- Fitch Affirms AfDB’s Triple ‘A’ Rating
Fitch Ratings has affirmed the African Development Bank’s (AfDB) Long-Term Issuer Default Rating (IDR) at ‘AAA’ with a Stable Outlook.
The leading global rating agency puts the bank’s Short-Term IDR at ‘F1+’ (best quality grade, indicating a strong capacity to meet its financial commitments).
In a statement, the agency said the ‘AAA’ rating primarily reflects extraordinary support from AfDB’s shareholders,which provides three-notch uplift over the bank’s intrinsic rating.
“AfDB enjoys strong support from its 80 member states, which include 26 non-African countries with high average ratings. Callable capital subscribed by member states rated ‘AAA’, the largest of which are the US, Germany and Canada, accounts for 21 per cent of the total. This fully covered the bank’s net debt at end-2016, underpinning the ‘aaa’ assessment of shareholders’ capacity to support,” the statement said.
The report underscores the strong propensity of member-states to support the bank in case of need as illustrated by previous capital increases and the bank’s important role in the region’s financing.
Fitch maintains a fast growth in AfDB’s lending in the last two years has translated into a rapid increase in its indebtedness, noting that the bank’s management has indicated that if there is no clear evidence of a capital increase within the next two years, it will have no choice but to curb lending growth to preserve the bank’s solvency metrics.
The report added that if no capital increase is approved by 2019, debt will not be covered by callable capital from ‘AAA’ rated countries, adding that this would place substantial pressure on Fitch’s assessment of extraordinary support and, hence on AfDB’s IDR.
Fitch asserts that the relatively high risk profile of borrowers is mitigated by the preferred creditor status (PCS) that the bank enjoys on its sovereign exposures.
Fitch assesses AfDB’s liquidity at ‘aaa’, which reflects excellent coverage of short-term debt by liquid assets (2.9x).
But, Fitch notes that the share of the portfolio invested in securities or bank placements rated ‘AA-’ or above (83 per cent in 2016) is declining, though their quality is still assessed at excellent.
Fitch said management intends to rebalance the treasury assets portfolio to increase the proportion of assets rated ‘AA-’ or above. This would help underpin Fitch’s assessment of the strength of extraordinary support, given the relevance of liquid assets’quality to the net debt calculation.
“The -1 notch adjustment to AfDB’s solvency stemming from our assessment of its business environment reflects the high risk operating environment in which the bank operates,” the report says.