Paris, March 25, 2019 -- Moody's Investors Service ("Moody's") today confirmed
JSC Development Finance Institution Altum's (Altum) Baa1 long-term
issuer rating. The baseline credit assessment (BCA) was upgraded
to baa3 from ba2. The short-term issuer rating was affirmed
at P-2. The outlook has been changed to stable from rating
under review.
This action concludes the review for upgrade initiated on 12 December
2018 following the introduction of an updated finance companies methodology
on 10 December 2018.
A list of affected ratings can be found at the end of this press release.
RATINGS RATIONALE
RATIONALE FOR THE UPGRADE OF THE BASELINE CREDIT ASSESSMENT
Altum's BCA upgrade to baa3 from ba2 reflects: 1) the strong
financial profile of the company with very strong capitalization and the
large share of loss coverage incorporated in the funding programmes,
also resulting in low refinancing risks, balanced against high levels
of problem loans and moderate profitability; and 2) the unique standing
of Altum in Latvia's financial services industry reflecting its
policy mandate to provide a distribution channel for state and EU program
funds to both end-customers and other financial institutions.
The first important driver in the BCA is Altum's strong financial
profile, underpinned by very strong capitalization, with tangible
common equity to managed assets of 44% at year-end 2018
(based on preliminary figures). Furthermore, Altum's
funding programs incorporate large shares of loss coverage, which
largely mitigate the credit risk the company takes on. Although
the problem loans to gross loans ratio is considerably higher than for
Latvian banks at 17.2% at year-end 2018, Moody's
understands that risk coverage of problem loans was 240%.
Furthermore, these programs have limited refinancing risks as the
company can continue using program specific funds as long as they are
invested in line with the intent of that program, even after its
stated end date. Although profitability during 2017 and 2018 has
been strong, with net income to average managed assets 0.82%
and 0.83% (based on preliminary figures) respectively,
the public nature of its mission and lack of profit maximizing incentives
point to moderate to low profitability going forward.
The next important driver underpinning the BCA is Altum's unique
position in the Latvian financial services industry, as a government
related institution with a clear mandate to promote the Latvian economy.
It is the sole conduit for European Union (EU) structural funds into the
Latvian economy, and is also used to disperse government programs.
Altum takes on this role by lending to companies and households,
providing venture capital to startups, and through its growing volumes
of guarantees to both companies and households.
By targeting customers that would not usually have access to the Latvian
banking industry due to limited financial history or limited financial
resources, Altum provides funds either directly or by helping customers
to access banking services. Although barriers to entry are moderate
in this segment, its services are complementary to commercial banks.
Altum has an institution specific law, which is unique for financial
institutions in Latvia. Therefore, its existence is not dependent
on the stability of the Latvian banking sector. It's focus
on fulfilling its mandate by providing financial instruments is in line
with current and future EU structural funding ambitions. Thus it
is well positioned to continue managing EU structural funding programs.
RATIONALE FOR THE CONFIRMATION OF ALTUM'S ISSUER RATINGS BASED ON
ASSESSMENT OF GOVERNMENT SUPPORT
The confirmation of Altum's Baa1 issuer rating incorporates the
baa3 BCA and ratings uplift under a joint default analysis as Government
Related Issuer. The assessment of a very high dependence on the
sovereign, Latvia (A3, Stable), and a very high probability
of government support, provides two notches of uplift above the
BCA. Altum is considered to be an important tool for the government
in its policy work, and Moody's expects a very high probability
that the government would inject additional capital into the company in
case of need. However, without explicit government guarantees
to Altum, or to its creditors, the government support does
not lead to a rating at par with the sovereign rating.
OUTLOOK
The stable outlook on Altum is in line with the outlook on the Latvian's
government ratings. Furthermore, Moody's forecasts
that the standalone credit fundamentals will develop gradually,
with strong capitalization, slightly lower profitability,
stable asset quality and over time, higher reliance on market funding.
FACTORS THAT COULD LEAD TO AN UPGRADE
An upgrade could follow if the Latvian government ratings are upgraded,
or if Altum improves its standalone credit fundamentals significantly,
including demonstrating lower volumes of problem loans and losses arising
from venture capital and guarantees, as well as managing non-EU
and State funding prudently.
FACTORS THAT COULD LEAD TO A DOWNGRADE
A downgrade could follow 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.
Issuer: JSC Development Finance Institution Altum
..Confirmed:
....Long-term Issuer Rating (local
currency), Baa1
..Affirmation:
....Short-term Issuer Rating (local
currency), affirmed P-2
..Outlook Action:
....Outlook changed to Stable from Rating
under Review
PRINCIPAL METHODOLOGIES
The methodologies used in these ratings were Finance Companies published
in December 2018, and Government-Related Issuers published
in June 2018. 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.
Roland Auquier
Asst Vice President - Analyst
Financial Institutions Group
Moody's France SAS
96 Boulevard Haussmann
Paris 75008
France
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Carola Schuler
MD - Banking
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Releasing Office:
Moody's France SAS
96 Boulevard Haussmann
Paris 75008
France
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
