TRIS Rating has affirmed the company rating of Credit Guarantee and Investment Facility (CGIF) at “AAA” with “stable” outlook. The rating reflects CGIF’s status as a supranational institution owned by the governments of the ASEAN+3 countries and the Asian Development Bank (ADB), together called “contributors”. The rating also reflects CGIF’s strong business platform and conservative risk management framework. The rating takes into consideration CGIF’s short operational track record and the challenges it faces as it expands.
The “stable” outlook reflects the expectation that CGIF will continue to expand in line with its mission and risk management framework. The rating could face downward pressure if losses in the guarantee portfolio cause CGIF's financial profile to deteriorate significantly, or if there is evidence of weakening support from the contributors.
CGIF was founded in 2010 as an initiative of 10 ASEAN countries, together with China, Japan, Korea, and the ADB. CGIF’s main objective is to provide credit guarantees. The guarantees allow eligible issuers to access local currency bond markets in the region. Issuers can thus avoid currency and maturity mismatches by issuing bonds within the region. ADB is the trustee of CGIF. It holds in trust all of CGIF’s capital and is responsible for managing the capital. CGIF finances its operations solely from capital contributions. It is not allowed to borrow from any source, except for cash management purposes.
CGIF’s strong business profile reflects its business platform, which is adequately structured to support its policy objectives and functions. CGIF’s competitive edge is in providing credit guarantees for cross-border transactions, for issuers tapping bond markets in countries with high credit spreads.
CGIF’s guarantee portfolio is expected to comprise bonds issued by issuers with credit risks comparable to the international-scale rating of “BB-” or better. For its investment portfolio, a bond issue must have an international-scale rating of at least “AA-” to be a part of CGIF’s investment beyond one year.
TRIS Rating holds the view that CGIF provides mutual benefits for the ASEAN+3 nations that are its contributors. CGIF’s objectives and functions play a strategically important role in promoting transactions and enhancing the stability of the regional bond markets. Given the financial strength of CGIF’s major contributors and the importance of its policy mandate, TRIS Rating believes there is a high likelihood that CGIF will receive financial support from its major contributors in times of distress.
As of June 2016, CGIF limited its maximum guarantee capacity (MGC) at about US$1.8 billion. The MGC is computed as the product of (1) CGIF’s paid-in capital plus retained earnings, less credit loss reserves, foreign exchange loss reserves, and all illiquid investments, and (2) the maximum leverage ratio of 2.5. As of July 2016, CGIF provided credit guarantees to 10 issuers, on 14 bond issues worth in total US$864 million, or about 48% of the MGC.
Considering CGIF’s Basel II capital adequacy ratio of 19.3% as at the end of June 2016, the level of its capital remains sound. Approval of guaranteed bonds follows the prudential limits and the guidelines on credit quality of issuers for which it provides guarantees. CGIF’s prudential limits specify, among other things, maximum limits for country concentration, currency concentration, aggregate sector concentration, and single borrower concentration. The current level of capital is considered very strong as the size of CGIF’s guarantee portfolio is still much lower than the MGC. As CGIF expands and the size of its guarantee portfolio approaches the MGC, the ability of its capital base to sustain losses under adverse conditions will depend on the credit profile of issuers for which it provides guarantees, the tenure of the bonds, and CGIF’s ability to charge guarantee fees commensurate with the credit risks it takes.
At the end of 2015, the average effective duration of CGIF’s investment portfolio was 1.8 years. CGIF estimated that a uniform one percentage point (100 bps) upward shift in the yield curve at the portfolio level would result in an unrealized loss of about US$12.8 million, or about 1.8% of its capital as at the end of 2015. According to the strategic asset allocation scheme, CGIF aims to gradually increase the average effective duration of its investment portfolio to two to four years. This move is expected to raise the overall return on CGIF’s investment portfolio though CGIF may incur a higher level of interest rate risk. The return on CGIF’s investment portfolio in 2015 was 1.3% per annum (p.a.).
CGIF’s liquidity profile is very strong. Investment assets mostly comprise marketable fixed-income securities with very high credit ratings. The cash inflows from the investments and guarantee fees are expected to cover the cash outflows for operating expenses over the next 12 months. In addition, CGIF is allowed to engage in repo transactions in order to manage its liquidity needs.
In TRIS Rating’s view, CGIF will face significant challenges in the near term. The integration of the regional bond market is in the early stage making cross-border bond issuances a challenge while the bond markets are dynamic and quite competitive. The well-developed bond markets in the region have relatively tight credit spreads, which can render the prices of CGIF’s guarantees from CGIF unattractive for the issuers, and CGIF might need to extend its guarantees to relatively weaker credit issuers. In addition, the timing of a capital injection from CGIF’s contributors remains unclear in order to allow more room for its business expansion. At the moment, the limit on country exposure has already, to some extent, constrained the growth of CGIF’s guarantee portfolio and limited new opportunities. Despite some delay on issuances of guaranteed bonds in 2015, MGC is expected to be reached within two years according to CGIF’s business plan.
TRIS Rating Co., Ltd./www.trisrating.com Contact: santaya@trisrating.com, Tel: 0-2231-3011 ext 500/Silom Complex Building, 24th Floor, 191 Silom Road, Bangkok 10500, Thailand ? Copyright 2016, TRIS Rating Co., Ltd. All rights reserved. Any unauthorized use, disclosure, copying, republication, further transmission, dissemination, redistribution, or storing for subsequent use for any purpose, in whole or in part, in any form or manner or by any means whatsoever, by any person, of the credit rating reports or information is prohibited, without the prior written permission of TRIS Rating Co., Ltd. The credit rating is not a statement of fact or a recommendation to buy, sell or hold any debt instruments. It is an expression of opinion regarding credit risks for that instrument or particular company. The opinion expressed in the credit rating does not represent investment or other advice and should therefore not be construed as such. Any rating and information contained in any report written or published by TRIS Rating has been prepared without taking into account any recipient’s particular financial needs, circumstances, knowledge and objectives. Therefore, a recipient should assess the appropriateness of such information before making an investment decision based on this information. Information used for the rating has been obtained by TRIS Rating from the company and other sources believed to be reliable. Therefore, TRIS Rating does not guarantee the accuracy, adequacy, or completeness of any such information and will accept no liability for any loss or damage arising from any inaccuracy, inadequacy or incompleteness. Also, TRIS Rating is not responsible for any errors or omissions, the result obtained from, or any actions taken in reliance upon such information. All methodologies used can be found at http://www.trisrating.com/en/rating_information/rating_criteria.html.