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Thursday, December 13, 2012

S&P downgrades CDB’s rating again

BRIDGETOWN, Barbados, Thursday December 13, 2012 – Six months after Standard & Poor’s (S&P) lowered the Caribbean Development Bank’s (CDB) prized ‘AAA’ rating by one notch to ‘AA+’ the Wall Street ratings agency has downgraded the financial institution again. 

According to a statement issued yesterday (December 12) by the S&P, following a review of the CDB under the S&P’s revised criteria for multilateral lending institutions (MLIs), it lowered its long-term foreign currency issuer credit rating on the CDB to 'AA' from 'AA+', while revising the bank’s outlook from stable to negative due to “rising embedded risks in CDB's public-sector loan portfolio.”

While outlining its rationale for the rating given to the CDB, S&P noted that the CDB's "strong" business profile has elements that are weaker than those of higher-rated peers.

Although most borrowing members traditionally have treated CDB as a preferred creditor, one government borrower is more than 180 days in arrears to CDB on interest and principal, while the government has paid its commercial debt. By its policy, the bank has halted disbursements to this borrower in arrears, and a late interest penalty is accruing on the arrears.

S&P stated that preferred creditor treatment is an important element in its assessment because it speaks to CDB's membership support, capital adequacy, and our expectation of loss given default. CDB's exposure to the government borrower more than 180 days past due is 3% of loans and 5% of adjusted common equity (net of receivables from members).

Despite this latest downgrade, the S&P did acknowledge that there have been some improvements in the bank’s operations since its June 2012 downgrade.

In keeping with the pledge made by CDB president Dr Warren Smith to improve the bank’s internal risk management in the wake of the June 2012 downgrade wherein the S&P offered the option that the “CDB’s risk management is not commensurate with other ‘AAA’ rated multilateral lending institutions, particularly given its size and regional economic weakness”, the bank established a risk management unit and formalized a risk committee that will include senior management and the chief risk officer. Efforts are also being made to align the bank's policies of funding, liquidity, and capital adequacy with the board's stated risk appetite. While management has also proposed establishing a longer-term capital planning framework to manage the bank's capital, funding, and liquidity needs over a longer time horizon than the bank's current four-year cycle.

The S&P also acknowledged that the CDB's capitalization is the cornerstone of its "very strong" financial and when the ratings agency used a risk-adjusted capital framework to analyze its capital adequacy, the CDB's basic risk-adjusted capital (RAC) ratio was 21%, while higher than many other MLIs, it was still deemed to be appropriate given CDB's operational risks. The S&P stated that its concentration adjustment to the RAC ratio reflected the CDB's largest loan exposures to Jamaica (24% of loans), Barbados (12%), St. Vincent and the Grenadines (10%), St. Lucia (9%), and Belize (7%), who all remained current on their obligations to the bank.

Notwithstanding the fact that the S&P stated that its ratings on the CDB reflected the bank’s "strong" business profile and its "very strong" financial profile, the ratings agency still cautioned that it could lower its rating even further if the government borrower more than 180 days in arrears does not clear its arrears with CDB, if other member governments fall more than 180 days past due, or if (contrary to our expectation) the bank's funding conditions or liquidity weaken.

However, the S&P added that the ratings could stabilize at current levels if the public-sector loan performance improves and if member capital contributions comply with scheduled payments


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