TEXT - S&P affirms Inter-American Development Bank ratings
Overview -- Following a review of the Inter-American Development Bank (IADB) under Standard & Poor's revised multilateral lending institutions (MLI) criteria (published Nov. 26, 2012), we are affirming our long- and short-term issuer credit ratings on the bank at 'AAA/A-1+'. -- The issuer credit rating on IADB comprises two factors. The first is a stand-alone credit profile of 'aa', which reflects the bank's "very strong" business profile and "strong" financial profile. -- In addition, we incorporate two notches into the issuer credit rating for potential extraordinary shareholder support owing to callable capital from 'AAA' rated sovereigns. -- The stable outlook reflects our expectation that IADB's financial profile will remain "strong," owing in part to the new financial commitments IADB is receiving as part of the ninth general capital increase. Rating Action On Dec. 13, 2012, Standard & Poor's Ratings Services affirmed its 'AAA/A-1+' long- and short-term issuer credit ratings on the Inter-American Development Bank (IADB). The outlook remains stable. Rationale The ratings on IADB reflect our assessment of the bank's business profile as "very strong" and its financial profile as "strong" (as our criteria define these terms) and extraordinary shareholder support it receives through callable capital (see "Multilateral Lending Institutions And Other Supranational Institutions Ratings Methodology," published Nov. 26, 2012). Founded in 1959, IADB is the oldest regional multilateral development finance institution (MDFI). It has 48 country members--26 borrowing member countries in Latin America and the Caribbean and 22 nonborrowing members (the U.S., Canada, and 20 nonregional countries). The bank lends mostly to central governments in Latin America and the Caribbean to promote economic development and to expand opportunities for the poor. Our assessment of IADB's "very strong" business profile reflects membership support and our expectation that the bank will continue to receive preferred creditor treatment (PCT), an internationally recognized practice of excluding MLIs from restructuring or rescheduling of sovereign debt. However, IADB's PCT track record is slightly weaker than that of some other MLIs. This is not just in the 1980s; a small government ran arrears of more than six months in December 2000. In addition, shorter arrears of less than one month on sovereign loans are not uncommon, and they sometimes are longer. No borrower, however, was in suspension status at the end of 2011. The ninth general capital increase (GCI) was approved in 2010 and officially went into effect in February 2012. Two of the 48 member countries decided not to participate in the capital increase. The GCI includes US$1.7 billion of paid-in capital that member countries will contribute over five years as well as US$68.3 billion in callable capital. Because of charter restrictions over the voting power distribution, the bank allocated about 88% of both paid-in and callable capital. The callable capital was fully subscribed, and by early December 2012, collections of the allocated paid-in shares were approximately 95%. Some countries have paid in part of the second installment due in February 2013. Since 2008, the bank has undertaken a number of policy initiatives to strengthen its financial and risk management capabilities. The new policies include the capital adequacy framework, liquidity policy, asset and liability management framework, and an income management model. However, half of IADB's voting members are borrowing members and, as such, have important influence over decision-making. We consider this a limiting factor for the bank's business profile because the interests of borrowing members could diverge from those of creditors. IADB's "strong" financial profile reflects its capital adequacy and its funding and liquidity. Standard & Poor's primary metric to assess capital adequacy, the risk-adjusted capital (RAC) ratio, was 25% before adjustments specific to MLIs at year-end 2011. However, after taking into account Standard & Poor's MLI-specific adjustments, the RAC ratio falls to 15%. For IADB, the predominant adjustment is a concentration penalization for sovereign exposures, which our expectation for continuing PCT somewhat offsets. The top five largest credit exposures at year-end 2011 were Brazil, Argentina, Mexico, Colombia, and Peru. These same countries have accounted for about 70%-73% of total loans and guarantees exposure over the past five years. Our funding and liquidity assessment reflects that IADB conducts its treasury operations and asset and liability management prudently. Our funding ratios indicate that IADB is structurally able to cover its scheduled short-term debt reimbursements without issuing new debt. Moreover, IADB is a frequent issuer across global markets. IADB has lower liquidity ratios than some other 'AAA' rated MLIs. However, under our liquidity stress scenario, at the one-year time horizon, assets and liabilities would fully cover liabilities, excluding scheduled loans. In addition to callable capital's importance for the institution's franchise value, we quantify the support provided by adding callable capital to the numerator of the RAC ratios. As of year-end 2011, the RAC ratios with callable capital from 'AAA' rated shareholders translate into an "extremely strong" financial profile with eligible callable capital. Based on this, we raise the issuer credit rating to 'AAA' from the SACP of 'aa'. Outlook The stable outlook reflects our expectation that IADB's financial profile will remain "strong." This is based on the new financial commitments IADB received as part of the ninth general capital increase, the expectation for timely contribution of associated paid-in capital, and the bank's strengthened financial and risk policy framework. In addition, the nonsovereign-guaranteed loan portfolio's good asset quality during the recent economic downturn, as well as the excellent performance of IADB's sovereign and sovereign-guaranteed loans, further supports the ratings. We could consider lowering the rating based on a weaker financial (including due to any decreased ability to generate capital internally) or risk management profile, a material deterioration in the bank's sovereign lending book (including due to rising economic risks in the region), or a weakening of preferred creditor treatment. Related Criteria And Research -- Multilateral Lending Institutions And other Supranational Institutions Ratings Methodology, Nov. 26, 2012 -- Inter-American Development Bank, Aug. 30, 2012 -- Supranationals Special Edition 2011, Sept. 23, 2011 Ratings List Ratings Affirmed Inter-American Development Bank Issuer Credit Rating Foreign Currency AAA/Stable/A-1+ Senior Unsecured AAA
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