Corporacion Andina de Fomento Supranational

Transcription

1 MAY 6, 2011 GLOBAL SOVEREIGN CREDIT ANALYSIS Corporacion Andina de Fomento Supranational Table of Contents: SUMMARY RATING RATIONALE 1 ORGANIZATIONAL STRUCTURE, MISSION AND STRATEGY 2 CURRENT STRATEGY 3 LENDING OPERATIONS 3 PROFITABILITY 4 ASSET/LIABILITY MANAGEMENT AND LIQUIDITY 4 CAF'S AMPLE LIQUIDITY 5 ASSET QUALITY 5 CAPITAL ADEQUACY 6 RATING HISTORY 7 ANNUAL STATISTICS 8 MOODY S RELATED RESEARCH 10 RELATED WEBSITE 10 Analyst Contacts: NEW YORK Patrick Esteruelas Vice President - Senior Analyst Patrick.Esteruelas@moodys.com Mauro Leos Vice President-Senior Credit Officer Mauro.Leos@moodys.com Bart Oosterveld Managing Director-Sovereign Risk Bart.Oosterveld@moodys.com Summary Rating Rationale Moody's A1 rating for long-term debt issued by the Corporación Andina de Fomento (CAF) and its P-1 rating assigned to short-term obligations reflect the presence of prudent financial management, a history of strong support from its primary shareholders, and an increased capital base with new members. Credit strength associated with CAF s prudent financial management is reflected by its strong balance sheet and capitalization, its high quality of assets, high liquidity levels, and good profitability figures. The Corporation benefits from having preferred creditor status. The preferred creditor status ensures that sovereign debt owed to the CAF is excluded from debt restructuring efforts by official creditors, and that resources are made available to service debt due to the CAF. Some of the privileges afforded to CAF when operating within primary shareholder countries include: exemption from taxes; immunity from expropriation; free convertibility and transferability of assets; exemption from any restriction on assets; and exemption from public sector debt restructurings and moratoria. The Corporation s credit challenges are derived from its development mandate, which includes balancing the risks derived from the regional concentration of its loan portfolio with the need to maintain adequate profitability indicators. The rating outlook for CAF is stable. Upward rating pressure could occur with an additional increase in investment grade shareholders. Similarly, downward rating pressure could occur if one or more of CAF's largest borrowers were to default, or become unwilling or unable to meet their obligations to the Corporation.

2 Organizational Structure, Mission and Strategy Structure CAF was established in 1970 to promote sustainable economic development and regional integration for its five original member countries: Bolivia, Colombia, Ecuador, Peru and Venezuela. Its principal activity is to provide loans to finance projects, working capital and trade activities in its shareholder countries. CAF s Establishing Agreement was amended in 2005 to allow other Latin American countries to become full members. As a result, CAF membership has expanded to 18 countries from the original 5. Of these, Argentina, Brazil, Panama and Uruguay have joined as full member with series A shares. In addition, Italy and Guatemala have signed Letters of Intent to become future shareholders. TABLE 1 Stockholders Series "A" Series "B" Series "C" Argentina Bolivia The five original countries plus Argentina, Brazil Brazil, Panama and Uruguay are both "A" and "B" shareholders, which means they Colombia are allowed to appoint to the Board of Ecuador Directors one principal director and one alternate director per type of share. The Panama other members hold series "C" shares which entitle them to elect two principal Peru directors and two alternates amongst Uruguay themselves to serve on the Board of Directors. Commercial banks from the Venezuela five founding countries also are able to be Chile members and hold series "B" shares. Costa Rica Dominican Republic Jamaica Mexico Portugal Paraguay Spain Trinidad & Tobago Commercial Banks Mission CAF's mission is to support sustainable development and economic integration among its shareholder countries by helping them to make their economies diversified, competitive and more responsive to social needs. This is achieved by financing economic and social infrastructure projects, encouraging foreign investment and capital markets development, promoting the expansion of regional trade and exports and supporting the development of small and medium-size enterprises. 2 MAY 6, 2011 CREDIT ANALYSIS: CORPORACION ANDINA DE FOMENTO

