Corporacion Andina de Fomento

Transcription

1 Primary Credit Analyst: Delfina Cavanagh, Buenos Aires (54) ; Secondary Contact: Elie Heriard Dubreuil, London (44) ; Research Contributor: Constanza M Perez Aquino, Buenos Aires ; constanza.perez.aquino@standardandpoors.com Table Of Contents Rationale Outlook Stand-Alone Credit Profile: 'aa-' Business Profile: Strong Policy Importance Assessment Governance And Management Expertise Financial Profile: Very Strong Capital Adequacy Risk Position Funding And Liquidity Likelihood Of Extraordinary Shareholder Support Appendix JULY 31,

2 Table Of Contents (cont.) Related Criteria And Research JULY 31,

3 Rationale We base our ratings on CAF on its "strong" business risk profile and its "very strong" financial risk profile, as defined by our criteria. Together, these metrics form CAF's 'aa-' stand-alone credit profile (SACP). The issuer credit rating (ICR) Counterparty Credit Rating Foreign Currency AA-/Negative/A-1+ does not incorporate extraordinary shareholder support from CAF's callable capital because we rate all of CAF's member shareholders lower than the institution. Established in 1968 by its constitutive agreement, CAF is a regional development bank serving Latin America. It provides financing--in the form of loans, guarantees, letters of credit and lines of credit, and equity investments--predominantly for infrastructure and energy-related projects. As of Dec. 31, 2014, CAF had US$30 billion adjusted total assets in Latin America. CAF's strong business profile rests on its policy importance, governance, and management. CAF's very strong financial profile reflects its very strong capital adequacy, its diversified funding profile, and its liquidity position. While CAF's risk-adjusted capital (RAC) ratio before adjustments increased to 26% as of Dec. 31, 2014, from 25% at the end of 2013, the RAC after adjustment declined to 14% from 15%. (These risk-adjusted capital ratios are based on the institution's balance sheet as of year-end dates and sovereign foreign-currency ratings as of the date of our affirmation.) These adjustments--like those applied to CAF's peers with large sovereign loan portfolios--consist mostly of increases to risk-weighted assets for sovereign concentration risk, offset in part by preferred creditor treatment (PCT). The decline in CAF's RAC ratio between fiscal year-end 2013 and year-end 2014 reflects principally the February 2015 downgrade of Venezuela to 'CCC' from 'CCC+'. Although CAF's 2014 RAC ratio of 14% is below the 15% threshold that we associate with very strong capital adequacy, we project that CAF will regain the 15% threshold by the end of 2016; our rating affirmation was premised on this assumption. The scheduled capital instalments under GCI number VIII and GCI IX, combined with expected annual comprehensive income in excess of $100 million, should support management's expected single-digit loan growth, assuming no deterioration of credit quality of CAF's major borrowers. Management's long-standing efforts to diversify its portfolio away from its original members will continue to reap the benefits of lowering concentration risk in the institution's portfolio. In March 2015, CAF's board of directors approved an increase in authorized capital to $15 billion from $10 billion. Although authorized capital has no direct bearing on CAF's cash equity, nor its callable capital, we see it as a harbinger that CAF will favorably consider a proposal for a tenth general capital increase, which we expect management to finalize and present in the next 12 months. That said, there are risks to CAF restoring its RAC ratio to 15%. Collectively, the Argentina and Venezuela sovereign JULY 31,

