Fitch Affirms CABEI's Ratings at 'A'; Outlook Revised to Positive
The revision of the Outlook on the Long-term IDR to Positive reflects an improvement in CABEI's overall risk profile, a trend that Fitch expects to continue over the medium term.
KEY RATING DRIVERS
The affirmation and Positive Outlook reflect the following key rating factors:
CABEI's IDR is fully driven by its intrinsic credit quality, most notably its high level of solvency (assessed at 'aa-') and its strong liquidity (assessed at 'aaa'). The high-risk business environment in which this multilateral development bank (MDB) operates leads to a two-notch lower rating from the solvency assessment of 'aa-', resulting in an intrinsic rating of 'a'.
In addition to reduced exposure to the private sector, the near elimination of impaired loans, the maintenance of solid reserve coverage and a gradual reduction in loan concentration, CABEI's liquidity profile includes a higher proportion of 'AAA'/'AA' rated investments. Fitch also expects continued diversification and lower average loan book risk over the rating horizon, as most of CABEI's loan growth will be directed toward countries with higher sovereign ratings.
In Fitch's view, the recent amendments to CABEI's Constitutive Agreement, effective June 2016, facilitate risk diversification and sustain capital growth, as well as strengthen CABEI's preferred creditor status and improve governance. These amendments will allow CABEI to widen its scope outside of the founding member countries (Guatemala, El Salvador, Honduras, Nicaragua and Costa Rica) as long as the projects are consistent with its purpose and strategy.
The MDB's solvency assessment is driven by its strong and stable capital position which compensates for the higher risk of its loan book. CABEI's excellent and stable capital ratio is underpinned by conservative capitalization policies, moderate exposure growth, and sustained capital contributions from member countries.
The operating environment weighs on the rating, as the MDB operates in a high-risk business environment. The focus of CABEI's financing operations on middle-income founding-member countries and the Dominican Republic, which exhibit some degree of political instability and generally weaker governance indicators as reported by the World Bank, drive this assessment. Additionally, the MDB's headquarters are located in Honduras, which falls into the lower quartiles for half of the World Bank governance indicators.
CABEI's IDR does not incorporate credit uplift for extraordinary support from shareholders due to the key shareholders' average rating of 'BB' at end-2015 and the lack of sufficient callable capital to provide full coverage of net debt.
As CABEI's LTFC IDR is materially above the sovereign ratings of Thailand, Mexico, Panama, Costa Rica, Honduras and Dominican Republic, the MDB is rated 'AAA' on the respective national rating scales.
The Positive Outlook reflects Fitch's assessment of the upside potential of the rating. The following risk factors, individually or collectively, could trigger a positive rating action:
--A marked improvement in the bank's risk exposure, reflected by an increase of the loan portfolio's average rating while maintaining good asset quality metrics. This increase would be driven by growth in countries other than the founding member countries, rated above the loan portfolio's current average rating of 'B+'.
A downgrade of the IDR is unlikely given the Positive Outlook. Factors that could individually or collectively result in a return to a Stable Outlook include:
--A material increase in business environment risk driven by a significant increase in the bank's exposure to countries with a higher risk profile.
--A marked deterioration in the average rating of the loan portfolio.
Fitch assumes that member countries, even if experiencing severe difficulties, will continue to honor CABEI's preferred-creditor status and exempt its private-sector borrowers from any measures that may affect the transfer and/or convertibility of their debt service payments.
Fitch has affirmed CABEI's ratings as follows:
--Long-Term IDR at 'A'; Outlook revised to Positive from Stable;
--Short-Term IDR at 'F1';
--Senior unsecured debt at 'A'.
--Long-term national rating in El Salvador at 'AAA(slv)'; Outlook Stable;
--Short-term national rating in El Salvador at 'F1+(slv)';
--Senior unsecured long-term debt in El Salvador at 'AAA(slv)';
--Long-term national rating in Honduras at 'AAA(hnd)'; Outlook Stable;
--Short-term national rating in Honduras at 'F1+(hnd)';
--Long-term national rating in Costa Rica at 'AAA(cri)'; Outlook Stable;
--Short-term National Rating in Costa Rica at 'F1+(cri)';
--Senior unsecured long-term debt in Costa Rica at 'AAA(cri)';
--Senior unsecured short-term debt in Costa Rica at 'F1+(cri)';
--Senior unsecured long-term debt in Mexico at 'AAA(mex)';
--Senior unsecured long-term debt in Panama at 'AAA(pan)';
--Senior unsecured long-term debt in Thailand at 'AAA(tha)'.
The following rating was unaffected:
--Long-term National Rating in Dominican Republic at 'AAA(dom)'; Outlook Stable.