MARC has affirmed the long-term and short-term counterparty credit ratings of AAA/MARC-1 on Credit Guarantee and Investment Facility (CGIF or Facility) with a stable outlook. The affirmed ratings reflect CGIF’s strong capital position and claims paying resources relative to its risk exposure, its sound leverage policy and traction gained in the ASEAN local currency and regional bond markets since commencing its guarantee operations in May 2012. In addition, MARC continues to view CGIF’s governance structure as a credit strength. The counterparty credit ratings on CGIF reflect MARC’s assessment of the Facility’s financial strength on a national rating scale.

CGIF was established as a trust fund of the Asian Development Bank (ADB) in November 2010 by 13 countries comprising ten member countries of the Association of Southeast Asian Nations (ASEAN) and the People’s Republic of China (PRC), Japan and Korea (ASEAN+3) as well as ADB. CGIF has a broad business mandate to develop and strengthen local currencies and regional bond markets in the 13 member countries of ASEAN+3 by providing guarantees for corporate bond issuances of creditworthy ASEAN+3 domiciled corporations.

CGIF will complete its second full year of guarantee operations in May 2014. As of end-2013, the Facility has closed two guarantee transactions with a total guarantee value of US$125 million and approved six guarantee transactions. Based on the risk profile of the two announced transactions and the Facility’s conservative targets for portfolio growth, MARC opines that CGIF’s management will remain selective in the type of risk it will guarantee. MARC draws comfort from the emphasis on quality over volume, which will ensure that the risk of CGIF having to pay significant claims on the guaranteed portfolio remains fairly low. Consistent with the Facillity’s objective, CGIF’s first two guarantees entailed the provision of credit enhancement in local currencies within ASEAN+3 member countries. While CGIF’s overall deal flow appears to exhibit moderate geographic diversity among target countries, the issuance of guarantees is subject to restrictions arising from single risk and country limits as well as eligibility criteria. Overall, these restrictions are viewed as consistent with the Facility’s goal of constructing a low-risk guarantee portfolio. The overall deal flow to date indicates strong interest from companies looking to tap the Singapore dollar and Thai baht markets, driven by more attractive funding cost.

A primary constraint faced earlier by CGIF in growing its book of business was its rather restrictive country limits. As the minimum amount of credit enhancement for a transaction typically falls within the range of US$80 million to US$100 million, this will limit CGIF to a maximum of two transactions per country at any one time. In November 2013, CGIF’s authorised leverage ratio was increased to 2.5:1 from 1:1, which effectively increased its guarantee capacity to US$1.75 billion from US$700 million. At the same time, MARC notes that CGIF has developed its own internal economic capital model to ensure that its capitalisation remain sufficiently strong to support potential claims. CGIF’s plans to start leveraging its capital to scale-up its guarantee capacity also entailed an increase in its country limit to US$350 million from US$140 million. Additionally, the rating agency expects CGIF’s prudent growth and operating strategies, as laid out in its ten-year business and financial projections, will also be key factors with regard to the maintenance of a sound capital position, going forward.

CGIF’s investment management prioritises investment liquidity and capital preservation. The Facility’s investment portfolio mainly constituted debt obligations which are guaranteed by governments or issued by government-related entities with a minimum rating of AA- on the international rating scale. Investments are mostly in short term debts with duration of less than two years. Investment returns are limited in view of CGIF’s conservative investment policy. In 2012, the annualised investment rate of return after incorporating the effect of changes in fair value was 1.15% (2011: 1.06%). The annualised return was lower at 1.11% in the first half of financial year ended December 2013 (1H2013), reflecting the current low interest rate environment.

CGIF registered its first guarantee income in 1H2013 amounting to US$108,000 arising from its first guarantee transaction. While income from guarantee operations is expected to increase gradually as CGIF builds up its guarantee portfolio, revenue is expected to continue to be driven by investment income (investment income stood at US$3.9 million in 1H2013). Net income decreased to US$1.5 million in 1H2013 (1H2012: US$2.3 million) due to higher operating costs arising from CGIF’s continued expansion of its staff strength. The Facility’s operating costs are expected to be sufficiently covered by its present level of investment income.

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:
Sharidan Salleh, +603-2082 2254/ sharidan@marc.com.my;
Oo Chin Kai, +603-2082 2260/ chinkai@marc.com.my