CDB responds to credit rating downgrades
BRIDGETOWN, Barbados, Monday June 18, 2012 – The Caribbean Development Bank (CDB) “will spare no effort” to ensure that the way it does business will not put it in line for any more Standard and Poor’s or Moody’s downgrades.
This was the pledge made by CDB president Dr Warren Smith in a media release issued June 15 in the face of regional criticism over the credit rating downgrades meted out to the bank by the two influential United States-based ratings agencies within less than a month.
On June 12, Standard and Poor’s downgraded the CDB by one notch to ‘AA+’, while affirming its short-term rating of ‘A-1+’, with a stable outlook. This followed the announcement by Moody’s Investor Service on May 11, 2012, that it had downgraded CDB’s credit rating by one notch from ‘Aaa’ to ‘Aa 1’, with a negative outlook.
Dr Smith, who has been in his post for less than a year, said in the release: “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”.
In its review, S&P wrote that the downgrade reflected its “… view that CDB’s risk management is not commensurate with other ‘AAA’ rated multilateral lending institutions, particularly given its size and regional economic weakness. CDB has failed to comply with one of its internal liquidity policy guidelines, and borrower concentration remains high.”
With regard to the issue of the liquidity policy, Moody’s noted that the Bank’s ability to service its debt in a timely manner was never imperilled and that CDB’s liquidity policy is very conservative, relative to those of other AAA-rated institutions.
The CDB acknowledged that the concerns raised by the credit agencies were valid and stated that the bank had started to address these concerns with the intention to implement appropriate recommendations by year end. In particular, stated the release, the bank had already undertaken an in-depth examination of its risk management framework and discussions have started with some of the major shareholders with a view to securing assistance in strengthening the internal risk management capacity.
With respect to the concern regarding the heavy front-loading of short-term maturities on its borrowings, the release stated that the Bank was actively engaged in addressing the maturity profile of its borrowings, including making more use of amortised borrowings and, wherever possible, increasing its funding from institutional sources.
While Standard & Poor’s highlighted the issue of borrower concentration, with the top five borrowers accounting for 63% of total loans, the CDB explained that this was primarily a function of the limited size of the Bank’s borrowing membership (18 borrowing member countries), the ability of these countries to access institutional and market-type borrowing, and the economic situation prevailing in the region.
The development bank also took pains to point out that both rating agencies acknowledged a number of significant credit strengths, including strong support from members; preferred creditor status; and strong capital adequacy ratios. The release highlighted that Standard and Poor’s noted CDB’s risk bearing capacity ratio was higher than many of CDB’s larger ‘AAA’ peers with more diversified membership and funding sources. In addition, the stable outlook reflects S&P’s expectation that the bank’s financial position will remain in line with its rated peers and that strong shareholder support will be sustained.