Fitch Affirms Corporacion Andina de Fomento's IDR at 'AA-'; Outlook Stable
KEY RATING DRIVERS
The affirmation and Stable Outlook reflect the following key rating factors:
--Asset quality is a key rating strength for Corporacion Andina de Fomento (CAF). The development bank's loan quality indicators have been strong despite the economic volatility in some of the countries in which it operates. There have been no impaired loans in the public-sector loan portfolio since inception. Additionally, the multilateral development bank (MDB) has reported negligible to no private-sector past-due loans (PDLs) since 2006.
--Sustained capital increases and profitability support CAF's ample capitalisation ratios. CAF's prudential framework requires a minimum total capital/weighted risks ratio (Basel II since 2007) of 30%, while in practice this ratio has been well above the minimum. At 2.5x, CAF's usable capital/required capital is on the low end relative to higher rated MDBs, though this is compensated by a higher level of paid-in capital.
--Subscribed paid-in capital contributions total USD3.2 billion for the five years ending in 2014, and will increase by an additional USD1.9 billion from 2015 to 2017. This could preserve or enhance capital ratios over the medium term depending on CAF's growth prospects. At 76%, CAF's paid-in capital/subscribed capital ratio is among the highest of Fitch-rated MDBs.
--Due to CAF's historic focus on the Andean region, loan concentration remains substantial and limits its ratings. However, Fitch Ratings expects this to gradually decline as lending to new member countries, such as Brazil and Panama, increases. As anticipated, concentration measures improved slightly, with the five largest consolidated borrowers accounting for 1.3x equity by the end of September 2014. Although this is above that of most other MDBs, it is well below the 2.5x reported in 2001.
--CAF has been able to operate without difficulty in successive periods of instability in the region due to conservative risk management policies and the member countries' support. Market risks are mitigated by hedges on all interest and foreign-exchange exposures, while liquidity is strong.
--Although CAF's ratings are driven by intrinsic factors, in Fitch's view, shareholder support is strong even though the member countries' creditworthiness is weaker than that of higher-rated multilateral development banks (MDB). This has been demonstrated by continuous capital contributions to sustain expansion. The shareholders are mostly governments and public agencies. CAF also benefits from similar privileges and immunities granted to other MDBs.
As CAF's ratings are primarily driven by intrinsic factors, the Stable Outlook reflects Fitch's expectation of continued conservative risk management, which should sustain CAF's steady financial performance and a risk profile compatible with its current ratings. Factors that could, individually or collectively, affect CAF's ratings are:
--Though not likely in the near term, CAF's ratings could benefit from a sustained reduction of loan concentrations, as well as material improvements in its borrowers' creditworthiness or in capitalization ratios.
--A stress situation in a member country that significantly affects asset quality or results in the invalidation of CAF's preferred creditor status or transfer and convertibility restrictions for private sector borrowers would be negative for creditworthiness.
--Additionally, a prolonged decline in capitalization related to asset losses, rapid operations growth or increased earnings volatility as well as a structural weakening of liquidity in the context of reduced capital market access could also be negative for CAF's ratings.
The ratings and Outlook are sensitive to a number of assumptions as follows:
--Member countries, even if experiencing severe difficulties (such as Argentina, rated 'RD', or Venezuela, rated 'CCC'), will continue to honor CAF's preferred creditor status and exempt its private sector borrowers from any measures that may impact the transfer and/or convertibility of their debt service payments, should any member country decide to default selectively to their creditors.
Fitch has affirmed CAF's ratings as follows:
--Long-term Issuer Default Rating (IDR) 'AA-'; Outlook Stable;
--Short-term IDR 'F1+';
--Senior unsecured debt 'AA-';
--Commercial paper 'F1+';
--Long-term National Rating in Venezuela 'AAA(ven)'*; Outlook Stable;
--Short-term National Rating in Venezuela 'F1+(ven)';
--Long-term National Debt Rating in Mexico 'AAA(mex)';
--Long-term National Debt Rating in Panama 'AAA(pan)'.
*The 'AAA(ven)' rating is equivalent to an 'A1' rating when using the mandatory rating scale required by the local Securities Exchange Commission.