MARC has assigned long-term and short-term counterparty credit ratings of AAA/MARC-1 to Credit Guarantee and Investment Facility (CGIF) with a stable outlook.

CGIF was established as a trust fund of the Asian Development Bank in November 2010 by the ten member countries of the Association of Southeast Asian Nations (ASEAN) and Japan, the People’s Republic of China (PRC) and Korea (ASEAN+3) and Asian Development Bank (ADB). CGIF’s principal mandate is to develop and strengthen local currency and regional bond markets in the 13 member countries of ASEAN+3 by providing guarantees for corporate bonds issuances of investment grade-rated ASEAN+3 domiciled corporations. CGIF is a key component of the ASEAN+3 Asian Bond Market Initiative (ABMI) which aims to foster the development of local currency bond markets as an alternative source of funding to short-term foreign currency loans, and consequently, improve regional financial stability.

CGIF’s ratings reflect an evaluation of factors relevant to its financial strength as a newly established multilateral credit guarantee facility, in particular its mandate and strategy, its capitalisation, liquidity, risk management framework, governance structure, and potential support from member countries. The counterparty credit ratings on CGIF reflect MARC’s assessment of the Facility’s financial strength on a national rating scale.

The assigned ratings primarily reflect CGIF’s high level of paid-in capital (which represents 100% of subscribed capital), conservative leverage policy and the expected credit quality of its guarantee portfolio. CGIF’s 10 member countries and ADB had contributed 100% of its subscribed initial authorised capital of US$700.0 million by end-April 2012, somewhat mitigating CGIF’s lack of callable capital. Over 90% of CGIF’s capital is owned by highly creditworthy member countries and ADB. These countries (PRC, Japan, Republic of Korea, Malaysia and Singapore) are rated single-A and above on an international scale. MARC expects CGIF to mitigate much of the credit risk stemming from its guarantee operations by implementing clear and robust credit processes, adhering to established risk management policies and practices and keeping a tight focus on underwriting and pricing discipline. Further providing assurance that CGIF’s capital resources and claims-paying resources will remain adequate relative to its risk exposure is its conservative leverage limit of 1:1 which means guarantee commitments cannot exceed the total paid in capital of CGIF plus retained earnings, less all illiquid investments. MARC expects the Facility to have very strong capital adequacy in the initial phase of operation and to maintain conservative underwriting leverage thereafter, based on the prudent growth and operating strategies embedded in its ten-year business plan and financial projections. Going forward, management is committed to maintaining its financial strength.

The key business challenge faced by CGIF in fulfilling its development mandate is to seek out sufficiently-priced low risk business in its mandated region, which is also key to demonstrating business viability. That said, CGIF’s base case forecast assumes that it will complete transactions averaging US$130 million in aggregate per year over the ten-year period from 2012 through 2021, keeping within constraints posed by its capital base and leverage limit. The annual origination targets in CGIF’s business plan should be achievable in the context of the current growth in Asian bond markets and ongoing measures by authorities to promote the issuance of local currency bonds and the regional integration of bond market infrastructure. MARC will continue to monitor the implementation of CGIF’s business plans in its assessment of the fund’s financial strength, going forward.

CGIF’s management focus for the most part of 2012 has been on building the staff and infrastructure to support its business plan and underwriting operations. CGIF has also put in place an internal credit rating framework to support its underwriting and portfolio monitoring activities. CGIF’s origination efforts will extend to all ASEAN+3 countries, however, its designated focus bond markets in the initial phase are Indonesia, Malaysia, Philippines, Singapore and Thailand. CGIF is currently building a pipeline of prospective guarantee transactions with a focus on long tenure issues, cross-border issuances and mid-investment grade issuers, niches identified as viable by the fund’s market sounding exercise.

As set out in its operational policies and reflected in its business plan, CGIF is expected to take a conservative approach to growing its guarantee portfolio to ensure its overall credit risk exposures remain prudent and manageable. MARC believes the graduated approach is important to limit single risk loss potential until core earnings are sufficient to support a higher loss tolerance. Relative to the risk bearing and earnings capacity of the fund, some degree of concentration by individual issuers/group of issuers and industry in the focus countries may be unavoidable in the initial stages of CGIF’s portfolio development.

As at end-December 2012, CGIF’s investment portfolio totalled US$708 million, comprising time deposits of US$88 million and very highly rated fixed-income securities of US$620 million. ADB‘s Treasury Department manages CGIF’s capital contributions in accordance with Board-approved investment guidelines with a primary objective of achieving capital protection. CGIF’s investment strategy should ensure the availability of sufficient liquidity resources relative to potential payments arising from a default or defaults by issuers.

The stable rating outlook reflects CGIF’s low risk business plan and prudent underwriting strategy, and expectations that its capital resources, leverage, future earnings and cash flow will remain within tolerances for the rating.

Contacts:
Milly Leong, +603-2082 2288/ milly@marc.com.my;
Sharidan Salleh, +603-2082 2254/ sharidan@marc.com.my