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Rating Action:

Moody's changes AFC's outlook to stable from negative; affirms A3 ratings

02 Jun 2021

New York, June 02, 2021 -- Moody's Investors Service ("Moody's") has changed the outlook of Africa Finance Corporation (AFC or the corporation) to stable from negative and has affirmed AFC's long-term issuer and senior unsecured ratings at A3, as well as AFC's short-term issuer rating at P-2. Concurrently, it has also affirmed the corporation's provisional long-term foreign currency senior unsecured MTN program rating at (P)A3 and the other short-term program rating at (P)P-2.

The stable outlook underlines the resilience of AFC's credit profile in the face of a significant shock. In light of developments during the past year, Moody's expects AFC to maintain its intrinsic financial strength, with strong capital adequacy and asset performance, liquidity and funding.

Moody's affirmation of AFC's ratings at A3 is underpinned by the sustained and effective measures the corporation is taking to protect capital adequacy and liquidity. Moody's expects the corporation will continue to gradually expand its activities to maintain a moderate leverage and will keep the level of non-performing assets low.

RATINGS RATIONALE

RATIONALE FOR THE STABLE OUTLOOK

AFC's INTRINSIC FINANCIAL STRENGTH IS RESILIENT TO A VERY CHALLENGING ENVIRONMENT

The main driver to change the outlook from negative to stable is AFC's demonstrated ability to avoid the erosion of its intrinsic financial strength despite the pandemic, which led to the worst recession on the African continent in decades. In particular, the oil price shock and asset price declines observed in the first part of 2020 have not resulted in anticipated significant losses and/or delayed loan repayments for the AFC.

The corporation's capital adequacy has strengthened due to a slight decrease of its leverage ratio (development-related assets (DRAs) + liquid assets rated A3 or higher / usable equity) to 2.55x in 2020 from 2.7x in 2019, a first decline since AFC's inception in 2007. This decrease is due to a more gradual expansion of AFC's activities last year as well as an increase in its usable equity. AFC's capital position measured by its Basel II ratio, stood at 34.1% in 2020 against 32.9% in 2019.

In addition, the corporation has been proactive in managing the risks inherent to the projects it finances. It restructured a few of them last year, corresponding to 5% of the loan book. This process is likely to continue in 2021 to deal with the aftermath of the pandemic. Overall, assets under watch (stage 2) increased only slightly, to 19.0% of total loans in 2020 from 17.2% in 2019. The corporation has further mitigated its exposure through the use of non-payment insurance (24% of the portfolio is covered) and the ongoing reinforcement of its risk management department. The portfolio's concentration risk has also fallen because of asset diversification as the corporation expands to new countries while AFC's exposure to the oil and gas sector continues to decline, representing 18% of the portfolio in 2020 compared to 20% in 2019 and close to 50% in 2016.

AFC's liquidity and funding indicators also remain strong, despite markedly weaker market conditions last year as a result of the pandemic and more generally funding pressures affecting Sub-Saharan Africa issuers. AFC's availability of liquid resources which compares projected net cash outflows over the next 18 months to discounted liquid assets, has improved to reach 125% compared to 121% in 2019, significantly above the median of A-rated peers which stood around 83%. Similarly AFC's ratio of liquid assets to total assets at 54% at the end of 2020 compares favorably to the median of A-rated peers at around 50%. Meanwhile, AFC continues to demonstrate access to international markets with successful global issuances and its first green bond in 2020, supplemented by strong partnerships with commercial banks for syndicated loans and development financial institutions for concessional credit lines.

RATIONALE FOR AFFIRMING THE A3 RATINGS

AFC'S PRUDENTIAL FRAMEWORK AND NEW MEASURES WILL CONTINUE TO ENSURE ROBUST CAPITAL ADEQUACY AND LIQUIDITY

Moody's affirmation of AFC's ratings at A3 is underpinned by the sustained and effective measures the corporation is taking to protect capital adequacy and liquidity. Moody's expects that AFC's capital adequacy will remain strong (Basel II capitalization ratio above 30%). Over time, ongoing efforts to further strengthen its capital base will allow the corporation to gradually expand its activities while maintaining moderate leverage and keeping the level of non-performing assets low. Meanwhile, Moody's expects the AFC will remain proactive in managing the risks inherent to its operations and the challenging environment currently existing in Africa, continuing to use credit enhancement tools such as non-payment insurance and reducing concentration risk by actively diversifying its portfolio.

Moody's also expects that the corporation will continue to adhere to its liquidity policy, which is relatively stringent compared to peers. The policy stipulates that AFC needs to retain liquid buffers covering 100% of net cash outflows over the next 18 months. As experienced in 2020, its large liquidity buffer afforded it time to secure new financing, evident at the beginning of the pandemic when market volatility limited scope for issuance.

LOW STRENGTH OF MEMBER SUPPORT UNCHANGED

While AFC's charter has been recently modified to introduce callable capital, AFC's share capital is currently entirely paid-in unlike most rated supranational institutions. As a result, the corporation's credit profile reflects its intrinsic financial strength, as represented by Moody's assessments of capital adequacy and liquidity, and does not include any uplift from member support.

Moody's also considers the high likelihood of extraordinary support from AFC's largest shareholder, the Central Bank of Nigeria, as well as the Corporation's ongoing efforts to attract additional shareholders. This was illustrated by $60 million from new shareholders, the issuance of $200 million equity warrants to the Central Bank of Nigeria, and a self-contribution of $115 million to the reserves from 2019 profits. The AFC has a broader objective to expand its capital base including non-regional shareholders by $1 billion by December 2023, of which $110 million has been achieved since the capital raising effort commenced in the third quarter of 2019. That said, Moody's does not expect any significant improvements in the underlying creditworthiness of AFC's current shareholders, who for the most part are facing negative credit pressure.

ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS

Notwithstanding environmental issues being material for many of AFC's borrowers and shareholders, environmental considerations do not have a material impact on AFC's credit profile at this stage given the corporation's portfolio diversification and its capacity to mitigate the indirect effects of adverse environmental events on its balance sheet.

Similarly, social risk informs AFC's credit profile in so far that it affects the credit profile of countries in which it lends -- some of which are affected by social and political unrest, low wealth levels, income disparity and low voice and accountability scores.

Governance considerations are material to AFC's credit profile, which reflects sound governance principles and risk management framework. This is evidenced by the corporation's management of rising non-performing loans following the 2015-16 commodity price shock, which was followed by increased staffing of key risk management functions and the adoption of tools to measure risks more accurately.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Positive pressure on AFC's A3 ratings will likely appear if the corporation is able to significantly strengthen its capital adequacy while maintaining strong levels of asset performance, liquidity and funding. This would reverse a trend of steady erosion of its capital adequacy over the years, except last year, as the corporation expanded its activities on the continent.

Moody's would likely downgrade the ratings if it were to conclude that AFC was unlikely to maintain a track record of sound asset quality, leading to material losses. This will ultimately contribute to a weakening of capital adequacy. A failure to implement the corporation's strategy aimed at strengthening its capital base, will also be credit negative. Furthermore, a marked erosion of liquidity buffers and/or increasing signs that access to funding is durably weakened would also likely lead to a downgrade.

The principal methodology used in these ratings was Multilateral Development Banks and Other Supranational Entities Methodology published in October 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1232238. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

The local market analyst for this rating is Aurelien Mali, +971 (423) 795-37.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1263068.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

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
Vice President - Senior Analyst
Sovereign
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

Marie Diron
MD - Sovereign Risk
Sovereign
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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