3 Current Strategy Products CAF offers its products to its member states and to the public and private financial institutions and corporations that operate within them. Available products include short-, medium- and long-term loans, co-financing arrangements, guarantees and selected equity investments. The majority of its loan operations are to the public sector, which accounted for 80.2% of CAF's loan book at year end Lending operations The CAF provides loans to public and private entities from its shareholder countries mainly to finance projects and development and integration programs. The loan portfolio has been growing in recent years and has been managed in an orderly way. Loans by country diversification has increased with new members, but portfolio is still highly concentrated on core countries The concentration of loans is typical of regional multilateral development banks. By country, CAF's largest credit exposures are to Ecuador, Venezuela, Peru and Colombia which together account for 64% of the total loan portfolio. In addition to asset concentration risk, all of the Latin Americanfocused institutions take on more credit risk than other MDBs (with the possible exception of the African Development Bank) as the majority of their loans are made to countries Moody's rates as noninvestment grade. TABLE 2 Portfolio composition by country (as of Dec 31, 2010) Argentina 10.1% Mexico 0.1% Bolivia 9.4% Panama 1.0% Brazil 8.1% Paraguay 0.5% Colombia 14.3% Peru 15.8% Costa Rica 1.1% Uruguay 4.8% Dominican Republic 0.9% Venezuela 16.2% Ecuador 17.7% Total loans (in US$ thousands) $ 13,777,964 Despite the high level of loan portfolio concentration, it has decreased significantly over the last several years as CAF has added new members and broadened its capital base. Public and Private loans As of December 31, 2010, CAF s total loans were $13.77 billion, of which 80.2% was to the public sector and 19.8% to the private sector of its shareholders countries. 3 MAY 6, 2011 CREDIT ANALYSIS: CORPORACION ANDINA DE FOMENTO

4 Loans by economic sectors The biggest share of the loan portfolio goes towards funding infrastructure projects (transportation, telecommunications, electricity, gas and water). At the end of 2010, infrastructure accounted for 55.6% of the total portfolio, followed by social development (17.4%) and financial intermediation (14.2%). Among multilaterals, CAF provides the highest financing for infrastructure in Latin America. TABLE 3 Loan Portfolio by economic Sector Percentage of portfolio in 2010 Infrastructure 55.6% Social development 17.4% Financial Intermediation 14.2% Structural reforms 10.7% Manufacturing industry 1.5% Mining 0.5% Other 0.3% Total loans (in US$ thousands) $ 13,777,964 Profitability The CAF has registered continuous years of high profitability, though gains have decreased since In 2010, net income totaled $166 million compared to $235 million in Total interest income decreased 2% to $385 million from $483 million on the previous year, and total interest expense declined 8.2% to $173 million at the end of The decline in net income is largely attributable to the decline in LIBOR, which all assets are tied to. Return on average assets (ROA) was 0.98% in 2010, below the average in 2009 of 1.58%. The net interest margin (net interest income as a percentage of average earning assets) was 1.29% in 2010 below the 2.12% posted in The Return on average equity (ROE) also declined in 2010 to 3.04% from 4.74% in Asset/Liability Management and Liquidity CAF s asset/liability management seeks to minimize liquidity, interest rate and exchange rate risks. Loans are mostly on a floating rate basis and repriceable assets tend to exceed floating rate liabilities. As of December 2010, the average yield of loans disbursed was 2.44%. CAF's loan and liability portfolios are fairly well diversified in terms of tenors, as is shown in the table below. Its access to the markets allows it to opportunistically lock in funding costs for its longer term project financings. TABLE 4 Maturity 2010 Less than one year $ 2,328,806 17% Between one and two years $ 1,635,890 12% Between two and three years $ 1,377,283 10% 4 MAY 6, 2011 CREDIT ANALYSIS: CORPORACION ANDINA DE FOMENTO

