CDB outlook moves to stable
Barbados and its other borrowing member countries could put an important Caribbean Development Bank (CDB) credit rating at risk unless they repay their loans adequately.
And Moody’s Investors Service has also told the Barbados-based financial institution the same could happen if it does not live up to its own policies, including complying with liquidity provisions.
Moody’s, an influential credit rating agency based in the United States, announced last week that it had affirmed the CDB’s Aa1 senior unsecured rating and revised the outlook to stable from negative, attributing the improvement to “significant strides the bank has taken over the past 18 months to address shortcomings in its risk management and financial planning capacity, as well as the success extension of its debt maturity schedule and the corresponding re-establishment of compliance with its liquidity policy”.
“With the issuance of $300 million of 15-year bonds last November, the bank was able to restore compliance with its liquidity policy by the end of 2012 while raising sufficient funds to retire its upcoming principal maturities as they come due,” Moody’s said in an analysis issued by a team led by Aaron Freeman, vice-president and senior credit officer for the organization’s Sovereign Risk Group.
“As this debt is repaid over the next 12 months, the transformation of the bank’s front-loaded amortization profile will be complete. Although the banks’ liquid assets will decline commensurately, so will its liquidity requirements.”
Moody’s also said its affirmation of the Aa1 rating “further considers the bank’s fundamental credit strengths, including strong financial support from both borrowing and non-borrowing members, reflected in the recent general capital increase and the bank’s relatively high percentage of paid-capital, and a preferred creditor status that has ensured timely repayment even from borrowing members that have gone through debt restructurings in recent years”.
However, the credit rating agency cautioned that the CDB’s rating and outlook were dependent not only on factors within its control, but the performance and loan repayment by Barbados and other economically challenged countries in the Caribbean.
Barbados was singled out because like Jamaica, St Lucia and St Vincent, it was one of the leading CDB borrowers, and also in light of the fact it was currently also one of the Caribbean’s struggling economies.
Moody’s noted that the CDB’s credit strengths “are balanced by the bank’s highly concentrated lending portfolio and the relatively weak average credit quality of its members, and particularly its borrowing member countries”.
“The stable outlook considers our expectation that the bank’s capitalization and liquidity ratios will remain strong, that loan portfolio performance will remain stable, and that borrowing members will continue to accord the bank preferred credit status despite any financial stress they may be undergoing.”
The firm also explained that the bank’s rating “could face upward pressure if the bank meaningfully diversifies its loan portfolio and reduces its exposure to trouble credits”.
“However, given the bank’s mission to serve the Caribbean coupled with the severe economic and financial challenges facing the region, we view this as unlikely in the near to medium term, notwithstanding management’s plans to increase lending to higher rated members and try to attract new regional members,” it observed.
“The rating could face downward pressure if the bank’s capitalization and/or liquidity levels decline; if its borrowing member credit quality experiences further deterioration and loan portfolio performance suffers as a result; if the bank again fails to comply with any of its financial policies; or if its new risk management framework proves to be ineffective.”
Last year in response to downgrades from both Moody’s and Standard & Poor’s, CDB president Dr Warren Smith acknowledged the concerns and the said the institution would take steps to ensure there were no more downgrades.
“Over the years CDB has developed the reputation for being a very sound financial institution. The bank is also extremely important to the development of this region. Therefore, we will spare no effort to ensure that corrective action is taken to address the various concerns that have been raised by the credit rating agencies. We will also be counting on the continued support of our member countries,” he said. (SC)