Credit Guarantee And Investment Facility #AA/A-1+# Ratings Outlook Remains Stable

Stocks and Financial Services Press Releases Friday June 22, 2018 15:11
SINGAPORE--22 Jun--S&P Global Ratings

SINGAPORE (S&P Global Ratings) June 22, 2018--S&P Global Ratings today affirmed its 'AA' long-term and 'A-1+' short-term issuer credit ratings on the Credit Guarantee and Investment Facility (CGIF). The outlook remains stable.

We affirmed the ratings on CGIF to reflect our view of its adequate business profile and extremely strong financial profile. The ratings do not benefit from extraordinary support as CGIF does not have callable capital.

A supranational institution established in November 2010, CGIF's mandate is to help deepen and develop liquid local-currency bond markets among members of the Association of Southeast Asian Nations (ASEAN). CGIF provides guarantees on bonds issued by corporates in the ASEAN region. As of May 2018, CGIF had issued 21 guarantees in the markets of Singapore, Philippines, Thailand, Indonesia, and Vietnam primarily to the region's blue chip companies. The guaranteed amount typically oscillates between US$50 million-US$80 million and generally have a tenor of five to 10 years.

CGIF's shareholders have demonstrated their support by approving its first ever capital increase to US$1.2 billion from US$700 million before December 2017. The subscription increase is on a voluntary basis, and proposed to be a proportional increase across all current shareholders. The shareholder payments are likely to be completed by the end of 2023. By increasing its capital, CGIF's guarantee capacity will be boosted to US$3 billion, from the current capacity of US$1.75 billion. While still six months remains to voluntary sign up to the increase in share capital, all large shareholders would contribute to increase the institution's capacity and starting to establish a track record of shareholder support.

CGIF renewed its annual reinsurance arrangement with a syndicate of reinsurers rated between 'AA-' and 'A' to boost its guarantee capacity and manage credit concentration risk limits. This arrangement covers 25% of the existing guarantee portfolio and all new guarantees written up until the end of 2018. Current country and currency exposures have been alleviated by approximately 15% as a result of the transfer of exposure to the reinsurers. Coupled with the capital increase, these two measures will enhance CGIF's guarantee capacity.

We consider CGIF's extremely strong financial profile to be a positive ratings factor. The facility's risk-adjusted capital (RAC) ratio was 47% before adjustments at year-end 2017. After adjustments specific to multilateral institutions, CGIF's RAC ratio falls to 26%, an extremely strong capital adequacy assessment.

The ratio after adjustments has improved significantly from 21% at the end of 2016, as a result of increased diversification benefits from single-name corporate exposures. CGIF added three guarantees to new issuers in 2017 adding diversification benefits in its guarantee portfolio. Over the next few years, we consider the capital increase to extend CGIF's existing guarantee capacity, maintaining the RAC ratio above our threshold of 23%. The criteria correction explained in "Criteria For Assessing Bank Capital Corrected," published on July 11, 2017, is not factored into the RAC ratio after diversification. The impact of the correction on the ratio is not material to the rating.

CGIF does not borrow; it obtains funding for its activities solely through retained earnings and contributors' equity. While we believe supranational backing provides one of the most stable sources of funding, this model also represents a concentration risk that in severe stress could be tested. Nonetheless, we assess CGIF's liquidity position as robust.

Our liquidity ratios indicate that CGIF would be able to comfortably pay out its guarantees for at least a year under stressed market conditions, without recourse to liquidity facilities from contributors or from the market. The facility's liquid assets, managed by the Asian Development Bank, are invested mostly in bonds of highly rated governments or government-related entities. They formed the bulk of CGIF's balance-sheet assets at year-end 2017.

CGIF was established as a trust fund of the Asian Development Bank (ADB). We believe that CGIF's creditworthiness benefits from its relationship with its contributors and the mandate they have entrusted it with. The current voting rights are dominated by four contributors: China (23.3%), Japan (39.9%), Korea (11.6%), and the ADB (15.1%). The 10 ASEAN governments collectively hold the remaining voting rights (10.1%).

Constraining our assessment on CGIF's business profile is the facility's relatively short track record of fulfilling its policy mandate compared with other supranational institutions. We believe that the deepening of the ASEAN bond markets by credit enhancement will remain limited, and as such, so will the role of the institution that could partially be filled by a commercial entity. CGIF acts as a catalyst for bond deals, rather than deepening the capital markets through volume.

Asset quality has so far been pristine because no bond issuance has defaulted and required the payout on CGIF's guarantees during its seven years of existence. We believe this to be a result of the guaranteed exposure representing the main companies in the region with relatively high ratings as well as CGIF's conservative risk appetite. Should a default occur, we take some comfort in that the typical sizes of each issue being around 7%-11% of the capital levels today.

The extent of the facility benefitting from preferential treatment is not established due to its short track record. CGIF benefits from being incorporated as a multilateral institution, which should exempt it from transfer and convertibility restrictions on sovereigns--but it has yet to be tested. However, its private-sector focused mandate excludes it from being treated as a preferred creditor given that private-sector companies cannot selectively default to one group of creditors while paying others as sovereigns can. Hence, we envisage potential future losses on the guaranteed bonds to be commensurate with market trends. That said, CGIF has made small yearly profits since inception, and we expect the facility to remain profitable.

CGIF's management team has the necessary expertise and experience to conduct its business and achieve its mandate. Its guarantee operations are controlled by conservative risk parameters in accordance with governance standards laid out in its articles of agreement. CGIF has expanded at a gradual pace, allowing its staffing capacity to catch up with the scale of operations. ADB manages CGIF's capital, which results in conservative investment policies.

The outlook is stable, reflecting our expectation that CGIF will maintain a solid balance sheet and prudent risk-management practices as it pursues new guarantee growth over the next 24 months. We believe changes to the rating most likely will be driven by CGIF's capital adequacy assessment and the effectiveness of its role in the local-currency ASEAN bond markets.

We may lower the rating if CGIF struggles to execute its mandate at a profit or its financial metrics weaken. This could happen if the facility aggressively expands its guarantee portfolio beyond the natural growth capacity provided with the likely increase in capital.

Upward pressure on the rating is in our view remote but could emerge if CGIF builds a track record and an ability to significantly contribute to a vibrant local currency regional capital market backed by ongoing shareholder support.


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