5 TABLE 4 Maturity 2010 Between three and four years $ 1,240,399 9% Between four and five years $ 1,102,446 8% Over five years $ 6,093,140 44% Total $ 13,777, % CAF also benefits from market diversification. The Corporation issues bonds and notes in the local markets of some of its member countries (Colombia, Mexico, Peru, Uruguay and Venezuela) as well as in the United States, Europe and Japan. Sixty three percent of its bonds are denominated in US dollars and 15% are denominated in Euros. Bonds comprise the lion's share of total liabilities (56.3% of total liabilities at year-end 2010) with short-term funding accounting for about one third of total liabilities. CAF's Ample Liquidity CAF's liquidity is conservatively managed, underpinning its P-1 commercial paper rating. The Corporation's broad access to the capital markets attests to its superior performance which has resulted in favorable funding costs, investor appetite for a range of medium and long tenors as well as good secondary market trading for its debt issuances. Liquid assets totaled 22.3% of total assets in CAF's internal policy is to maintain sufficient liquidity to cover 25% of its total financial liabilities, and 80% of liquidity must be invested in investment grade instruments and concentrated in the short-term. Guidelines also require that at a minimum liquidity should cover the greater of 35% of debt service plus expected disbursements over the next twelve months, or 45% of the undisbursed total of committed project loans. Asset Quality Credit quality remained strong with no non-performing loans in CAF traditionally has a very low level of non-performing loans, explained by its preferred creditor status. The Corporation maintains a loan loss allowance of $141 million, in line with US GAAP accounting rules, which provides a solid cushion against potential credit losses. TABLE 5 Asset quality indicators (US$ millions) Overdues Loans in non-accrual status Loans written-off Allowance for loan loses Total Loan Portfolio 10, , , MAY 6, 2011 CREDIT ANALYSIS: CORPORACION ANDINA DE FOMENTO

6 Capital Adequacy Capital Adequacy- Expanding Capital Base The CAF has a strong capital base. The Corporation s capital base consists of member subscriptions that are divided into paid-in and callable portions. The Corporation s usable equity is defined as paidin capital received in convertible currencies plus total reserves. Callable capital is considered a full faith and credit obligation of each member government. At the end of 2010, authorized capital stood at $10 billion. Paid-in capital was $2.81 billion and callable capital was $1.43 billion. The Andean nations account for 73.8% of paid-in capital and 62.6% of callable capital. The remainder is provided by non- Andean members as well as the private banks who are members. The Corporation s capital base has increased with the addition of new members. In 2007 and 2008 agreements were signed with the expected and new full member for contributions to paid-in capital for a total amount of approximately $1.5 billion to be paid between 2008 and 2014 as well as $360 million in callable capital. On August 2009 CAF s Board of Directors approved an additional $2.5 billion increase in paid-in capital, to be paid between 2010 and 2017, to further support CAF s growing role in the region. From that amount, $0.5 billion are allocated to Series C shareholders who want to increase their participation. Capital payments reached $405 million during 2010, and payments of $462 million are expected for 2011 The Risk asset coverage ratio (RAC), a measure of capital adequacy that measures paid in capital, equity reserves and retained relative to Loans to non-investment grade countries, stood at 50.5% in The position of the RAC indicates that the Corporation has sufficient equity to cover credit of non-investment grade countries, regarded as riskier. TABLE CAF's Risk asset Coverage Ratio (without callable capital) (USD Thousands) Paid In Capital 2,813,940 Equity Reserves 2,156,937 Retained Earnings 166,139 Loans to non investment grade 10,168,833 RAC 50.5% In Moody s opinion, the Corporation s capital base remains robust. Conservative policies Since 1992 CAF's policy has been to maintain a minimum BIS capitalization level of risk-weighted assets; over that time it has consistently exceeded that target. In addition, CAF follows a conservative policy of risk-weighting all government-guaranteed or related credits according to Basel II guidelines. The capital base is also protected by the operational limits that the Corporation has put in place. The gearing policy limits the sum of loans, equity securities and guarantees to net worth to 4.0:1; as of December 31, 2010 the ratio was 2.4:1, well under the maximum. Similarly, its leverage (financial liabilities/net worth) is capped at 3.5:1 and was only 2.2:1 at December 31, MAY 6, 2011 CREDIT ANALYSIS: CORPORACION ANDINA DE FOMENTO

7 Rating history TABLE 7 Rating Class Rating Date Rating Action LT Issuer Rating A1 30-Jun-05 Rating raised Senior Unsecured (Foreign) A1 30-Jun-05 Rating raised Senior Unsecured (Domestic) A1 1-Jan-08 Redenomination Senior Unsecured MTN (Foreign) (P)A1 27-Aug-10 Provisional Rating Senior Unsec. Shelf (Foreign) (P)A1 30-Jun-05 Rating raised Commercial Paper (Foreign) P-1 1-Jan-08 EMU Event Other Short Term P-1 2-May-01 Rating raised BACKED Commercial Paper (Foreign) P-1 1-Jan-08 EMU Event 7 MAY 6, 2011 CREDIT ANALYSIS: CORPORACION ANDINA DE FOMENTO

