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 position which are underpinned by sound policy guidelines and governance structure established by the Asian Development Bank (ADB) and ASEAN+3 governments, which set up CGIF as a trust fund of ADB. The ASEAN+3 governments comprise the 10 ASEAN nations plus China, Japan and Korea. The stable ratings outlook reflects MARC’s expectation that CGIF will continue to receive support from its shareholders in respect of capital resources and will abide by its conservative leverage and investment policies.

CGIF’s guarantee portfolio grew by four issuances to 13 issuers, bringing the net guaranteed amount to US$774.0 million as at end-October 2018 and representing a 10.8% growth year to date. The increased pace of growth is mainly due to the timing of the completion of deals that were already in the pipeline rather than a major shift in growth strategy. MARC continues to view CGIF as conservative in its approach towards building its guarantee portfolio, balancing its mandate to grow the regional bond market with maintaining a healthy leverage position. CGIF’s net leverage ratio stood at 0.87:1, well below its internal limit of 2.50:1 as at end-1H2018, providing ample headroom for growth.

Following shareholders’ approval in 2017 to raise CGIF’s capital to US$1.2 billion by 2023, shareholders have paid in new capital of US$159.1 million, bringing the total paid-in capital to US$859.1 million as at end-1H2018. The ongoing capital increase has also boosted CGIF’s maximum guarantee capacity (MGC) to US$2.26 billion as at end-June 2018, and eventually to US$3 billion in 2023 when the capital raising is completed.

MARC notes that CGIF’s moderate guarantee portfolio size limits diversification of risks related to issuance size, country and currency. Its top five largest issuances, net of reinsurance, collectively accounted for around 49% of total equity of US$893.0 million (end-2017: 61%) while Vietnamese dong-denominated issuances comprised about 40% of the total net guaranteed amount (14% of MGC) as at end-October 2018. Nonetheless, these exposures remain well within the country and currency exposure limit of 20% and 40% of MGC that CGIF had established. Mitigating portfolio concentration risk is the sufficiency of its capital to cover calls on guarantees. The group also cedes 25% of its existing guarantee exposures to reinsurers.

As CGIF funds its operations from retained earnings and paid-in capital, it maintains a sizeable holding of liquid assets to address operational obligations. Liquid assets accounted for 96.0% of total assets, underpinned by substantial investments in low-risk debt obligations issued by government and government-related entities, which comprised 78.1% of total investments as at end-June 2018. Additionally, CGIF’s exposure to a large liquidity call arising from the default of any guaranteed obligation is somewhat mitigated by its ability to maintain the payment schedule of the obligations.

In 1H2018, CGIF’s net profit grew 50.8% y-o-y to US$7.9 million, primarily due to a sharp increase in investment income, which benefitted from a larger investment base as well as increased allocation in higher yield fixed-income securities. Investment income grew 55.2% y-o-y to US$8.7 million in 1H2018 while yields on its investments were higher at an annualised 1.96% (1H2017: 1.52%). This was aided by investments in securities rated A+ on an international rating scale, which accounted for 9.1% of total investments as at end-June 2018. Investments in the lower rating band were in government-related bonds of its contributor countries that have a minimum international rating of A+. Aside from these, CGIF’s bond investments would continue to need to have a minimum rating of AA. As a trust fund of ADB, CGIF’s capital is managed in line with the bank’s conservative investment policies.

Contacts:
Douglas De Alwis, +603-2717 2965/ douglas@marc.com.my;
Sharidan Salleh, +603-2717 2954/ sharidan@marc.com.my.