Research Update: Corporacion Andina de Fomento 'AA-/A-1+' Ratings Affirmed; Outlook Remains Negative Primary Credit Analyst: Delfina Cavanagh, Buenos Aires (54) 114-891-2153; delfina.cavanagh@spglobal.com Secondary Contacts: Abril A Canizares, Mexico City (52) 55-5081-4417; abril.canizares@spglobal.com John B Chambers, CFA, New York (1) 212-438-7344; john.chambers@spglobal.com Table Of Contents Overview Rating Action Rationale Outlook Related Criteria And Research Ratings List WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JUNE 24, 2016 1
Research Update: Corporacion Andina de Fomento 'AA-/A-1+' Ratings Affirmed; Outlook Remains Negative Overview CAF's board of directors' approval of the 10th general capital increase for $4.5 billion, together with the bank's internal capital generation, should sustain capitalization levels in the next two years absent any downgrades of major borrowers. Still, the low 'CCC/C' ratings and negative outlook on Venezuela are posing risks to CAF's risk-weighted capital levels. We are affirming our 'AA-/A-1+' long- and short-term issuer credit ratings on the bank. The negative outlook on the long-term rating reflects that there is at least a one-in-three likelihood that we could lower the ratings on CAF within the next two years if its RAC ratio declines below 15% on an adjusted basis, or if one of CAF's members fails to treat it as a preferred creditor. Rating Action On June 24, 2016, S&P Global Ratings affirmed its 'AA-/A-1+' long- and short-term issuer credit ratings on Corporación Andina de Fomento (CAF). The outlook remains negative. Rationale The ratings on CAF reflect our assessment of the bank's business profile as strong and its financial profile as very strong. Together, these metrics form CAF's 'aa-' stand-alone credit profile (SACP). The issuer credit rating does not incorporate extraordinary shareholder support from CAF's callable capital because we rate all of CAF's member shareholders lower than the institution. Since it was established in 1968 by its constitutive agreement, CAF has served a prominent role as the cornerstone lender in Latin America. As a regional development bank, CAF provides financing in the form of loans, guarantees, letter of credits and lines of credit, and equity investments to Latin American countries. It is a key lender for infrastructure and energy projects in the region, with 82.3% of its loans to the public sector and the remaining to the private sector. Since CAF's five original members, CAF has grown from a subregional Andean institution to an infrastructure lender throughout Latin America. Today, the Caracas, Venezuela-based bank serves 19 members (10 full members and nine WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JUNE 24, 2016 2
associated members). Thanks to its deep knowledge of the region and the strong relationship it has built with its borrowers, CAF has a strong track record of more than three decades fulfilling its public policy mandate throughout credit cycles. CAF has proven a consistent net lender in economic downturns, securing its exceptional shareholder support, which we expect to continue. Shareholders have repeatedly reaffirmed CAF's public policy mandate through several capital increases. In November 2015, the board of directors approved a general capital increase (GCI) for $4.5 billion (GCI number X, the largest capitalization in the bank's history). Series A and B shareholders will contribute $4 billion, while $0.5 billion will be available for series C shareholders. Contributions will begin in 2017 for up six to seven years. As of today, eight countries have already signed for about $ 2.2 billion; all payments are to be made in cash (no callable capital). Under GCIs number VIII and number IX, CAF received $878 million in capital in 2014 and $684 million in 2015 and additional $1.3 billion is scheduled for 2016-2017. All members are making timely payments of their capital contributions, except Brazil. Although past performance is not a guarantee of preferred creditor treatment (PCT) in the future, we believe that a long history of regular capital contributions, together with a strong track record of timely debt service even during times of economic distress, is evidence of shareholder support for a multilateral lending institution (MLI). Based on this, CAF's shareholder support is among the strongest of rated MLIs. We expect that its exceptional history of PCT will extend to its new full shareholders as well--although this has not been fully tested in a downturn. We assume this historical track record of PCT will hold despite the fairly high degree of default risk embedded in CAF's loan portfolio. The recent case of Argentina--that, despite the foreign currency rating being in selective default ('SD') from July 2014 to May 2016, continued to make timely debt service payments to the bank--adds to our assessment of CAF's strong PCT. Our rating affirmation is premised on our assumption that Venezuela will continue to pay debt service to CAF even if it defaulted on its commercial debt. Our assessment of CAF's governance is constrained by the absence of nonborrowing member countries, a weakness relative to higher-rated MLIs with greater shareholder diversity. Three members (Peru, Venezuela, and Colombia) account for 54.6% of total shares, followed by Argentina and Brazil, accounting for 9.1% and 7.7%, respectively. On the other hand, the growing diversity of CAF's sovereign loan portfolio, the strengthening of its liquidity position, the institution's solid bylaws and risk practices that moderate loan growth, and a dividend policy that retains most earnings collectively buttress our view of CAF's governance. In our opinion, CAF has a very strong financial profile, reflecting its WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JUNE 24, 2016 3
