TEXT-S&P affirms Inter-American Investment 'AA/A-1+' ratings
Overview -- Following a review of the Inter-American Investment Corp. (IIC) under our revised criteria for multilateral lending institutions (MLI), we have affirmed our 'AA/A-1+' foreign currency issuer credit ratings on IIC. -- IIC's stand-alone credit profile is 'aa' and the issuer credit rating is 'AA', based on its "adequate" business profile and its "extremely strong" financial profile. -- The outlook remains stable, reflecting our expectation that IIC will maintain a strong funding structure, capitalization, and liquidity, as well as our expectation that other Inter-American Development Bank Group shareholders will assume the 2% of total shares that the U.S. relinquished. Rating Action On Dec. 11, 2012, Standard & Poor's Ratings Services affirmed its 'AA/A-1+' foreign currency issuer credit ratings on Inter-American Investment Corp. (IIC). The outlook remains stable. Rationale The ratings on IIC reflect its "extremely strong" financial profile and its "adequate" business profile, as our criteria define these terms. The financial profile reflects our view of IIC's capital levels relative to its risk profile and its balance-sheet liquidity. Its business profile reflects its membership in the Inter-American Development Bank Group, its track record on payments of capital contributions, the size of its $1 billion loan portfolio, and the embedded risk in its lending to private-sector borrowers, principally banks. IIC, founded by international treaty in 1985, provides financing without a sovereign guarantee to small and medium-size private-sector enterprises (SMEs) in Latin America and the Caribbean. IIC provides loans and guarantees to SMEs and makes equity investments, although these remain a small share of assets. IIC's "adequate" business profile reflects the constraints of the corporation's niche mandate to lend to small and medium enterprises in Latin America and the operational risk this entails, while its sister institution, the Inter-American Development Bank, lends to larger private-sector enterprises and project finance. Moreover, the institution's lending has not been as countercyclical as other MLIs, notably during the last downturn. IIC's business profile also reflects the strength of the institution's governance, limited risk appetite, conservative liquidity and capitalization policies, and management expertise and continuity. Under our revised criteria, we distinguished "preferred creditor treatment," which occurs when borrowing governments pay an MLI before other creditors, from "preferential treatment," which governments under stress may provide MLI lenders to the private sector, for example, by not restricting access to foreign exchange for debt service or dividend payments. IIC's borrowing members have afforded it preferential treatment, in our view, in support of its mandate. The majority of IIC shareholders made timely payment of subscriptions under the last capital increase (in 1999), which affirms their support for IIC's mandate. However, the U.S., IIC's largest shareholder, now holder of 23% of shares, had delays paying in its new capital subscriptions. The IIC board approved a rescheduling of U.S. arrears in 2008. In 2012, the U.S. paid in a portion of the remaining shares, but the U.S. relinquished its remaining unpaid shares (2% of total shares, equivalent to $15.8 million). We expect that another member shareholder of the Inter-American Development Bank Group will take up the relinquished shares. The subscription delays and the relinquishment of shares by the largest shareholder lower our perception of shareholder support for the institutional mandate. Strong capitalization anchors IIC's "extremely strong" financial profile. We have adopted, as a component of our new criteria, a capital adequacy analysis framework that applies risk weights to IIC's shareholders' equity based on its asset exposures. IIC's baseline risk-adjusted capital (RAC; adjusted common equity divided by risk-weighted assets) ratio was 61% at year-end 2011. The RAC ratio after MLI-specific adjustments was higher, at 92%. IIC's markets of operation are diversified across Latin America, but it has a significant sector concentration as a second-floor lender to many banks (70% of loans at the end of 2011). The higher adjusted RAC ratio derives from IIC's geographic diversification and a cap on risk weights assigned to equity investments, given IIC's already strong capital position. Ample liquidity and a diversified and proactive funding strategy reduce IIC's rollover risk and size constraints for capital market access. A diverse funding strategy largely offsets the infrequency of IIC's global capital market issuance. This funding strategy consists of new and increased issuance in Mexican and other Latin American bond markets, credit lines from several international banks, global geographic diversification of lenders, financial support from IADB (which we expect to remain in place), and IIC's practice of issuing long-term debt to match the medium- to long-term maturities of its investments. IIC maintained cover for 12 months of debt service and scheduled loan disbursements at the end of 2011, and we believe its holdings are of sufficient quality that it could meet these commitments over a one-year horizon under an extreme 'AAA' stress scenario. IIC has tended to use less leverage, reflecting its higher-risk mandate, than small MLI peers in recent years. The corporation's leverage--debt to shareholders' equity--increased to 1.2x in November following a $350 million global bond issue from 0.9x at the end of 2011. Outlook The stable outlook reflects our expectation that IIC will maintain its "extremely strong" financial profile, as well as our expectation that other Inter-American Development Bank Group shareholders will assume the relinquished shares. Related Criteria And Research -- Multilateral Lending Institutions And Other Supranational Institutions Ratings Methodology, Nov. 26, 2012 -- Inter-American Investment Corp., July 24, 2012 -- Supranationals Special Edition 2011, Sept. 23, 2011 -- Standard & Poor's Risk-Adjusted Capital Framework Provides Insight Into Basel III, June 9, 2011 -- Principles Of Credit Ratings, Feb. 16, 2011 -- Bank Capital Methodology and Assumptions, Dec. 6, 2010 -- For Development Banks, Callable Capital Is No Substitute For Paid-In Capital, Dec. 31, 2009 -- How Preferred Creditor Support Enhances Ratings, June 15, 1999 Ratings List Ratings Affirmed Inter-American Investment Corp. Issuer Credit Rating Foreign Currency AA/Stable/A-1+ Senior Unsecured AA Temporary telephone contact number: Kelli Bissett (347) 439-2680. Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.
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