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