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