Moody's Investors Service ("Moody's") has affirmed the International Finance Corporation's (IFC) Aaa long-term issuer, (P)Aaa senior unsecured MTN, and Aaa senior unsecured debt ratings. Concurrently, its short-term ratings of (P)P-1/P-1 have been affirmed. The outlook remains stable.
Today's affirmation is based on IFC's very high intrinsic financial strength, underpinned by very high capital adequacy and liquidity, and the high creditworthiness of major shareholders and strength of their commitment to support the institution.
In particular, IFC's financial strength is supported by very strong capitalization, relatively lower leverage than Aaa-rated multilateral development bank (MDB) peers, very low asset concentration, ample liquidity and strong market access to a deep and diverse funding base.
Because IFC lends only to the private sector in emerging and frontier markets, it has higher non-performing loans (NPLs) than peers. However, IFC's very strong capitalization and prudent risk management framework allow it to withstand relatively higher levels of NPLs without impairing the institution's overall creditworthiness.
The stable outlook reflects Moody's view that IFC will maintain its very high capital adequacy, liquidity, combined with strong risk management practices and shareholders' capacity and willingness to provide financial support, thus keeping its credit profile in line with its Aaa rating.
RATINGS RATIONALE
RATIONALE FOR THE AFFIRMATION
FIRST FACTOR -- VERY STRONG ASSET COVERAGE, LOW LEVERAGE AND DIVERSIFIED PORTFOLIO BOLSTER CAPACITY TO ABSORB NPLS
IFC's very high capital adequacy is underpinned by a strong asset coverage ratio (ACR), relatively low leverage and a globally diversified portfolio that reduces the risk of significant losses eroding the bank's capital. A strong capital position and low leverage allow IFC to absorb the generally somewhat higher NPLs compared to other Aaa-rated MDBs that result from the institution's focus on private sector lending.
Moody's ACR assesses usable equity against total loans outstanding and risk-weighted liquid assets, where usable equity excludes callable capital. For IFC, this ratio has remained consistently very high. As of the financial year ending on June 30, 2017 (FY2017), IFC's ACR was 66.7%, a level that compares favorably to the Aaa-rated MDB median of 32.3%.
IFC's robust capital adequacy is further supported by its moderate leverage. Strong financial results in FY2017 brought the gross debt-to-usable equity ratio down to 238%, a reduction of over 20 percentage points from FY2016, compared to the Aaa-rated MDB median of 282%. Absent major changes to risk appetite or IFC's capital adequacy framework, Moody's expects these ratios to remain largely unchanged over the medium term.
One of IFC's major credit strengths stems from its highly diversified portfolio, which has translated into lower concentration risk than for both smaller private-sector-focused MDBs and larger public sector-focused MDBs. IFC's top 10 exposures account for only 7% of its total portfolio, which is almost half of the next lowest concentration level (12%) amongst Aaa-rated MDBs.
However, given IFC's focus on the private sector, it generally has weaker asset performance than other MDBs that lend primarily to sovereigns. In FY2017, the ratio was 4.4%, significantly higher than the Aaa-rated MDB median of 0.7%.
SECOND FACTOR -- VERY STRONG LIQUIDITY AND MARKET ACCESS
IFC's balance sheet is highly liquid. As of end FY2017, cash and liquid assets were equivalent to 82% of the next three years' cash needs.
IFC's liquidity position remains very strong. Its debt service coverage ratio, which measures the stock of short-term and currently maturing long-term debt against the stock of liquid assets, was approximately 30% in FY2017 relative to the Aaa-rated MDB median of about 36%. This reflects a favorable maturity profile and ample liquidity, consistent with the bank's official liquidity policy which requires a minimum of 12 months coverage of projected debt service and net loan disbursement needs by cash and liquid assets. Its internal liquidity ratio policy requires the IFC to maintain a minimum level of liquidity that would cover at least 45% of the next three years' net cash requirements.
Meanwhile, IFC prudently manages sector and geographic concentration of its investments.
IFC also benefits from very strong access to funding markets to support its financing requirements, reflected by the frequency of debt issuance, range of funding instruments, including local currency bond issues, and its stable, diversified investor base. During the course of 2017, the IFC borrowed in 26 currencies, a historic high for the organization. The US dollar continues to dominate the debt portfolio, accounting for nearly 60% of borrowings, followed by Australian dollar and Brazilian real.
THIRD FACTOR -- STRONG WIILLINGNESS AND CAPACITY BY MEMBERS TO PROVIDE SUPPORT
Unlike the majority of MDBs, the IFC does not benefit from callable capital provisions or any other form of contractual support from its shareholders.
However, Moody's believes that in the very unlikely scenario that IFC would be unable to service its own debt, its shareholders' willingness and capacity to provide financial support would be very high.
RATIONALE FOR STABLE OUTLOOK
The stable outlook reflects Moody's view that IFC will maintain its very high capital adequacy, liquidity, and willingness and capacity by shareholders to provide support thus keeping its credit profile in line with its Aaa rating.
WHAT COULD MOVE THE RATING DOWN
Downward pressure on IFC's rating could occur in the event of substantial deterioration in asset quality, resulting from credit stress among its largest borrowers and investments in emerging markets. Notwithstanding IFC's very strong intrinsic financial strength and prudent risk management, evidence that willingness or capacity by shareholders to provide financial support weakened would also be credit negative.
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