Wednesday, Dec 11, 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.
Contacts:
Douglas
De Alwis, +603-2717
2965/ douglas@marc.com.my;
Mohd Izazee Ismail, +603-2717 2947/ izazee@marc.com.my