Research Update: Corporación Andina de Fomento Outlook Revised To Negative On Likelihood Of Venezuela Nonpayment; Ratings Affirmed Primary Credit Analyst: Alexis Smith-juvelis, New York + 1 (212) 438 0639; alexis.smith-juvelis@spglobal.com Secondary Contacts: Constanza M Perez Aquino, Buenos Aires (54) 544-891-2167; constanza.perez.aquino@spglobal.com Alexander Ekbom, Stockholm (46) 8-440-5911; alexander.ekbom@spglobal.com Table Of Contents Overview Rating Action Rationale Outlook Related Criteria Related Research Ratings List WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JUNE 12, 2018 1
Research Update: Corporación Andina de Fomento Outlook Revised To Negative On Likelihood Of Venezuela Overview Recurrent payment delays from Venezuela over the past 12 months, combined with intensifying economic and liquidity strains, increase the likelihood of reduced preferential treatment to CAF, in our view. CAF's large exposure to Venezuela exacerbates the impact of potential nonpayment on its business profile and capital ratios. We are revising our outlook on CAF to negative and affirming our 'AA-/A-1+' ratings. The negative outlook reflects our view that within the next 24 months, there is a greater than one-in-three likelihood of Venezuela entering in protracted arrears. Rating Action On June 12, 2018, S&P Global Ratings revised its outlook on Corporación Andina de Fomento (CAF) to negative from stable. At the same time, S&P Global Ratings affirmed its 'AA-/A-1+' long- and short-term issuer credit ratings. Rationale We revised the outlook to negative from stable based on the growing likelihood of persistent and long-term arrears in Venezuela's payment flows to CAF. Over the past 12 months, CAF has experienced recurrent payment delays with Venezuela. As of December, accumulated arrears reached US$136 million. While these were subsequently cleared in January 2018, further payment delays exceeding 90 days started accruing in the second half of 2018. While Venezuela is now current on these payments, we expect persistent and longer-term payment delays to eventually accrue over the next 24 months as economic conditions in Venezuela continue to worsen, compounded by sanctions and declining oil production. The sovereign has already entered into nonaccrual status (delays exceeding 180 days) with other multilateral lending institution (MLI) peers. Generally, Venezuela has demonstrated its willingness to pay CAF, supported by its close working relationship with the institution, while having defaulted on commercial obligations (See "Venezuela Long-Term Foreign Currency Rating WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JUNE 12, 2018 2
Lowered To 'SD'," published on Nov. 13, ), but we expect the ability to treat them as preferred as increasingly constrained. The risks associated with nonpayment are exacerbated by CAF's significant exposure to Venezuela, which accounts for 14% of the total portfolio share. Unlike other MLI peers with exposure to Venezuela, CAF's nominal exposure to the sovereign will remain approximately constant in 2018, mainly because of a US$400 million liquidity facility approved to the Venezuelan central bank in December. We believe Venezuela's capacity to reduce the overall exposure of US$3.3 billion to CAF is limited, given 2018 expected disbursements from previously approved loans to the central government and disbursements under the central bank facility. These risks could lead to CAF's risk-adjusted capital (RAC) ratio after adjustments to decline from 16% as of December to below 15%, a threshold for a lower capitalization assessment, as well as affecting its preferred creditor status. CAF's level of liquidity has been rising, and we expect it won't be affected substantially by a nonpayment of Venezuela because we believe CAF has strong market access and will target high liquidity levels. As such, we expect them to accommodate unplanned disbursements. Our 'AA-' long-term issuer credit rating on CAF is predicated on our view of CAF's strong business profile and very strong financial profile. These combined factors result in a stand-alone credit profile (SACP) assessment of 'aa-'. We don't incorporate extraordinary shareholder support from CAF's callable capital into our issuer credit rating because we rate all of CAF's member shareholders lower than the institution. CAF continues to be a key lender for infrastructure and energy projects in the region and enjoys exceptional support from its shareholders. The past 10 years have been characterized by more frequent and larger general capital increases. In 2015, the Board of Directors approved the largest general capital increase in its history, equivalent to US$4.5 billion. In, paid-in capital contributions totaled US$570 million, and shareholders continue to pay on time and in full. This reinforces our view of CAF's important role in the region and will support continued growth in its portfolio. Our expectation is that all other sovereign members will continue to remain current on their debt service to CAF. Our appraisal of CAF's governance is constrained by the absence of a set of non-borrowing member countries, a weakness relative to higher-rated MLIs with greater shareholder diversity. Three members (Peru, Venezuela, and Colombia) account for 52% of total shares, followed by Argentina and Brazil, accounting for 9.0% each. On the other hand, CAF continues to strengthen its governance and adheres to robust risk management practices, which buttress our view of CAF's governance. CAF's RAC ratio after adjustments is 16% as of December, down from 17% in September. The reduction in CAF's risk-based capital mainly reflects the WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JUNE 12, 2018 3
