Reuters
Overview
— Following a review of the European Bank for Reconstruction and Development (EBRD) under our revised criteria for multilateral lending institutions (MLIs), we have affirmed our long- and short-term issuer credit ratings on the EBRD at ‘AAA/A-1+’.
— The stand-alone credit profile for the EBRD is ‘aaa’, reflecting our assessment of its “very strong” business profile and “extremely strong” financial profile, as our criteria define these terms.
— The stable outlook reflects our view that the EBRD’s capital position and liquidity are strong enough to withstand a period of severe financial distress in its countries of operations.
Rating Action
On Dec. 7, 2012, Standard & Poor’s Ratings Services affirmed its long- and short-term issuer credit ratings on the European Bank for Reconstruction and Development (EBRD) at ‘AAA/A-1+’. The outlook is stable.
Rationale
The ratings on the EBRD are based on its “very strong” business profile and “extremely strong” financial profile, as our criteria define these terms. Its stand-alone credit profile (SACP) is ‘aaa’. We outline these factors in our revised criteria, “Multilateral Lending Institutions And Other Supranational Institutions Ratings Methodology,” published Nov. 26, 2012, on RatingsDirect on the Global Credit Portal.
The EBRD began in 1991 with a mandate to help the countries of Central and Eastern Europe and the Commonwealth of Independent States (CIS) transition to market economies, principally by public- and private-sector lending, making equity investments, and providing guarantees.
The political uprisings in the Middle East and North Africa in 2011 (see “Political Risk And Monetary Inflexibility Continue To Weigh On MENA Sovereign Ratings,” published May 3, 2012), reinforced the policy importance of the EBRD. We expect the bank will extend its geographical mandate into the South and Eastern Mediterranean (SEMED) region to assist in the development of the private sector in some target countries. Currently, Egypt (B/Negative/B), Jordan (BB/Negative/B), Morocco (foreign currency BBB-/Stable/A-3), and Tunisia (BB/Stable/B) are under consideration. EBRD shareholders (now including the aforesaid countries) will need to unanimously approve the extension of the EBRD’s mandate.
The EBRD has gradually increased its number of shareholders and its geographic scope of operations during the last 20 years. From 40 shareholders at origin, it now has 63 (predominantly European) countries. The shareholder group also includes two supranational institutions: the European Union (EU; AAA/Negative/A-1+) and the European Investment Bank (EIB; AAA/Negative/A-1+). On Nov. 16, the EBRD board of governors approved a resolution allowing Kosovo to become the 66th member of the EBRD. We expect this to complete by the end of the year.
The Russian Federation is the EBRD’s country of largest exposure, with 27% of total development-related exposure at year-end 2011, equal to 49% of the EBRD’s adjusted common equity, covering 301 active projects. That said, the bank benefited from preferred creditor treatment (PCT) and preferential treatment on its loans when Russia defaulted in 1998. The EBRD did not experience any default or restructuring from its public- and private-sector borrowers, owing to an exemption included in the Russian three-month moratorium of Aug. 17, 1998. While there is no guarantee that EBRD will always be afforded PCT, we believe that the 1998 experience is relevant for any future debt restructurings.
Our assessment of EBRD’s “extremely strong” financial profile factors in its high capitalization, leading to a Standard & Poor’s risk-adjusted capital (RAC) ratio (our primary measure for assessing capital adequacy) of 16% before adjustments, despite having riskier assets than most other MLIs. Most of EBRD’s loans and all its equity investments are in the private sector; most other MLIs have a majority of loans to sovereign or sovereign-guaranteed entities. However, EBRD loan write-offs have been decreasing: EUR49 million over the five years to 2011, compared with EUR64 million and EUR89 million over the five years to 2010 and 2009, respectively.
The EBRD’s RAC ratio increases to 25% when we take into account adjustments specific to MLIs under our new criteria. These are primarily our expectation for PCT for sovereign borrowers, a cap on the risk weight of high-risk exposures, and the geographic diversification of the EBRD exposures. The cap to the risk weights is particularly relevant to EBRD, due to the large equity portfolio in high-risk countries, which are otherwise allocated capital in excess of nominal exposure in the unadjusted RAC ratio. These adjustments are partially offset by single-name concentration resulting from direct sovereign exposures.
We expect the EBRD to be able to finance a large part of its growth through internal capital generation since it does not pay dividends. In 2011, it reported a net profit of EUR173 million before transfers of net income approved by the board of governors. While still strong, given the difficult market conditions throughout the year, it is a significant reduction from EUR1.4 billion in 2010. The unaudited first three quarters of 2012 show a net rebound from 2011, with net income up to EUR0.9 billion, compared to an almost nil profit for the first three quarters of 2011.
Our funding and liquidity ratios for EBRD indicate that the bank would be able to fulfill its mandate for at least one year, even under extremely stressed market conditions, without access to the capital markets. Moreover, we estimate that it would not need to reduce the scheduled disbursements of its loan commitments, even if half of the total commitments were to be drawn in one year. The EBRD’s funding benefits from the bank’s strong access to capital markets, including through its global benchmark bond issuance, its EUR35 billion global medium-term note program, and its EUR4 billion commercial paper program. The bank’s treasury policy also calls for liquidity to cover 75% of all committed but undisbursed project financing plus one year’s debt service and at least 45% of the net cash requirement over a three-year horizon. EBRD exceeded the minimum requirement on its two key liquidity policies at end-2011. The EBRD has set a medium-term operating target of 90% liquidity over a three-year period.
The EBRD’s ‘aaa’ SACP is buttressed by EUR9 billion (70% of adjusted common equity) in subscribed callable capital from members rated ‘AAA’, though five shareholders out of the 14 ‘AAA’ rated EBRD shareholders are on negative outlook, reflecting our view of the risk of further economic deterioration in the EU.
Outlook
The outlook is stable. In our view, even with increased exposure to the private sector and the EBRD’s focus on financing in its countries of operations at an early and intermediary stage of transition, its capital position and liquidity are strong enough to withstand severe financial distress in its countries of operations. EBRD has so far received preferential treatment from its countries of operations.
We could consider lowering the ratings if the bank’s asset quality were to deteriorate markedly, beyond our current expectations, or if it were no longer afforded PCT. Growth of exposures beyond the pace of internal capital generation, and in the absence of a paid-in capital increase, could also exert pressure on the rating.
Related Criteria And Research
— Ratings On European Investment Bank Affirmed At ‘AAA/A-1+’ Following Criteria Revision; Outlook Negative, Dec. 5, 2012
— European Union, Dec. 4, 2012
— Multilateral Lending Institutions And Other Supranational Institutions Ratings Methodology, Nov. 26, 2012
— European Bank for Reconstruction and Development, Oct. 3, 2012
— Supranationals Special Edition 2011, Sept. 23, 2011
— Principles Of Credit Ratings, Feb. 16, 2011
Ratings List
Ratings Affirmed
European Bank for Reconstruction and Development
Issuer Credit Rating
Foreign Currency AAA/Stable/A-1+
Senior Unsecured cnAAA
Senior Unsecured AAA
Commercial Paper A-1+
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