.

Profitability is a credit weakness for Altum, with expected low internal capital generation. Although profit maximization is not Altum's goal due to its specific business model, according to the Law the entity should operate profitably in the long-term, preserving the capital invested by the state. A positive return on equity is incorporated into the business strategy. After adjusting for non-recurring items, its net profit stood at EUR85 thousand in 2016 down from EUR831 thousand in 2015, which translates into a net income to average managed assets ratio of 0.01% in 2016, against 0.15% in 2015. Over time, Moody's expects slight improvements in profitability, with efficiency gains coming from increased business volumes on one side and reduced operating expenses on the other, mostly due to reorganization efforts and implementation of new IT systems.

--Government Support

The Latvian government has a strong track record of providing support to strategic companies, including the electricity, postal services, airlines, railways, and telecom sectors, as well as development institutions. Due to the importance of Altum for planning and implementing growth strategies in the national economy, Moody's expects that the probability of government support is very high. The Latvian government has previously supported its development institutions by means of recapitalisation, liquidity support and guarantees.

--Government Dependence

The very high default dependence reflects the strong probability that, in the event of a sovereign credit default, the risk of a potential financial crisis affecting Altum would be quite high, given (1) clear operational linkages to the government, whereby Altum has an explicit and well-recognised mandate to implement specific government policies; (2) the geographic focus of Altum's activities in Latvia; and (3) its high dependence on state funding.

RATIONALE FOR STABLE OUTLOOK

The stable outlook assigned to Altum's Long-term issuer rating reflects Moody's expectations that the bank's standalone credit profile and the government support and dependence will remain broadly in line with their current standing over the next 12 to 18 months.

WHAT COULD CHANGE THE RATING—UP/DOWN

Upward rating pressure could arise if the Latvian government ratings are upgraded, or if Altum demonstrates improving profitability while maintaining its high asset risk coverage, and/or demonstrates lower volumes of problem loans and losses arising from venture capital and guarantees.

Negative rating pressure could emerge if the Latvian government ratings are downgraded, or if the probability of government support decreases, or a combination of (1) Altum significantly changing its funding structure and; (2) its risk coverage reserves significantly deteriorating; or (3) capitalisation deteriorating significantly.

LIST OF AFFECTED RATINGS

Issuer: JSC Development Finance Institution Altum

Assignments:

....LT Issuer Rating (Local Currency), Assigned Baa1, Outlook, Assigned Stable

....ST Issuer Rating (Local Currency), Assigned P-2

Outlook

....Outlook, Assigned Stable

PRINCIPAL METHODOLOGIES

The methodologies used in these ratings were Finance Companies published in December 2016, and Government-Related Issuers published in October 2014. Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

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.

Niclas Boheman
Asst Vice President - Analyst
Financial Institutions Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Sean Marion
MD - Financial Institutions
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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