NEW YORK, USA -- Standard & Poor's Ratings Services this week lowered its long-term foreign currency issuer credit rating on Caribbean Development Bank (CDB) to 'AA' from 'AA+'. The outlook is negative. The agency also affirmed its 'A-1+' short-term foreign currency rating on CDB.
"The development bank's strong business profile is anchored by its role as a prominent lender to Caribbean governments and its historical capacity to lend countercyclically through the credit cycle in support of its public policy mandate," said Standard & Poor's credit analyst Kelli Bissett.
Periodic capital increases -- the most recent of which is planned to increase CDB's paid-in capital by 138% over six years (2010-2016) -- have demonstrated shareholder support. Most major and extra-regional shareholders have begun to pay in their subscriptions on time, although 28% of anticipated subscription payments for the first two years are pending because of administrative and parliamentary delays.
"CDB's strong business profile has elements that are weaker than those of higher-rated peers," said Bissett.
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.
Preferred creditor treatment is an important element in Standard & Poor's assessment because it speaks to CDB's membership support, capital adequacy, and the agency’s 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).
"CDB's capitalization is the cornerstone of its very strong financial profile," said Bissett.
Standard & Poor's has adopted a risk-adjusted capital framework to analyze MLIs' capital adequacy. CDB's basic risk-adjusted capital (RAC) ratio was 34% as of year-end 2011. After taking into account concentration exposure to sovereign governments and other MLI-specific adjustments, the RAC ratio declines to 21%, which is higher than that of many other MLIs but appropriate given CDB's operational risks.
Standard & Poor's concentration adjustment to the RAC ratio reflects CDB's largest loan exposures to Jamaica (24% of loans), Barbados (12%), St Vincent and the Grenadines (10%), St Lucia (9%) and Belize (7%). These top-five borrowers remain current on their obligations to the bank.
"The negative outlook reflects embedded credit risks in CDB's loan portfolio," said Bissett. "Our view of the treatment of CDB as a preferred creditor by its borrowing member shareholders, which is established by practice, is a pivotal component of this analysis."
Standard & Poor's could lower its ratings on CDB 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 expectation) the bank's funding conditions or liquidity weaken. The ratings could stabilize at current levels if the public-sector loan performance improves and if member capital contributions comply with scheduled payments.