8 Annual Statistics BALANCE SHEET (US$M) Deposits and Investment 4,126,874 3,685,384 3,281,002 2,457,555 1,930,615 1,788,340 Loan Portfolio 13,783,043 11,686,689 10,184,068 9,547,987 8,097,472 7,346,978 Equity Investments 94,721 85,482 75,066 74,317 93, ,646 Non-performing loans Non-Accrual loans ,332 Less: Allowance for loan losses 141, , , , , ,629 Other Assets 683, , , , , ,987 Total Assets 18,546,875 15,887,069 14,272,455 12,589,973 10,439,493 9,540,654 Financial Liabilities 12,474,683 10,403,809 9,466,819 8,246,637 6,483,703 5,875,691 Other Liabilities 319, , , , , ,802 Total Liabilities 12,793,688 10,600,265 9,718,542 8,462,664 6,746,766 6,303,493 Capital Stock 2,813,940 2,485,645 2,176,430 2,014,750 1,870,615 1,681,885 Shareholder's Equity 5,753,187 5,286,804 4,553,913 4,127,309 3,692,727 3,237,161 INCOME STATEMENT (US$M) Interest Income 385, , , , , ,744 Non-interest income 7,900 1,082 1,303 10,871 6,260 1,721 Total income 393, , , , , ,465 Interest Expense 173, , , , , ,585 Provision for loan losses -2,990-1,656-22,970-23,133 19,000-14,500 Administrative expenses 69,735 62,562 56,482 51,195 46,414 42,640 Unrealized changes in fair value related to financial instruments 13,713-13,363 13,483-12,278 4,372-1,146 Net Income 166, , , , , ,238 RATIOS Profitability ROA 0.98% 1.58% 2.36% 3.59% 3.34% 3.01% ROE 3.04% 4.74% 7.24% 10.46% 9.39% 9.56% Asset Quality NPLs/Gross Loans 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Non-Accruals/Gross Loans 0.00% 0.00% 0.00% 0.00% 0.00% 0.02% 8 MAY 6, 2011 CREDIT ANALYSIS: CORPORACION ANDINA DE FOMENTO

9 Liquidity Liquid Assest/Total Assets 33.08% 35.42% 34.66% 29.80% 29.78% 30.44% Other ratios Administrative Expenses/Assets avg Administrative Expenses/Loans avg Shareholder's Equity/ Total Assets 0.41% 0.42% 0.43% 0.46% 0.48% 0.45% 0.55% 0.59% 0.60% 0.58% 0.64% 0.62% 31.0% 33.3% 31.9% 32.8% 35.4% 33.9% BIS total Capital Ratio 37.2% 41.7% 38.4% 36.3% 40.9% 40.6% 9 MAY 6, 2011 CREDIT ANALYSIS: CORPORACION ANDINA DE FOMENTO

10 Moody s Related Research Credit Opinion:» Corporacion Andina de Fomento Analysis:» Corporacion Andina de Fomento, October 2009 (120450) Rating Methodology:» Sovereign Bond Ratings, September 2008 (109490) To access any of these reports, click on the entry above. Note that these references are current as of the date of publication of this report and that more recent reports may be available. All research may not be available to all clients. Related Website For additional information, please see the company's website: MOODY S has provided links or references to third party World Wide Websites or URLs ("Links or References") solely for your convenience in locating related information and services. The websites reached through these Links or References have not necessarily been reviewed by MOODY S, and are maintained by a third party over which MOODY S exercises no control. Accordingly, MOODY S expressly disclaims any responsibility or liability for the content, the accuracy of the information, and/or quality of products or services provided by or advertised on any third party web site accessed via a Link or Reference. Moreover, a Link or Reference does not imply an endorsement of any third party, any website, or the products or services provided by any third party. 10 MAY 6, 2011 CREDIT ANALYSIS: CORPORACION ANDINA DE FOMENTO

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