4 exposures accounted for 29% of CAF's loans as of Dec. 31, Argentina is currently in default on some of its commercial debt, and we do not expect the government to remedy the default this year. Venezuela's economy is experiencing severe distress; a further fall in oil prices could result in economic collapse, creating not only asset-quality issues for CAF but operational issues for the Caracas-based institution. During 2014, CAF continued to strengthen the quantity and quality of its liquidity. Liquid assets over gross debt and over short-term debt by remaining maturity increased to 59% and 302%, respectively, as of the end of 2014 from 53% and 191% in Beginning in 2014, CAF updated its liquidity policy, which now stipulates that CAF hold liquid assets sufficient to meet at least 12 months of net cash requirements (debt service plus scheduled loan and equity investment disbursements, net of cash inflows from loan collections, and committed capital payments receivable). Although, in practice, CAF had already held liquidity in excess of its previous policy requirement, we believe these developments bode well for the institution's future liquidity management. As of December 2014, CAF had raised its liquid assets sufficiently to meet maturing liabilities while continuing to disburse committed loans and equity investments for up to one year without capital market access under our severe stress scenario. Similar to multilateral lending institutions (MLIs), CAF would have to defer a portion of its loan disbursements. Thanks to its global investor base, CAF maintains a well-diversified funding profile, made up of 66% bonds, 18% term deposits from central banks, 9% commercial paper, and 7% long-term loans as of the end of Outlook We see a greater than one-in-three probability that we could lower our ratings on CAF this year or next year, as indicated by our negative outlook. Our rating on CAF will most likely turn on its capital adequacy. We could lower the ratings if CAF's RAC ratio declines further (because of, for example, a downgrade of a major borrowing member country), if CAF's members fail to treat it as a preferred creditor, or if we believe the cash amount of a tenth GCI will not be sufficient to sustain CAF's very strong financial profile over the next three to five years. On the other hand, we could revise our rating outlook to stable if it restores its RAC ratio to above 15% and we revise our rating outlook on Venezuela to stable. A higher RAC ratio could come about through general improvements in its portfolio--as measured by ratings on member countries--or through a robust increase in capital. Stand-Alone Credit Profile: 'aa-' We assess CAF's SACP at 'aa-', reflecting the bank's strong business profile and its very strong financial profile. Our analysis draws comparisons with several peers. We selected the following supranational institutions because of their common multilateral development mandate, many of them in emerging markets; their regional or subregional scale; the large portion of sovereign and public-sector lending on their balance sheets; the diversity of their capital market presence; as well as more granular distinctions. CAF's peers include larger regional banks--inter-american Development Bank (IADB), Asian Development Bank (ADB), African Development Bank (AFDB), and the European Bank for Reconstruction and Development (EBRD)--as well as smaller subregional banks--central American Bank for JULY 31,

5 Economic Integration (CABEI) and Black Sea Trade and Development Bank (BSTDB). Table 1 Selected Comparative Statistics For CAF And Peers As of Fiscal Year-End 2014 Total adjusted assets (mil. US$) RAC ratio after adjustments* (%) Purpose-related assets (gross) / adjusted total assets (%) Gross debt / adjusted common equity (x) Liquid assets / adjusted total assets (%) Static funding gap at one year* (x) Black Sea Trade and Development Bank Central American Bank for Economic Integration Corporacion Andina de Fomento African Development Bank European Bank for Reconstruction and Development Inter-American Development Bank Asian Development Bank (BSTDB) (CABEI) (CAF) (AFDB) (EBRD) (IADB) (ADB) 1,057 8,044 30,495 22,951 52, , , RAC--Risk adjusted capital ratio. ACE--Adjusted common equity. * As of fiscal year-end 2013, with ratings parameters as of July 31, Business Profile: Strong CAF has a strong business profile, in our opinion, reflecting the bank's role, public policy mandate, and governance. Policy Importance Assessment Established in 1968 by its constitutive agreement, CAF is a regional development bank serving Latin America. The Caracas, Venezuela-based bank serves 19 members. CAF provides financing--in the form of loans, guarantees, letters and lines of credit, and equity investments--predominantly for infrastructure and energy-related projects. CAF had $30.5 billion adjusted total assets in Latin America, and total loans accounted for 62% of total assets as of Dec. 31, Loans to sovereigns and public-sector companies accounted for 51% of total assets as of the same date. Participation of nonfounding countries in total approvals has increased to almost 50% in 2014 from 30% in Transportation, together with energy and social development, accounted for about 79% of the banks total portfolio as of end JULY 31,

