CREDIT GUARANTEE AND INVESTMENT FACILITY - 2019

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 comprises guarantees on issuances by 17 companies operating across Indonesia, Vietnam, Thailand, the Philippines, Singapore, Myanmar, Vietnam, South Korea and Malaysia. For the eight-month period of 2019 (8M2019), CGIF provided guarantees to three new issuers, more than offsetting the redemption from one issuer and leading to a 12.7% year-to-date growth in net guaranteed portfolio to US$917.7 million.  

MARC notes that given its mandate to support the development of regional bond markets, CGIF will make further inroads into relatively undeveloped markets such as Laos, Cambodia and Myanmar. While this will provide new business opportunities and diversification for CGIF, it will increase the facility’s credit risk profile given the lower sovereign ratings of these countries. Nevertheless, MARC takes comfort in CGIF’s conservative approach in building its guarantee portfolio in line with growth in its capital base, which has enabled the facility to maintain a consistently healthy leverage position; as at end-August 2019, CGIF’s net leverage ratio stood at 0.83:1, well within its internal limit of 2.50:1. The ratio is not likely to increase substantially in the near- to medium-term given additional capital contributions of another US$200 million from member countries until 2023.  

These additional contributions follow shareholders’ approval in 2017 to raise CGIF’s capital to US$1.2 billion from US$700 million by 2023. Since then, shareholder capital payments to CGIF have been forthcoming, with total paid-in capital rising to US$1.0 billion as at end-June 2019. Of this, US$144.6 million was paid-in during 1H2019. The ongoing capital increase has also boosted CGIF’s maximum guarantee capacity (MGC) to US$2.7 billion as at end-June 2019, and eventually to US$3 billion in 2023 when the capital raising is completed. 

CGIF’s moderate guarantee portfolio size limits diversification of risks related to country, currency and issuance size. As at end-August 2019, the largest country and currency exposure, which was Vietnam and the Vietnamese dong, comprised 36% of the total net guaranteed amount. At the same time, the top five largest issuances, net of reinsurance, collectively accounted for around 37% of total equity. Nonetheless, as the guarantee facility continues to expand its portfolio over the years in line with its growing capital base, company concentration risk has improved; the top five largest issuances had accounted for 44% of equity in 2018 and 56% in 2017. Additionally, country and currency exposures remain well within the internally established limits of 20% and 40% of CGIF’s MGC of US$2.7 billion. 

In 1H2019, CGIF’s net profit grew 56.7% y-o-y to US$12.4 million (1H2018: US$7.9 million), driven by strong growth in investment and guarantee income. Greater investment income largely came on the back of a larger investment base, as capital contributions of US$144.6 million during the period were allocated towards relatively high quality fixed-income securities and time deposits. Investment income grew 31.9% y-o-y to US$11.5 million in 1H2019 while yields on its investments were higher at an annualised 2.36% (1H2018: 1.96%). At the same time the increase in capital enabled CGIF to scale up its guarantee portfolio, resulting in a 42.5% y-o-y growth in guarantee income to US$7.1 million for 1H2019 (1H2018: US$4.5 million). 

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 95.0% of total assets, underpinned by substantial investments in low-risk debt obligations issued by government and government-related entities, which comprised 79.1% of total investments as at end-June 2019. 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.  

Major Rating Factors 

Strengths 

• Conservative leverage and liquidity management policy; 
• Strong credit underwriting policy;  
• Sound governance structure; and 
• Strong support from shareholders.   

Challenge/Risk 

• Guarantee portfolio exhibits limited diversification.