TEXT-S&P Affirms CABEI 'A/A-1' Ratings; Outlook Remains Stable
-- Following a review of the Central American Bank for Economic Integration (CABEI) under our revised criteria for multilateral lending institutions (MLIs), we have affirmed our 'A/A-1' foreign currency issuer credit ratings on CABEI.
-- CABEI's 'a' stand-alone credit profile results from its "adequate" business profile and its "strong" financial profile.
-- CABEI's borrowing shareholders have not afforded the bank a tradition of preferred creditor treatment, by our definition of the concept, potentially undermining the institution's policy importance at times of stress.
-- The stable outlook reflects the demonstration of shareholder support through a multiyear capital increase and our expectation that capitalization, leverage, and liquidity levels will remain prudent.
On Dec. 11, 2012, Standard & Poor's Ratings Services affirmed its 'A/A-1' foreign currency issuer credit ratings on the Central American Bank for Economic Integration (CABEI). The outlook remains stable. We also affirmed our Mexico national scale (CaVal) rating of 'mxAAA'.
The ratings on CABEI reflect its "adequate" business profile and its "strong" financial profile, as our criteria define these terms (see "Multilateral Lending Institutions And Other Supranational Institutions Ratings Methodology," published Nov. 26, 2012). We do not see that CABEI's borrowing member shareholders have treated it materially differently than their commercial creditors during periods of financial or political crises. We expect that--without preferred creditor treatment--CABEI's policy importance, as our criteria define it, may decline, its losses given default could increase, and its ability to rely on callable capital could diminish.
CABEI was founded in 1960 by the General Treaty on Central American Economic Integration to promote the economic integration, economic development, and social development of its five Central American founding members, two regional nonfounding members, and one beneficiary member. The bank makes loans to public-sector entities and private companies of its Central American member countries and equity investments, holds securities of borrowing member countries, and provides guarantees. CABEI had $5.3 billion in total development-related exposure at the end of 2011.
Shareholders have demonstrated their support through a multiyear capital increase, under which the five founding-member shareholders have begun to pay in $2.5 million each of new capital in the first year of subscription payments (2012-2013), which will be followed by extraregional shareholders' payments. In addition, we expect Brazil and Korea to join as extraregional shareholders, providing additional paid-in capital.
CABEI's "adequate" business profile reflects the bank's important role as a lender to Central American governments. The bank disburses more funding to its borrowers than larger MLIs, and it has provided long-dated infrastructure and other financing on more flexible terms and amounts than many of its small-economy borrowers could secure through capital market issuance. However, the strength and stability of CABEI's relationship with shareholders has been less robust than higher-rated MLIs. On one hand, members have demonstrated support by paying in new capital, new members are expected to join, borrowing members pay above-average interest rates, and shareholders build the bank's capital (and lending capacity) by retaining earnings and foregoing dividends. On the other hand, CABEI's borrowing member governments do not have a tradition of affording the bank preferred creditor treatment.
In the early 1990s, CABEI's performance came under stress when a number of founding governments defaulted on their obligations to the bank (as well as to other MLIs) because of difficult economic conditions in the region in the 1980s. In addition, CABEI offered debt relief to Nicaragua and Honduras by writing off a large share of their loans under the Heavily Indebted Poor Countries (HIPC) initiative. Most recently, Honduras went into arrears with CABEI and withdrew funding during the 2009-2010 political crisis after CABEI halted loan disbursements to the government. (Today Honduras is in good standing.) Although CABEI maintains strong risk-management policies and has instituted a globally competitive executive recruitment process, there is governance risk from the concentration of borrowing members' shareholdings (more than 51% of voting shares), whose interests could diverge from those of its creditors.
CABEI's "strong" financial profile is anchored by the bank's capital adequacy (which is lower than many higher-rated peers'), borrower concentration among its sovereign loans, and diversified funding profile that helps offset some of its financing and rollover risks due to its small size relative to other global capital market issuers. We have adopted a capital adequacy analysis framework that compares CABEI's shareholders' equity to its asset exposures, weighted according to their relative risk, as a component of our revised criteria. CABEI's baseline risk-adjusted capital (RAC) ratio was 26% (that is, adjusted common equity divided by risk-weighted assets) at year-end 2011. Traditionally, CABEI has had high borrower concentrations to its founding member governments and a high share of public-sector loans (74% of loans at the end of 2011). This contributes to the 10% RAC ratio after MLI-specific adjustments. Our adjustments mainly stem from our single-name concentration penalty on these sovereign loan exposures.
CABEI's public-sector loans continued to perform well through the 2008-2009 economic downturn (with the exception of Honduras due to political events). The bank's corporate loan portfolio deteriorated in 2009, but the bank continues to provision for the uncollateralized portion of nonaccruing loans and to write off nonaccruing loans (resulting in 3% impaired to total loans at year-end 2011).
In our opinion, CABEI conducts its treasury operations and asset-liability management prudently. As a smaller subregional MLI, CABEI's global bond issues are less frequent. The bank offsets these risks by using a diversified funding strategy, issuing in regional markets (including Mexico, Colombia, and Costa Rica) and increasingly in Asian markets and borrowing from international commercial banks, in addition to bilateral loans from foreign aid agencies and higher-rated MLIs. CABEI uses more leverage than some of its subregional MLI peers, with 2.3x debt to shareholders' equity and 1.6x net of liquid assets as of year-end 2011. Short-term and maturing debt (including CABEI's commercial paper program) was 32% of gross debt at year-end 2011. Over the past few years, the bank has improved its liquidity (net of holdings of Central American securities) to 21% of assets as of year-end 2011. Under a severe stress scenario, we expect CABEI would possess sufficient on-balance-sheet liquidity to cover 12 months of debt service and scheduled loan disbursements, as of year-end 2011.
Under our revised criteria, we assess the benefit of callable capital from CABEI's eligible (equivalent or higher-rated) shareholders as extraordinary shareholder support. However, we rate most of CABEI's shareholders lower than CABEI, and our view of the uneven borrowing member shareholder support for the institution during its history lowers our expectation of extraordinary shareholder support. Thus, we do not assign additional uplift from callable capital to the 'a' stand-alone credit profile.
The stable outlook on CABEI reflects our expectation that new paid-in capital from existing members under the capital increase as well as capital from new members Brazil and the Republic of Korea will be paid in full and on time, bolstering the bank's capital base and increasing its value to Central American borrowing members. This scenario is contingent on our assumption that the loan portfolio will grow moderately as capital installments are paid in, CABEI prudently manages leverage and maintains liquidity, and the sovereign loan continues to perform robustly.
We could raise the ratings most likely if CABEI strengthens its RAC after adjustments. Conversely, we could lower the ratings if CABEI's financial profile deteriorates or if shareholders do not pay capital installments in full and on time.
Related Criteria And Research
-- Multilateral Lending Institutions And Other Supranational Institutions Ratings Methodology, Nov. 26, 2012
-- Central American Bank for Economic Integration, Sept. 6, 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
Central American Bank for Economic Integration
Issuer Credit Rating
Foreign Currency A/Stable/A-1
Senior Unsecured A
Senior Unsecured mxAAA
Commercial Paper A-1
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