capital adequacy and funding profile and balance-sheet liquidity. S&P Global Ratings RAC ratio before adjustments is based on the same RAC framework used for commercial banks (see "Bank Capital Methodology And Assumptions," published Dec. 6, 2010). As of fiscal year-end 2015, our RAC ratio for CAF was 25%, slightly diminishing from the 26% as of year-end 2014. Weakening creditworthiness--signaled by sovereign downgrades--of several of CAF's largest sovereign borrowers, including Argentina and Venezuela, has been deteriorating CAF's capital ratio especially since 2014. Despite the rating on Venezuela remaining at CCC/Negative/C, Argentina's upgrade to B-/Stable (see " Argentina Long-Term Foreign Currency Rating Raised To 'B-' From 'SD' On Payment Of Past-Due Interest On Exchange Bonds," published May 6, 2016) had a significant positive impact on CAF's RAC ratio after adjustment. (Argentina's default in 2014 had a significant negative impact on CAF's RAC ratio.) The RAC ratio after adjustments increased to 17% at the end of 2015 from 14% in 2014, mainly reflecting Argentina's upgrade. The sovereign single-name concentration adjustment for the potential loss on these exposures--partially offset by our expectation of PCT, which supports its historically low loan loss experience--explains the difference between the 25% RAC ratio before MLI-specific adjustments and the 17% RAC ratio after as of December 2015. CAF's current capital levels do not provide a sufficient capital buffer to support its risk-weighted capital adequacy (above the 15% threshold) if two borrowers are at default at the same time. Beginning in 2014, CAF's management implemented several measures to preserve its capital given the weaker economic conditions in the region, such as reducing the growth pace of its loan portfolio while also diversifying its loans book as new members join. At the same time, CAF continues to receive capital increase installments from its members. The bank's loan portfolio grew 6.8% last year (in line with what it has previously projected), versus 6.3% in 2014. The bank projects 8% portfolio growth for 2016. Management's long-standing efforts to diversify its portfolio away from its original members will continue to reap the benefits of lowering concentration risk in the institution's portfolio. The highest single-country participation in the loan portfolio is 15.1% to Venezuela, which is the same as last year but is down from 16% in 2013 and 18% in 2011. The second- and third-largest portfolio concentrations are Ecuador (14.9%) and Argentina (13.6%). Together, the top three account for 43.6% of the portfolio, down from 45% in 2013 and 51% in 2011. Our expectation of CAF maintaining low and conservative loan portfolio growth, together with the strengthening of its capital base through the scheduled capital installments under GCI number VIII, GCI IX, and GCI X and expected annual comprehensive income in excess of $100 million, should support CAF's capitalization level, assuming no credit quality deterioration of CAF's major borrowers. That said, there are risks that could lead to CAF's RAC ratio declining to WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JUNE 24, 2016 4
below 15%, a threshold for a lower capitalization assessment. Venezuela's economy is experiencing severe distress, which could create asset-quality issues (and, more importantly, potentially for its PCT status) and operational issues for CAR. None of CAF's sovereign members was in arrears to the bank as of the end of 2015, and they remained current on their debt service to CAF through the first half of 2016. In 2015, there were no nonaccrual loans. Loans written off during 2015 amounted to US$16.4 million (these were two projects in Brazil and Argentina by IMPSA, an Argentine company related to energy projects). Even though net interest income to operating revenues and net interest income to average net loans remained similar to 2014 levels (44.