07 September 2014, Tunis – Moody’s Investors Service has on 29 August 2014 affirmed the long-term issuer rating of the African Development Bank (AfDB) and its senior unsecured debt ratings at Aaa/(P)Aaa. The rating agency has concurrently affirmed the AfDB’s Prime-1 short-term ratings and its Aa1 subordinated debt rating. The outlook on all ratings is stable.
Rationale for affirming the Aaa rating
The Aaa long-term issuer rating of the AfDB is consistent with the bank’s (1) strong capitalisation; (2) very strong liquidity; and (3) very strong shareholder support. These strengths, which are largely derived from the bank’s conservative risk-management policies and practices, offset Moody’s credit-negative considerations, including the fairly low average credit quality of AfDB’s loan portfolio, owing to the bank’s challenging operating environment across Africa.
The AfDB’s capital adequacy is high. Total useable equity — defined as paid-up capital plus total reserves — increased slightly from SDR7.461 billion in 2012 to SDR7.645 billion in 2013, which constitutes a comfortable cushion for its lending activities. AfDB’s asset coverage ratio — defined as useable equity as a percent of total loans and equity operations — stands at 48.4% in 2013, just below the Aaa median of 51.7%.
Likewise, AfDB performs well on Moody’s measures of leverage. AfDB’s debt as a percent of useable equity registered 222% in 2013, just over the Aaa median of 209.7%. The AfDB’s liquidity position, which is very strong, also underpins its Aaa rating. The AfDB operates under a selfimposed liquidity policy to ensure that it can meet all projected cash-flow needs for a rolling one-year period without recourse to external capital markets. The AfDB’s liquid portfolios of cash and treasury investments totaled SDR7 billion as of the end of 2013, comfortably above the prudential minimum required under its policy.
The ratio of short-term debt and currently maturing long-term debt to liquid assets — 37.8% at the end of 2013 — is in line with Aaa median peers at 40.8%. Liquidity is an important rating factor for multilateral development banks (MDBs) because they usually do not have access to the back-stop liquidity facilities provided by central banks.
Moody’s assessment of the AfDB’s very high intrinsic financial strength is complemented by very strong shareholder support. Indeed, in addition to its own financial resources, the AfDB (if needed) could draw support (callable capital, in particular) from its shareholder governments (79 countries as of June 2014). This large group includes many highly rated, non-regional countries, including the G7. Aaa-rated member countries accounted for 22% its capital structure, while Aa-rated members accounted for 13% as of the end of December 2013.
Callable capital from those two groups amounted to USD32.7 billion in 2013, almost 1.6x the size of the operational assets of the bank or its debt. In 2010, AfDB shareholders demonstrated their commitment and support to the bank (as a channel that fosters development in Africa) by agreeing to a record 200% General Capital Increase (GCI). It has tripled the AfDB’s capital base to slightly above $100 billion follwoing capital subscriptions. This has been the sixth GCI (GCI-VI) since 1964.
As of end-June 2014, SDR928 million has been paid-in as part of this increase, with the remaining SDR1.7 billion to be paid-in by 2023. The role of the AfDB as one of the main forces for development in Africa and the significance of its actions across the continent translates into a very strong willingness from shareholders (both regional and non-regional) to support it.
Given the AfDB’s prominence in the region and shareholder diversity, Moody’s considers the propensity and priority of shareholder support to be very strong. The main credit challenge facing AfDB is asset quality. This results from the weak economic and financial operating environment and political instability in some member countries. Of the 53 African countries in which the AfDB can operate and of the 16 governments currently eligible for sovereign loans, only four Botswana (A2 stable), Mauritius (Baa1 stable), Namibia (Baa3 stable) and South Africa (Baa1 negative) have achieved investment-grade status.
The AfDB’s ratio of nonperforming loans (NPLs) — 2.9% at the end of 2013 — is still relatively high for an Aaa-rated MDB, and is mainly related to very long-standing arrears from countries no longer eligible to borrow from the bank, namely Somalia, Sudan, and Zimbabwe. Also, the volatile political situation in North Africa, where the bank’s portfolio is heavily concentrated with around 46% of the disbursed portfolio, is a potential source of new NPLs. As the bank’s strategy adapts to client needs, private sector lending will grow as a share of overall development assets.
Accordingly, we expect non-sovereign NPLs to gradually increase from their current low level. However, the AfDB’s robust capitalisation, ample liquidity buffers, and sound risk management framework help offset existing balance sheet risks and help create substantial headroom in risk-bearing capacity to expand lending.