Hong Kong, February 15, 2017 -- Moody's Investors Service has placed Caa1 issuer and senior unsecured
debt ratings of the Development Bank of Mongolia LLC (DBM) on review for
downgrade. At the same time, Moody's has affirmed DBM's
Baseline Credit Assessment at ca.
The rating actions follow Moody's review for downgrade of Mongolia's sovereign
ratings on 15 February 2017. Please see the related press release
for more information on the sovereign action at this link: http://www.moodys.com/viewresearchdoc.aspx?docid=PR_362057
Moody's expects to complete the review within three months.
A full list of the affected ratings can be found at the bottom of this
press release.
RATINGS RATIONALE
The review for downgrade of DBM's rating is driven by its strong linkages
with the Mongolian government -- as reflected by the government's
direct ownership in the bank, its clear public policy mandate,
and the presence of an irrevocable government guarantee on DBM's
$580 million bonds -- and follows the review for
downgrade of Mongolia's sovereign rating of Caa1.
The sovereign review is initiated because of uncertainty around the financing
options for DBM's $580 million repayment which is maturing on 21
March 2017. DBM lacks the foreign currency funds to finance the
repayment itself, and the presence of an irrevocable and unconditional
government guarantee on the DBM issuance means that Moody's would consider
a default on the notes to constitute a default by the sovereign.
The DBM notes also contain cross-acceleration clauses on other
government obligations, implying wider implications of a default
for investors.
The purpose of the sovereign review is to assess the implications of the
21 March 2017 maturity of government-guaranteed notes issued by
the DBM for the government's fiscal position and foreign exchange
buffers. In Moody's view, the as yet unresolved issue
of how that maturity will be financed poses a near-term threat
to Mongolia's credit profile, notwithstanding ongoing discussions
with the IMF.
Should an agreement with the IMF be reached during the review, the
review will also assess the extent to which the terms of the program mitigate
those near-term risks, as well as offer the prospect of improvements
in Mongolia's credit profile over the medium term.
The review for DBM will focus on the level of expected loss, if
any, for holders of the DBM government-guaranteed bond of
the redemption proposal at maturity in March if the government guarantee
is not exercised.
DBM's Baseline Credit Assessment (BCA) at ca already reflects a high likelihood
that DBM will require extraordinary support from the government to meet
this debt service obligation, such as through a distressed exchange,
and its BCA is therefore affirmed.
What Could Stabilize the Rating at the Current Level:
The bank's long-term rating incorporates a three-notch uplift
from its BCA and is at the same level as the sovereign rating.
As such, positive rating action is unlikely in the absence of upward
pressure on Mongolia's sovereign rating.
At the end of the review period, Moody's will confirm the
Caa1 rating with a stable outlook if the sovereign rating of Caa1 is confirmed
with a stable outlook, and if any expected losses for bondholders
are in line with the loss levels expected for a Caa1 rating.
Moody's would consider upgrading the BCA of ca if DBM improves its capitalization
and liquidity position after it repays the $580 million bond due
in March 2017, while also demonstrating stable asset quality over
the next 4-6 quarters.
What Could Change the Rating - Down:
Factors that could result in a downgrade include, but are not limited
to, the following:
(1) A downgrade of Mongolia's sovereign rating; or
(2) An expected loss larger than compatible for a Caa1 rating.
The resultant ratings and actions are listed below:
- Foreign currency issuer rating of Caa1 placed on review for downgrade
- Foreign currency backed senior unsecured/backed senior unsecured
MTN of Caa1/(P)Caa1 placed on review for downgrade
- B3(cr) Counterparty Risk Assessment placed on review for downgrade
- BCA/adjusted BCA of ca affirmed
- NP(cr) Counterparty Risk Assessment affirmed
PRINCIPAL METHODOLOGIES
The methodologies used in these ratings were Banks published in January
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 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.
The first name below is the lead rating analyst for this Credit Rating
and the last name below is the person primarily responsible for approving
this Credit Rating.
Hyun Hee Park
Asst Vice President - Analyst
Financial Institutions Group
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077
Graeme Knowd
MD - Banking
Financial Institutions Group
JOURNALISTS: 813-5408-4110
SUBSCRIBERS: 813-5408-4100
Releasing Office:
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077
