TEXT-S&P raises Corporacion Andina de Fomento ratings to 'AA-/A-1+'

Wed Dec 19, 2012 12:33pm EST

Overview
     -- Corporacion Andina de Fomento (CAF) has had continued success in 
raising paid-in capital--with on-time or early payments--from an expanded 
membership base.
     -- We are raising our issuer credit ratings on CAF to 'AA-/A-1+' from 
'A+/A-1'.
     -- Following our newly revised multilateral lending institutions (MLI) 
criteria, we have assigned a 'aa-' stand-alone credit profile (SACP) to CAF, 
reflecting its "strong" business profile and "very strong" financial profile. 
We don't incorporate any uplift from callable capital into our 'AA-' issuer 
credit rating on CAF.
     -- The stable outlook reflects continued concentration in CAF's loan 
portfolio and capital and liquidity ratios that are lower than those of 
higher-rated multilateral development finance institutions (MDFIs).

Rating Action
On Dec. 19, 2012, Standard & Poor's Ratings Services raised its issuer credit 
ratings on Corporacion Andina de Fomento (CAF) to 'AA-/A-1+' from 'A+/A-1'. 
The outlook is stable.

Rationale
The ratings reflect our assessment of the bank's "strong" business profile and 
"very strong" financial profile. It does not incorporate any extraordinary 
shareholder support from callable capital, as outlined in our new methodology 
for rating MLIs (see "Multilateral Lending Institutions And Other 
Supranational Institutions Ratings Methodology," published Nov. 26, 2012).

Since CAF was established in 1968 to foster the economic integration of its 
founding members in the Andean region, its membership base has expanded 
significantly. As a result, CAF has evolved from being a subregional lending 
institution into an increasingly important regional one. 

CAF has had repeated success in raising paid-in capital--with on-time and 
often early payments--from an increasingly expanded membership base. CAF now 
has 10 full, or core, member shareholder countries and nine associate member 
shareholder countries. 

CAF's paid-in capital totaled US$3.969 billion at year-end 2011--up by US$539 
million from 2010 and by US$2.0 billion since 2005, when paid-in capital 
totaled US$1.921 billion. The higher figure reflected various capital 
increases by both the five original shareholders and other members. Argentina, 
Brazil, Panama, Paraguay, and Uruguay achieved full membership status in 
either 2010 or 2011. Members pledged to increase paid-in capital by a total of 
US$6 billion from 2008 to 2017, with payment underway. This includes a US$2 
billion increase the board of directors agreed to in November 2011. This year, 
Trinidad & Tobago initiated the process of becoming the 11th full-member 
shareholder, and Mexico made an extraordinary capital contribution. CAF 
projects annual contributions of almost US$700 million on average through 2017.

Our assessment of CAF's business profile as "strong" reflects the strength of 
its relationship with its shareholders, as demonstrated by this track record 
of successive increases in paid-in capital. This underscores the franchise 
value its expanded shareholder base affords CAF, as it has proven a consistent 
net lender in economic downturns. We believe that its historically unsurpassed 
preferred creditor treatment (PCT) will extend to its new full shareholders as 
well, though this has not been tested in a downturn, and would be maintained 
should CAF request net repayment from its borrowing member governments. CAF's 
governance and management expertise is limited by the absence of a wide set of 
nonborrowing member countries, a weakness relative to higher-rated MLIs. This 
is despite CAF's solid institutional bylaws, governance and risk practices, 
and a dividend policy that retains most earnings to provide for solid growth. 

CAF's "very 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 27% 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 17%. 

For CAF, the predominant adjustment is a concentration penalization for 
sovereign exposures, which our expectation for continuing PCT somewhat 
offsets. For example, as of September 2012, about 75% of its loan portfolio 
was concentrated in five exposures: Venezuela, Peru, Ecuador, Argentina, and 
Colombia. An important change in 2011 was that the top five now includes 
Argentina, which jumped to the fourth-largest exposure (from sixth in 2010), 
pushing Bolivia to sixth largest. However, overall concentration in the top 
five is down from more than 90% prior to 2007. CAF expects that loan 
concentration will continue to diminish slowly as it increasingly lends to new 
members. In 2011, 44% of loan approvals were to newly subscribed core 
shareholders, up from 38% in 2010. 

Our funding and liquidity assessment reflects that CAF conducts its treasury 
operations and asset and liability management prudently. Our funding ratios 
indicate that CAF is structurally able to cover its scheduled short-term debt 
reimbursements without issuing new debt. CAF is a frequent issuer in global 
markets. In 2012, CAF has undertaken 11 bond issues totaling US$2.5 billion in 
the U.S., Europe, and Asia. CAF has lower liquidity ratios than some other 
higher-rated MLIs. However, under our liquidity stress scenario, at the 
one-year time horizon, assets and liabilities would fully cover liabilities, 
excluding scheduled loans.

Outlook
The rating outlook on CAF is stable. CAF's continued concentration in its loan 
portfolio and its capital and liquidity ratios that are below those of more 
highly rated MDFIs limit the potential for an upgrade. We could raise the 
ratings if CAF meaningful improves these measures. We could lower the ratings 
if CAF's capital ratios weaken amid high growth of its loan portfolio, if any 
of CAF's sovereign borrowers run arrears with the bank, or if CAF faces 
significant delays in receiving payments of paid-in capital from its members. 

Related Criteria And Research
     -- Multilateral Lending Institutions And other Supranational Institutions 
Ratings Methodology, Nov. 26, 2012
     -- Corporacion Andina de Fomento, July 10, 2012
     -- Supranationals Special Edition 2011, Sept. 23, 2011

Ratings List

Upgraded
                                        To                 From
Corporacion Andina de Fomento
 Issuer Credit Rating
  Foreign Currency                      AA-/Stable/A-1+    A+/Positive/A-1
 Senior Unsecured                       AA-                A+
 Commercial Paper                       A-1+               A-1

Ratings Affirmed

Corporacion Andina de Fomento
 Senior Unsecured                       mxAAA              



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 
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