New York, October 08, 2018 -- Moody's Investors Service ("Moody's") has today placed under review for
downgrade the Aa3 long-term issuer rating of Islamic Corporation
for the Development of the Private Sector (ICD). The short-term
issuer rating has been affirmed at P-1.
The decision to place the ratings on review for downgrade was underpinned
by the large losses on ICD's equity investment portfolio,
with a high likelihood of further equity investment losses as revaluations
continue, which are likely to offset the contributions from shareholders
under the second general capital increase and erode ICD's capital
buffers to a position no longer consistent with a Aa3 rating. The
equity revaluations also shed light on potential weaknesses in ICD's
risk management. As the institution plans to grow its portfolio
at a rapid pace, while reorienting its operations to different business
lines, effective risk management will be key to prevent a further
erosion of capital buffers.
The review will focus on the expected future performance of the equity
investment and loan portfolios, the size and pace of scheduled payments
under the ongoing General Capital Increase (GCI), and ICD's
risk management, allowing Moody's to form a view regarding
the likely evolution of ICD's capital adequacy metrics.
Concurrently, the Aa3 and (P)Aa3 senior unsecured foreign currency
and senior unsecured MTN program ratings of ICDPS Sukuk Limited have also
been placed under review for downgrade as the sukuk investors (certificate
holders) of ICDPS Sukuk Limited are exposed to the senior unsecured credit
risk of ICD. ICDPS Sukuk Limited (formerly Hilal Services Ltd)
is a special purpose vehicle set up by ICD for sukuk issuance.
RATINGS RATIONALE
RATIONALE FOR THE REVIEW FOR DOWNGRADE
LIKELIHOOD OF FURTHER EQUITY INVESTMENT LOSSES OFFSETTING GENERAL CAPITAL
INCREASE TO RESULT IN WEAKER CAPITAL ADEQUACY
The decision to place ICD's ratings under review for downgrade reflects
the increased likelihood that ICD's capital adequacy will be materially
weaker than previously assessed. ICD's leverage ratio has
increased to 177% in 2017, above the average for Aa3-rated
multilateral development banks (MDBs). The review period will allow
Moody's to re-assess the likely evolution of ICD's
key capital adequacy metrics such as the asset coverage ratio and leverage
and determine if the likely future trajectory remains compatible with
a Aa3 rating.
The ICD is a multilateral development institution and the private-sector
branch of the Islamic Development Bank (IsDB) (Aaa stable). The
ICD provides loans and equity investment to the private sector in its
53 member countries, mobilizes capital in the international financial
markets, and provides advisory services to business and governments.
ICD's equity portfolio suffered heavy losses in the 2017 financial
year, amounting to $107 million, which is equivalent
to around the previous five years of cumulative net profits. The
loss was primarily due to fair value adjustments on ICD's portfolio
of unlisted equity investments, which despite accounting for just
23% of ICD's assets, accounted for 91% of the
losses experienced last year. The loss resulted in a return over
assets of -3.6% in 2017.
ICD's equity investments are unlisted, direct equity participations
which typically carry a much higher risk profile and uncertain payoff
compared to its loan portfolio. While ICD's equity portfolio
has largely yielded positive returns in previous years despite this inherent
riskiness, the cumulative revaluation of five investments down by
30% in 2017 resulted in a $99 million loss.
Although the losses were recognized in 2017, some of the fundamental
drivers behind the revaluations have been building for several years.
The losses were attributable to several factors, including weakness
in Saudi Arabia's real estate market and foreign exchange movements
(primarily relating to the devaluation of the Egyptian pound).
ICD's half-year financial results indicate continued underperformance
in the equity portfolio, which recorded income of just $0.4
million against budgeted income of $5 million. Moody's
believes there is a material risk that downward pressure on the financial
performance of ICD's equity portfolio persists, particularly
in Saudi Arabia's real estate sector. An ongoing decline
in the expatriate population and weak investor sentiment are likely to
continue to weigh on property values.
Further losses on equity investment could offset the equity build-up
from the ongoing general capital increase (GCI). Equity contributions
from shareholders under the GCI (ICD's second) have thus far buffered
ICD's capital adequacy metrics and prevented an otherwise marked
deterioration in the asset coverage and leverage ratios. In total,
of the $1 billion made available for subscription, over 80%
has been subscribed to under the GCI, scheduled to arrive by 2020.
While Moody's base case scenario assumes that ICD will receive a
very significant proportion of the capital subscriptions, smaller
or slower payments would compound the deterioration in capital adequacy
resulting from potential additional losses in the equity investment portfolio.
EQUITY AND LOAN EXPOSURES HIGHLIGHT POTENTIAL RISK MANAGEMENT WEAKNESSES
AS OPERATIONAL STRATEGY SHIFTS
The review will also allow Moody's to determine the most likely
path for ICD's asset performance in general and reassess the strength
of the corporation's risk management approach, in particular
as it shifts its operational focus towards lending to financial institutions
from equity investment.
Asset performance has also been and is likely to remain weak in the non-equity
parts of ICD's portfolio. ICD does not benefit from preferred
creditor status nor sovereign guarantees. Non-Performing
Loans (NPLs) increased by $41 million in the first half of 2018.
After rapid loan growth lowered the NPL ratio between 2015 and 2017 to
13.4%, the NPL ratio rose to 15.5% as
of June 2018. The new NPLs were accrued in the term finance portfolio
from exposures to both corporate and financial institutions. A
sustained increase in NPLs could signal a return to previously weak lending
standards and indicate weaker risk management than Moody's previously
assessed.
Meanwhile, ICD also has some exposure to Turkish entities,
both via lines of credit, term finance and equity investments as
well as the treasury portfolio. Overall, exposure to Turkish
entities amounted to 7.7% of the balance sheet in 2017.
Although the vast majority of ICD's Turkey obligors continue to meet their
debt service obligations, the sharp slowdown in the Turkish economy
may present a continuing risk to the performance of these exposures in
the near-future.
The losses on equity investment and loans highlight potential weaknesses
in the corporation's risk management approach. ICD's
risk exposure will evolve as its operations shift from equity (36%
of its operational assets in 2017) towards lending to financial institutions
(53% of its operational assets). Moody's will assess
the strength of risk management, especially as ICD intends to maintain
relatively rapid growth in its overall portfolio, at around 20%
annually to 2020.
WHAT COULD CHANGE THE RATING DOWN IN THE CONTEXT OF THIS REVIEW
Sustained losses in the equity investment portfolio, either evident
in the current year valuation process to be completed in November 2018
or likely to occur in future years due to underlying trends affecting
the portfolio, and/or indications of likely delays in scheduled
capital payments, which have the effect of increasing the leverage
ratio and decreasing the asset coverage ratio to levels no longer compatible
with a Aa3 rating would likely lead us to downgrade ICD's ratings.
Evidence of weaker risk management practices than Moody's had previously
assessed would also be consistent with a lower rating.
WHAT COULD LEAD TO CONFIRMATION OF THE RATING AT THE CURRENT LEVEL
Moody's would confirm ICD's Aa3 ratings if at the end of the
review period, it seemed likely that further equity losses would
be limited, providing scope for the general capital increase to
strengthen ICD's capital adequacy. More generally,
confidence that ICD's risk management approach will adequately preserve
the institution's capital while operations grow and shift focus
would support a confirmation of the rating.
The principal methodology used in these ratings was Multilateral Development
Banks and Other Supranational Entities published in September 2018.
Please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
The local market analyst for these ratings is Thaddeus Best, +971
(423) 795-06
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.
Gabriel Torres
VP - Senior Credit Officer
Sovereign Risk Group
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 Risk Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
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