deteriorating credit quality of CAF's borrowers. On Jan. 11, 2018, we lowered our long-term foreign currency rating on Brazil to 'BB-', followed by lowering our long-term foreign currency rating on Bolivia to 'BB-' on May 23, 2018. This has been partially offset by the increases in paid-in capital. (The RAC ratio after diversification does not reflect the criteria correction published on July 11,. We believe the impact of the correction on the ratio is not material to the rating.) CAF's loan book was US$23.6 billion as of December, and we expect it to grow between 4.0% and 5.0% in 2018. We expect management will continue to diversify its portfolio and gradually increase exposure to investment-grade sovereigns. The top three countries that account for the largest proportion of the portfolio are Ecuador, Venezuela, and Argentina, accounting for 41% in, down from 42% in 2016. Similarly, 36% of its loan book is investment-grade, up from 35% in 2016. We expect this trend to continue, which can, over time, support the bank's capital ratio. As of December, loans in nonaccrual status as a percentage of the loan portfolio was 0.59%, up from 0.55% in December 2016, all of them from the private sector. This is relatively low vis-à-vis peers. At the same time, CAF's liquidity has been strengthening. While CAF's prudential liquidity policy minimum is coverage of 12 months of net cash requirements, it is actively targeting 24 months of coverage. This translates into improving liquidity ratios, with short-term debt plus currently maturing long-term debt as a percentage of liquid assets of 61% in. CAF's liquid assets are of sufficient quantity and quality so 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. According to our calculations, CAF's liquidity at the one-year horizon under stressed market conditions and assuming scheduled disbursements was 1.4x as of Dec. 31,. Under this same stress scenario, CAF could satisfy some increased demand for unplanned loan disbursements. We view CAF's funding program as very diversified by both geographic market and type of investor, supported by its frequent issuance in multiple markets and currencies. 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 2.2x at the one-year horizon as of December, compared with 2.0x at year-end 2016. Its static funding gap (without loan disbursements) was 1.4x for five years. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JUNE 12, 2018 4
Outlook The negative outlook on the long-term rating reflects our view that within the next 24 months, there is a greater than one-in-three likelihood that the worsening economic and liquidity conditions of Venezuela could diminish its capacity to treat CAF as preferred. This would weigh on the business profile and could trigger a deterioration of CAF's risk-weighted capital adequacy. If, contrary to our expectations, any of CAF's shareholders fail to treat CAF as preferred, that could also lead to a downgrade. We could revise outlook to stable if CAF builds sufficient capital buffers and maintains high levels of liquidity to counterbalance increased risk in its loan portfolio. Related Criteria General Criteria: S&P Global Ratings' National And Regional Scale Mapping Tables, Aug. 14, General Criteria: Methodology For Linking Long-Term And Short-Term Ratings, April 7, General Criteria: National And Regional Scale Credit Ratings, Sept. 22, 2014 Criteria - Governments - General: Multilateral Lending Institutions And Other Supranational Institutions Ratings Methodology, Nov. 26, 2012 Criteria - Financial Institutions - Banks: Multilateral Lending Institutions Capital Methodology And Assumptions, Dec. 6, 2010 General Criteria: Use Of CreditWatch And Outlooks, Sept. 14, 2009 Related Research Colombia Foreign Currency Issuer Credit Ratings Lowered To 'BBB-/A-3' On Weaker Policy Flexibility; Outlook Stable, Dec. 11, Venezuela's Global Bonds Due 2023 And 2028 Downgraded To 'D', Dec. 8, Sovereign Ratings History, Dec. 7, Venezuela's Global Bonds Due 2025 And 2026 Downgraded To 'D', Nov. 21, Venezuela Long-Term Foreign Currency Rating Lowered To 'SD', Nov. 13, Argentina Long-Term Ratings Raised To 'B+' On Expected Economic Improvement; Outlook Is Stable, Oct. 30, Introduction To Supranationals Special Edition, Oct. 20, WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JUNE 12, 2018 5
Republic of Ecuador Long-Term Ratings Lowered To 'B-' On Higher Fiscal And External Vulnerabilities; Outlook Is Stable, June 29, How Brexit Could Impact Ratings On Supranational Institutions, April 10, 2016 Annual Sovereign Default Study And Rating Transitions, April 3, Corporacion Andina de Fomento, July 25, How Much Can Multilateral Lending Institutions Up The Ante?, April 12, 2016 How An Erosion Of Preferred Creditor Treatment Could Lead To Lower Ratings On Multilateral Lending Institutions, Aug. 26, 2013 Ratings List Ratings Affirmed; Outlook Revised To From Corporacion Andina de Fomento Issuer Credit Rating AA-/Negative/A-1+ AA-/Stable/A-1+ Ratings Affirmed Corporacion Andina de Fomento Senior Unsecured Senior Unsecured Commercial Paper AAmxAAA 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.capitaliq.com. All ratings affected by this rating action can be found on 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 12, 2018 6
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