CREDIT GUARANTEE AND INVESTMENT FACILITY - 2017 |
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| Report ID | 5406 | Popularity | 1219 views 2 downloads | |||||
| Report Date | Jan 2017 | Product | ||||||
| Company / Issuer | Credit Guarantee & Investment Facility | Sector | Finance | |||||
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| Rationale |
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 ratings affirmation is driven by CGIF’s strong leverage and liquidity position, supported by sound policy guidelines and a strong governance structure put in place by its shareholders who are members of ASEAN along with China, Japan, South Korea (ASEAN+3) and the Asian Development Bank (ADB). CGIF was established in 2010 as a key component of the Asian Bond Market Initiative (ABMI) with a mandate to develop regional bond markets by providing guarantees on local currency-denominated bonds issued by corporations domiciled in the region. As at end-November 2016, CGIF guaranteed 11 issuers from seven countries in the region with the total guarantee amount standing at US$896.0 million (end-2015: US$583.8 million). Of these, five issuers were secured during the 11-month period in 2016 as opposed to only one issuer in 2015, indicating a stronger pace of growth for CGIF’s guarantee portfolio but well within its prudential guidelines. MARC notes that CGIF continues to maintain a conservative approach in managing its capital; CGIF’s net leverage ratio as measured by guarantee amount (after taking into account reinsurance cover) to total equity after deducting loss reserves and illiquid investments stood at 1.06:1 as at end-November 2016 (2015: 0.81:1), remaining below its conservative limit of 2.50:1. CGIF has also entered into a reinsurance treaty with a consortium led by Munich Re to cede 25% of its existing exposures and new guarantees written from October 2016 to December 2017. Additionally, CGIF will seek to double its paid-in capital of US$700.0 million, subject to approval by its contributors at the annual meeting to be held in May 2017. MARC views these measures will potentially strengthen CGIF’s position as a multilateral regional bond guarantor. MARC also notes that while CGIF’s guarantee portfolio continues to exhibit geography and client concentration risks, these exposures are well within its policy parameters. Its top five largest guaranteed issuances collectively accounted for about 68.4% of total equity as at end-November 2016. Its exposure in Indonesia and Vietnam accounted for 28.3% (or US$216.6 million) and 25.0% (or US$191.7 million) of the total net guarantee amount as at end-November 2016. In terms of currency, Singapore dollar-denominated issuances made up a sizeable 49.9% (or US$382.6 million). CGIF has to manage its currency risk given that its guarantee exposures are in local currencies and its functional currency are in US dollars. For guarantee fee receivables in local currency, CGIF manages currency risk with foreign exchange forwards. For cross-border issuers, CGIF requires them to hedge their currency exposures in respect of the guaranteed debt throughout the programme tenures. CGIF also monitors the overall value of its guarantee portfolio on a regular basis to adjust its US foreign exchange reserves. For 1H2016, CGIF’s guarantee income rose by 64.1% year-on-year (y-o-y) to US$3.7 million, attributed to the increase in new deals compared to the previous corresponding period. Investment income, which remains CGIF’s main revenue contributor, increased by 11.1% y-o-y to US$4.9 million on an improved average investment yield of 1.34% on an annualised basis (1H2015: 1.28%). Nonetheless, higher operating expenses moderated CGIF’s net profit growth to 7.8% y-o-y at US$4.5 million in 1H2016. CGIF’s healthy liquidity profile is reflected by its liquid assets which accounted for 94.8% of total assets as at end-June 2016 (2015: 96.0%). This is underpinned by a conservative investment approach with substantial allocation of funds in government and government-related entity debt obligations rated at AA- and above on the international rating scale. MARC notes that CGIF has continued to increase its investments in longer-term bonds to better align with the average maturity of its guarantee portfolio. While it plans to gradually increase its portfolio duration to 3.0 years from 2.1 years as at end-June 2016 (2015: 1.8 years), the duration will remain within its limit of 5.0 years. MARC notes that in the event of claims, liquidity risk is minimised by CGIF’s ability to accelerate the principal claim payments prior to the maturity of the debt issuance upon default or to maintain the payment schedule of the guaranteed obligations. The stable rating outlook reflects CGIF’s low-risk business plan and prudent underwriting strategy. MARC believes that CGIF will continue to maintain its capital resources, leverage and future earnings and cash flow at levels commensurate with the current rating band Major Rating Factors Strengths
Challenges/Risks
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