% and 1.4%, respectively, as of year-end 2015), CAF's net income declined to $77 million from $138 million. This is equivalent to net income to average assets of 0.3%, lower than the 0.5% posted in 2014. The main reason for the drop in net income is the accountability change implemented in 2015, by which transfers to off-balance-sheet funds to assist member countries are now accounted as an expense (instead of a distribution of earnings). Contributions to stockholders' special fund accounted for $54 million in 2015. CAF has established and substantial market access as it's a regular benchmark issuer within a diversified market, and we are not expecting material deterioration of CAF's funding conditions stemming from a deterioration of its shareholders. (Several shareholders are currently in stressful situations, such as Venezuela, and that did not affect CAF's market access.) At the same time, CAF has a conservative funding profile, with cumulative assets exceeding consistently cumulative debt for maturities up to one year and no significant gap for five years. We estimate that CAF is structurally able to cover its scheduled short-term debt liabilities without recourse to new issuance; its static funding gap (without loan disbursements) was 1.8x at the one-year time horizon as of year-end 2015, compared with 1.7x in 2014. Qualitatively, we view CAF's funding program as very diversified by both geographic market and type of investor, reflecting CAF's frequent issuance in many markets and currencies. The bank regularly raises funds in the international capital markets through the issuance of debt securities. Thanks to its global investor base, CAF maintains a well-diversified funding profile consisting of 69% bonds, 12% term deposits, 12% commercial paper, and 7% long-term loans as of year-end 2015. CAF's liquidity levels--as measured by our extreme capital markets and economic conditions stress test--remain supportive of its mandate and have improved since 2013 but remain weaker than those of larger regional development banks, such as IADB. CAF's liquid assets are of sufficient quantity and quality that we expect it would, under our stress scenario, be able to service its debts and maintain operations for one year without capital market access. Similar to many MLIs, however, CAF would have to defer a WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JUNE 24, 2016 5
portion of its loan disbursements under such conditions. At the end of 2015, the bank had $32.5 billion in total assets, of which $10.8 billion were liquid assets (equivalent to 33% of total assets) invested in instruments rated 'A-' or above as of year-end 2015, with an overall 'AA' average. Liquid assets were 37% time deposits, 18% U.S. treasury, 16% commercial paper, 13% corporate and financial bonds, 11% certificates of deposit, and the remaining 2% in others. Outlook The negative outlook reflects our view that there is at least a one-in-three likelihood that we would lower the ratings on CAF within the next two years, should its financial profile weaken. We could lower the ratings if CAF's RAC ratio declines materially below 15% on an adjusted basis, or if one of CAF's members defaults to the bank. CAF's RAC ratio could erode below 15% if two major borrowers were to default at the same time, or if one of CAF's members fails to treat it as a preferred creditor. Conversely, the ratings could stabilize at current levels if we believe CAF will be able to maintain its RAC ratio above 15% and if the rating on Venezuela stabilizes. CAF's RAC ratio after adjustments improved to 16.5% as of year-end 2015, above the 15% threshold. Related Criteria And Research Related Criteria S&P Global Ratings' National And Regional Scale Mapping Tables, June 1, 2016 National And Regional Scale Credit Ratings, Sept. 22, 2014 Multilateral Lending Institutions And Other Supranational Institutions Ratings Methodology, Nov. 26, 2012 Bank Capital Methodology And Assumptions, Dec. 6, 2010 Use Of CreditWatch And Outlooks, Sept. 14, 2009 Related Research How Much Can Multilateral Lending Institutions Up The Ante?, April 12, 2016 Introduction To Supranationals Special Edition 2015, Oct. 8, 2015 Corporacion Andina de Fomento 'AA-/A-1+' Ratings Affirmed, Outlook Remains Negative, July 2, 2015 Corporacion Andina de Fomento, July, 16, 2014 How An Erosion Of Preferred Creditor Treatment Could Lead To Lower Ratings On Multilateral Lending Institutions, Aug. 26, 2013 WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JUNE 24, 2016 6
Ratings List Ratings Affirmed Corporacion Andina de Fomento Issuer Credit Rating Foreign Currency Senior Unsecured Senior Unsecured Senior Unsecured Commercial Paper AA-/Negative/A-1+ AA- AA-p mxaaa A-1+ Certain terms used in this report, particularly certain adjectives used to express our view on rating relevant factors, have specific meanings ascribed to them in our criteria, and should therefore be read in conjunction with such criteria. Please see Ratings Criteria at www.standardandpoors.com for further information. Complete ratings information is available to subscribers of RatingsDirect at www.globalcreditportal.com and at www.spcapitaliq.com. All ratings affected by this rating action can be found on the S&P Global Ratings public website at www.standardandpoors.com. Use the Ratings search box located in the left column. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JUNE 24, 2016 7
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