MARC has affirmed its long-term and short-term counterparty credit ratings of AAA/MARC-1 on Credit Guarantee and Investment Facility (CGIF) with a stable outlook. The ratings are based on Malaysia’s national rating scale.

The affirmed ratings reflect CGIF’s strong capital and liquidity positions which are underpinned by sound policy guidelines and a strong governance structure. Manila-based CGIF is a trust fund of Asian Development Bank (ADB) that was set up by 10 member countries of ASEAN along with China, Japan and South Korea (ASEAN+3) as well as ADB in November 2010 to provide guarantees on local currency-denominated bonds issued by corporations from these countries. CGIF is a key component of the Asian Bond Market Initiative (ABMI) to develop regional bond markets.

CGIF’s guarantee portfolio comprises 11 issuers with a total outstanding guaranteed amount of US$923.8 million as at end-November 2017. Of this amount, about 25% of its exposure is ceded to reinsurers. With a deal amounting to US$85 million pending issuance, CGIF is currently assessing several other deals worth US$1.1 billion. The slow pace of growth of its guarantee portfolio is partly attributed to CGIF’s stringent underwriting standards and partly to the immaturity of local corporate bond markets. CGIF’s shareholders have agreed to increase the trust fund’s paid-in capital to US$1.2 billion by end-2023 from the current US$700 million. The capital increase will further boost CGIF’s maximum guarantee capacity (MGC) from US$1.83 billion as at end-June 2017.

CGIF’s guarantee portfolio exhibits limited diversification given its small size. As at end-November 2017, the top five largest issuances, net of reinsurance, collectively accounted for 61% of total equity of US$735.7 million. In terms of currency exposure, Singapore dollar-denominated issuances dominated at 46% of the total net guaranteed amount of US$692.9 million (18% of MGC), followed by Vietnamese dong-denominated issuances at 30% (11% of MGC). However, CGIF’s exposures remain within its established country limit and currency exposure of 20% and 40% respectively of its MGC.

CGIF’s net leverage ratio of 0.98:1 indicates sufficient capital to cover its guarantees and is well below its internal limit of 2.50:1. Its net leverage ratio could increase to 1.07:1 if the pending deal is approved. CGIF’s capital base is also protected by reinsurance cover from a consortium led by Munich Re. Its “no debt” financial policy, meanwhile, prevents the institution from leveraging its capital base through external debt. In MARC’s view, the implementation of IFRS 9 in 2018 is not expected to have a significant impact on CGIF’s capital given that its financial assets mainly comprise highly rated bonds.

For the six months ended June 30, 2017 (1H2017), CGIF reported a higher net profit of US$5.3 million which was 16.6% higher than the corresponding period of the previous year. Investment income grew by 15.5% y-o-y to US$5.6 million. Yield on its investments was higher at 1.52% on an annualised basis largely due to increased holdings of longer-term bonds.

CGIF maintains a highly liquid balance sheet that allows it to maintain significant flexibility to address its operational obligations in an environment of constrained market liquidity without dependence on its shareholders. Liquid assets accounted for 94.9% of total assets as at end-June 2017, underpinned by substantial investments in low-risk debt obligations issued by government and government-related entities, which comprised 82.0% of total investments as at end-June 2017. Additionally, CGIF’s exposure to a large liquidity call arising from the default of any guaranteed obligation is somewhat mitigated by CGIF’s ability to maintain the payment schedule of the obligations.

The stable ratings outlook reflects MARC’s expectations that CGIF will continue to maintain its capital resources, leverage and future earnings and cash flow at levels commensurate with the current rating band.

Contacts:
Afeeq Amiri, +603-2717 2956/ afeeqamiri@marc.com.my;
Sharidan Salleh, +603-2717 2954/ sharidan@marc.com.my.