6 Table 2 Principal Business Activities --As of Dec Purpose-related assets (gross) / adjusted total assets (%) Net loans / adjusted total assets (%) Public-sector (including sovereign-guaranteed) loans / total loans (%) Private-sector loans / total loans (%) Equity investments / adjusted total assets (%) Memo (mil. US$): Total guarantees Letters of credit Total adjusted assets* 30,495 27,418 24,604 21,535 18,547 *Adjustments made to reported shareholders' equity to calculate adjusted common equity (an institution's cash capital) are carried through to total assets. Shareholders have demonstrated firm support for CAF's public policy mandate. CAF is a prominent lender in the Latin America and a consistent net lender in economic downturns, securing it exceptional shareholder support, which we expect to continue. Member countries have approved several capital increases over the past years, demonstrating their support for CAF's mandate. In August 2009, CAF's directors approved a general capital increase (GCI) of $2.2 billion for (GCI number VIII). In November 2011, the directors approved another $2.1 billion GCI for (GCI number IX). Under these two GCIs, CAF received $878 million in capital in We expect that the remaining $2 billion of scheduled capital instalments will be paid in full over the remaining subscription periods from CAF's 19 member countries. We assess CAF's shareholder support as among the strongest of multilateral lending institutions (MLIs) we rate. In the past, CAF's shareholders (Venezuela, Ecuador, Bolivia, and Peru) have paid CAF even while in default on their commercial debt in the 1980s. Venezuela and Ecuador did so again in the early 1990s. CAF has continued extending its shareholder base since then. We nevertheless expect that its new shareholders will accord CAF the same PCT as its original members have--although this assumption has not been fully tested in a downturn. For example, Argentina has maintained its timely payments to CAF even though it is currently in default on some of its external commercial debt. It also previously maintained payments to CAF while in default to its bilateral official creditors. Our appraisal of CAF's management--which is moderating loan growth, diversifying its loan portfolio, and adjusting its distribution policy to bolster the institution's capitalization ratios--demonstrates proactive governance. CAF's expanding membership reinforces its relations with its shareholders. Each of CAF's shareholders is eligible to borrow. This has increased the appeal of the bank to its expanding membership. CAF now has 10 full, or core, member shareholder countries and nine associate member shareholder countries in Latin America and the Caribbean. Full membership corresponds with a larger share of CAF's paid-in capital. That brings along with it greater ability to borrow from CAF and greater voting privileges at the board (see the Governance and Management Expertise section for further detail). JULY 31,

7 Though past performance is not a guarantee of PCT in the future, we believe that a long history of regular capital contributions, together with PCT in times of financial stress, is objective evidence of shareholder support for an MLI. By these criteria, CAF's shareholder support is among the strongest of rated MLIs. We expect that its exceptional history of PCT will extend to its new full shareholders as well--although this has not been fully tested in a downturn. Further, we expect CAF's borrowers would maintain this PCT. CAF's borrowing members have provided the bank a solid track record of PCT. CAF has never suffered arrears on payments of interest or principal exceeding 90 days on a public-sector loan. (According to CAF's bylaws, public-sector loans enter nonaccrual status no later than 180 days after the due date, and private-sector loans no later than 90 days.) This contrasts, for example, with the experience of the World Bank and IADB, to which Peru went into much longer arrears during the 1980s while remaining current with CAF. Since becoming a shareholder in 2001, Argentina has been current with debt service to CAF; the sovereign was current on its debt service and capital payments as of today. We assume Argentina will maintain ongoing, timely payment to CAF while it is in nonpayment status on its external debt based on its historical preferred payment record and especially after normalizing relations with official creditors, such as the Paris Club, in early We also believe Argentina's bilateral payment settlement agreements with CAF are beyond the reach of holdout creditors, so its payments to CAF will remain uninterrupted. In addition, payments are not subject to the injunction order that affects payments to restructured bondholders. Along with other MLIs, CAF did grant Bolivia debt relief as part of the Heavily Indebted Poor Countries (HIPC) initiative led by the International Monetary Fund. In turn, CAF was compensated for its participation by donations from advanced economies and by Bolivia giving up a portion of its shareholder rights. Governance And Management Expertise Our appraisal of CAF's governance is supported by the institution's bylaws and risk practices that moderate loan growth, the growing diversity of CAF's sovereign loan portfolio, as well as a dividend policy that retains most earnings. Our assessment of CAF's governance is tempered by the absence of a wide set of nonborrowing member countries, a weakness relative to higher-rated MLIs with greater shareholder diversity. All of CAF's shareholders are eligible to borrow from the bank. Although this has increased the attractiveness of the institution to new membership, this shareholder structure presents certain agency risks of the shareholder-borrower relationship that are less prominent in more diversified regional and global MLIs, in our view. In particular, CAF's top five public-sector borrowers are also among its largest shareholders. Table 3 History Of CAF's Capital Increases Since 1999 Date of capital increase Paid-in capital subscriptions approved (mil. US$) Participating member countries ,074 Argentina, Bolivia, Brazil, Colombia, Ecuador, Panamá, Paraguay, Perú, Uruguay, Venezuela, México, Trinidad and Tobago ,240 Argentina, Bolivia, Brazil, Colombia, Ecuador, Panamá, