(The following statement was released by the rating agency)
Dec 05 -
-- Following a review of the European Investment Bank (EIB) under our revised criteria for multilateral lending institutions (MLIs), we have affirmed our long- and short-term issuer credit ratings on the EIB at ‘AAA/A-1+'.
-- The stand-alone credit profile for the EIB is ‘aa’, reflecting our assessment of its “extremely strong” business profile and “strong” financial profile, as our criteria define these terms.
-- Our ratings on the EIB incorporate two notches of potential extraordinary shareholder support because of the adequate reserve of callable capital from ‘AAA’ rated sovereigns.
-- The outlook remains negative, reflecting our view of the risk to the EIB’s portfolio from the economic challenges facing the European Union (EU). The long-term ratings on about half of the EU and candidate countries we rate currently have a negative outlook.
On Dec. 5, 2012, Standard & Poor’s Ratings Services affirmed its long- and short-term ratings on the European Investment Bank (EIB) at ‘AAA/A-1+'. The outlook remains negative.
The ratings on the EIB reflect our assessment of the bank’s business profile as “extremely strong” and its financial profile as “strong”, as our criteria define these terms. The ratings also reflect our expectation of extraordinary shareholder support through callable capital. We outline these factors in our revised criteria, “Multilateral Lending Institutions And Other Supranational Institutions Ratings Methodology,” published Nov. 26, 2012, on RatingsDirect on the Global Credit Portal.
Since its establishment by the treaty of Rome in 1958, the EIB has carried out its mandate of supporting growth and employment, economic and social cohesion, and environmental sustainability. EIB shareholders--the 27 European Union (EU) member states--continue to support the institution’s policy importance via new capital increases. On June 29, 2012, the EIB announced that its shareholders recommended a EUR10 billion increase in paid-in capital (24% of adjusted common equity). We anticipate the EIB board of governors will approve this capital increase, which would then support up to EUR60 billion in additional loans and other purpose-related exposures over the next few years (16% of total purpose-related exposures).
The EIB benefited from preferred creditor treatment (PCT) during the Greek debt private-sector involvement earlier in 2012: it did not incur any losses. While there is no guarantee that PCT will always apply to the EIB, we believe that the bank’s past experience is relevant for future debt restructurings if and when they occur.
Our assessment of EIB’s “extremely strong” business profile factors in the bank’s governance and management. The bank did not distribute dividends in 2011 (or in previous years). However, the EIB contributed 2% of its profits (EUR50 million) to the Highly Indebted Poor Countries (HIPC) debt relief initiative in 2011. The EIB allocated the remainder of its profits to reserves in order to buttress its adjusted shareholders’ equity, which increased by 6% to EUR42 billion.
Our “strong” assessment of EIB’s financial profile rests on its relatively lower embedded credit risk, compared with many other MLIs. This is offset by its higher leverage than most peers’, and the deteriorating creditworthiness of many EU governments. The EIB’s Standard & Poor’s risk-adjusted capital (RAC) ratio (our primary measure for assessing capital adequacy) was 13% before adjustments as of December 2011, assuming today’s ratings. After factoring in adjustments specific to MLIs, the RAC ratio remains at 13%. The MLI-specific adjustments include a penalty for single-name concentration resulting from sovereign exposures, including sovereign bonds in the treasury portfolio, offset by our expectation of continuing PCT and the geographic diversification of the EIB’s exposures. Both RAC ratios, before and after adjustments, are lower than several other MLIs’.
Under its 2012-2014 operational plan, the EIB originally intended to decrease its yearly new lending to an annual average of EUR48 billion (10% of total assets), consistent with pre-2008 levels. In line with the EIB’s mandate to support economic growth in the EU, in June 2012 it committed to extend up to an additional EUR60 billion of new lending exposures over the next few years. However, these new loans are conditional on the board of governors’ approval of the proposed EUR10 billion paid-in capital increase. We expect the loans would be spread across the entire EU, rather than only in the most challenged economies, in accordance with the EIB’s underwriting standards. The maximum leverage attached to the announced capital increase is 6x (EUR60 billion of purpose-related exposure divided by EUR10 billion of paid-in capital), significantly lower than the 9x average multiple of the last five years. We therefore expect both RAC ratios to improve modestly over the next few years.
The EIB uses derivatives to hedge its foreign-exchange and interest-rate risks. At Dec. 31, 2011, the bank estimated its value-at-risk at EUR316 million to quantify both risks at the standard 99% confidence interval over a one-day horizon. In other words, the bank estimates that on one trading day out of 100 (or two to three times a year), interest rate and foreign exchange risk factors could generate a daily marked-to-market loss higher than EUR316 million (less than 1% of the EIB’s adjusted common equity).
Our funding ratios indicate that EIB is structurally able to cover its scheduled short-term debt repayments without recourse to new issuance. The bank reached its 2012 target for debt issuance of EUR60 billion in September 2012, thereby showing strong market access while benefiting from improving financing spreads during the year.
The EIB maintains lower liquid assets than most other ‘AAA’ rated MLIs relative to its total exposures. However, in 2009 it became an eligible counterparty in the Eurosystem’s monetary policy operations, giving it access to the European Central Bank (AAA/Stable/A-1+) to refinance some of its assets. The EIB is aiming to increase its pool of eligible assets for refinancing. Under our liquidity stress scenario, the bank would be able to continue fulfilling its mandate, even under extremely stressed market conditions, without access to the capital markets. However, it could need to draw on its access to the ECB and would likely have to reduce its scheduled loan disbursements. The EIB estimates that it would be able to continue its operations, including planned disbursements, for about 10 months without accessing the markets or selling its assets at distressed prices; the bank could, however, repo its eligible unencumbered treasury assets.
In addition to its importance for the franchise value of the institution, we quantify the support from eligible callable capital by factoring it into the RAC ratio. When factoring in the callable capital from the EIB’s seven ‘AAA’ rated shareholders, the financial profile aligns with an “extremely strong” assessment under our criteria, which is commensurate with the ‘AAA’ rating level.
The outlook on the EIB remains negative, reflecting our view of the economic challenges facing the EU. The weak macroeconomic outlook poses a challenge to the risk-weighted-asset component of the EIB’s RAC ratios and to the number of ‘AAA’ rated shareholders that subscribed the EIB’s callable capital. Our forecast for the region is mirrored in our negative outlooks on about half of the EU and candidate countries we rate.
We could lower the ratings if our expectations for improving capital ratios--notably due to the announced capital increase--do not materialize, or if higher funding costs materially decrease the EIB’s net interest margin and therefore its capacity to generate equity internally. We could also lower the ratings if the bank no longer benefits from PCT.
The ratings could stabilize at the current level if the bank’s loan portfolio continues to perform well despite higher embedded risks, if its PCT continues, and if it improves its capital ratios. The ratings could also stabilize if the outlooks and ratings on the majority of EU sovereigns stabilize at their current levels.
Related Criteria And Research
-- Multilateral Lending Institutions And Other Supranational Institutions Ratings Methodology, Nov. 26, 2012
-- European Investment Bank, Sept. 27, 2012
-- Supranationals Special Edition 2011, Sept. 23, 2011
-- For Development Banks, Callable Capital Is No Substitute For Paid-In Capital, Dec. 31, 2009
European Investment Bank
Issuer Credit Rating
Foreign Currency AAA/Negative/A-1+
Senior Unsecured AAA
Commercial Paper A-1+