-- 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.
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.
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
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
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'.
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
Inter-American Development Bank
Issuer Credit Rating
Foreign Currency AAA/Stable/A-1+
Senior Unsecured AAA