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Fitch Ratings-Taipei/New York/Hong Kong-30 September 2009: Fitch Ratings has today assigned a National Long-term rating of 'AA(twn)' to Central American Bank for Economic Integration's (CABEI) four outstanding senior unsecured debts totaling TWD10.5bn. The National Long-term rating assigned to the issue is in compliance with Fitch's criteria on senior bond instruments of financial institutions and the mapping between the national and international rating scale. A detailed list of rating actions follows the end of this commentary.
CABEI's Long-term Issuer Default Rating (IDR) of 'A-' with Stable Outlook reflects its preferred creditor status and privileges conferred on it by its member countries, as well as its solid fundamentals (including a strong capital base), good asset quality and an established track record in terms of self-sustainable profitability. The rating is constrained by the volatility of the economies where the institution operates, its significant loan concentration, and its member countries' creditworthiness. The rating also factors in a relatively high average exposure to the private sector.
CABEI's shareholders are mostly Central American governments and have historically demonstrated strong support in the form of capital contributions and exemptions. As CABEI is one of the few providers of medium-term financing to the region, Fitch considers that its shareholders have a vested interest to provide support should it run into difficulties. However, given the relatively low ratings of most shareholders, some doubts remain as to their ability to do so.
CABEI is a Central American Multilateral Development Bank (MDB) based in Honduras. It is not subject to local regulation and is immune from taxation. It is currently 59% owned by its so-called five founding member states: Costa Rica, El Salvador, Guatemala, Honduras and Nicaragua. The remaining shares belong to other non-regional members: Argentina, Colombia, Mexico, Taiwan, Spain, Dominican Republic and Panama. CABEI's objective is to fund development projects in Central America by channeling medium and long-term foreign currency resources to both public and private institutions.
Honduras is experiencing severe political turmoil, after its elected President was ousted in June 2009. This situation has resulted in a deterioration of the local operating environment and social unrest. Since that time, CABEI (in line with actions taken by other multilateral and bilateral agencies) has decided to stop the disbursements of loans to Honduras, while the current political situation continues. It should be noted, according to information provided by the management, that all borrowers (public and private) are servicing their debt to CABEI in a timely basis as of today.
Also, on 28 August 2009, the Central Bank of Honduras decided to exclude CABEI from the list of international banks in which local banks can invest (effective 30 September 2009); as a result, local banks have started to withdraw their deposits at CABEI (estimated at less than 3% of total funding). In Fitch's opinion, the current level of liquid assets, strong cash flow of the bank and access to other sources of funding, should comfortably mitigate the repayment of those deposits. The recent upsized issuance of medium-term notes of USD500m is a clear sign of continued market access and should enhance the bank's liquidity position even further.
As of today, the privileges and immunities conferred to CABEI as a preferred creditor (under its Constitutive Agreement) has been preserved by the current government of Honduras; a situation that, in Fitch's opinion, should continue. Thanks to its position as a leading supplier of credit to the region, and considering the benefits and immunities conferred on it by its member countries, CABEI (as also other MDB's) has historically been able to operate without difficulty through the successive periods of instability that have characterised the economies of the region. However, a violation of its preferred creditor status by one of its member countries, a situation considered unlikely by Fitch, could result in changes of its ratings.
CABEI's senior unsecured bonds
- TWD3.5bn carries a fixed coupon rate of 2.08% and will mature on 3 October 2011, assigned at 'AA(twn)'
- TWD1.3bn carries a fixed coupon rate of 2.60% and will mature on 29 December 2010, assigned at 'AA(twn)'
- TWD3.7bn carries a fixed coupon rate of 2.60% and will mature on 21 January 2011, assigned at 'AA(twn)'
- TWD2.0bn carries a fixed coupon rate of 2.70% and will mature on 24 February 2013, assigned at 'AA(twn)'
Note to editors: Fitch's National ratings provide a relative measure of creditworthiness for rated entities in countries with relatively low international sovereign ratings and where there is demand for such ratings. The best risk within a country is rated 'AAA' and other credits are rated only relative to this risk. National ratings are designed for use mainly by local investors in local markets and are signified by the addition of an identifier for the country concerned, such as 'AAA(twn)' for National ratings in Taiwan. Specific letter grades are not therefore internationally comparable.
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