February 23, 2010 Research Update: The Currency Exchange Fund N.V. (TCX) Outlook Revised To Negative From Stable; 'A-/A-2' Ratings Affirmed Primary Credit Analyst: Maria J Redondo, London (44) 20-7176-7094;maria_redondo@standardandpoors.com Secondary Credit Analysts: Christian Esters, CFA, Frankfurt (49) 69-33-999-242;christian_esters@standardandpoors.com Claire Curtin, London (44) 20-7176-7032;claire_curtin@standardandpoors.com Table Of Contents Overview Rating Action Rationale Outlook Related Research Ratings List www.standardandpoors.com/ratingsdirect 1
Research Update: The Currency Exchange Fund N.V. (TCX) Outlook Revised To Negative From Stable; 'A-/A-2' Ratings Affirmed Overview We are revising the outlook on The Currency Exchange Fund N.V. (TCX) to negative from stable. The negative outlook reflects our concerns that TCX's business volumes are below expectations, which we believe could result in TCX becoming of lower importance to its shareholders in the medium term. We are affirming the 'A-' long-term and 'A-2' short-term issuer credit ratings on TCX, which are unaffected by the ownership transfer of TCX Investment Management Company B.V., TCX's manager. We believe the likelihood of extraordinary financial support from TCX's dominant shareholders, including FMO and KfW, remains "high". TCX's stand-alone credit profile (SACP) remains 'BBB-'. Rating Action On Feb. 23, 2010, Standard & Poor's Ratings Services revised its outlook on The Currency Exchange Fund N.V. (TCX) to negative from stable, and affirmed its 'A-' long-term and 'A-2' short-term issuer credit ratings. The ratings are unaffected by the sale of Nederlandse Financierings-Maatschappij voor Ontwikkelingslanden N.V.'s (FMO; AAA/Stable/A-1+) 100%-stake in TCX Investment Management Company B.V. (TCX IMC) (not rated). FMO is one of TCX's major shareholders. Rationale The outlook revision reflects our concerns about TCX's low business volume with shareholders. It is our view that protracted low transactional volumes could undermine TCX's purpose by jeopardizing its business model and by weakening shareholders' support. TCX's financial position has improved in 2009, with TCX posting a $73 million profit, following a $65 million loss in 2008. Transactions contracted with shareholders--which are at the core of its mandate--remain subdued, however, and far below our expectations. The nominal value of transactions concluded with shareholders amounted to $101 million in 2009, a low amount compared to 2008 and far below TCX's own expectations. We understand that market conditions in 2009 did not favour local currency financing, nor did difficulties faced by financial institutions in frontier markets. However, we believe that such subdued business volumes create a challenge for TCX to prove that its business model works, in order to attract investors and counterparties and achieve the benefits of Standard & Poor s RatingsDirect on the Global Credit Portal February 23, 2010 2
Research Update: The Currency Exchange Fund N.V. (TCX) Outlook Revised To Negative From Stable; 'A-/A-2' Ratings Affirmed diversification. Failure to achieve this could lead to eroding shareholders' support. In our view, new products and a broader client base would boost business volumes and, provided TCX's risk management policies remain in place, reduce concentration risks. The affirmation of the ratings on TCX follows TCX's shareholders' approval on Feb. 12, 2010, for a transfer of FMO's 100%-stake in TCX IMC to Cardano Development B.V. (not rated), a subsidiary of Cardano Holding B.V. (not rated)--which also owns Cardano Risk Management B.V. (not rated), TCX's risk manager. We believe that the sale of TCX's management company does not imply a reduced likelihood of extraordinary support by FMO or by any other shareholder, which under our criteria we view as "high", based on our assessment of the "important" role of TCX for its dominant owners and its "very strong" link (see Related Research below). The dominant owners include FMO, KfW (AAA/Stable/A-1+) (including Deutsche Investitions- und Entwicklungsgesellschaft; DEG), and The European Bank for Reconstruction and Development (EBRD, AAA/Stable/A-1+), each of which holds a 16.71% stake. We understand that FMO's disinvestment is driven by its wish to avoid potential conflicts of interest resulting from its role as client and shareholder of TCX, and owner of TCX's management company. FMO's share in TCX remains unchanged, and FMO will continue to provide a US$150 million back-stop guarantee to TCX. In addition, we expect that FMO will remain the largest client of TCX. As the initiator of TCX, FMO's commitment remains critical, especially in the short term, to avoid early equity redemptions by other shareholders--although redemptions are subject to yearly limits. Redeemable capital and two subordinated convertible loans granted by the Dutch government and KfW stood at $537 million as of end-2009, and the notional size of the swap portfolio was $635 million. In our view, the sale of TCX IMC does not have any impact on TCX's stand-alone credit profile, which we currently assess at 'BBB-' on the basis of TCX's strong capital base and sound liquidity levels. In our view, these factors go some way to offsetting the significant market risk inherent in its activities. The ownership transfer of TCX IMC also does not impact the business or financial profiles under the current governance set-up, whereby TCX's shareholders maintain control of TCX's strategy and operations through TCX's supervisory board. Outlook The negative outlook reflects our concern that TCX's business volumes remain subdued and below expectations, and indicates that downward pressure on the rating exceeds upward pressure over a two-year period. Although we view shareholders' commitment to TCX as high, this support could wane if TCX's business model does not prove its viability. The ratings could stabilize if TCX's business and financial profiles improve significantly on the basis of a larger and more diversified portfolio in terms of products, which we believe would ensure that TCX was continuing to play an important role for its shareholders. www.standardandpoors.com/ratingsdirect 3
Research Update: The Currency Exchange Fund N.V. (TCX) Outlook Revised To Negative From Stable; 'A-/A-2' Ratings Affirmed Related Research Enhanced Methodology And Assumptions For Rating Government-Related Entities, June 29, 2009 Ratings List Ratings Affirmed; CreditWatch/Outlook Action To The Currency Exchange Fund N.V. (TCX) Issuer credit ratings A-/Negative/A-2 From A-/Stable/A-2 Additional Contact: Sovereign Ratings;SovereignLondon@standardandpoors.com Complete ratings information is available to RatingsDirect on the Global Credit Portal subscribers at www.globalcreditportal.com and RatingsDirect subscribers at www.ratingsdirect.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column. Alternatively, call one of the following Standard & Poor's numbers: Client Support Europe (44) 20-7176-7176; London Press Office (44) 20-7176-3605; Paris (33) 1-4420-6708; Frankfurt (49) 69-33-999-225; Stockholm (46) 8-440-5914; or Moscow (7) 495-783-4011. Standard & Poor s RatingsDirect on the Global Credit Portal February 23, 2010 4
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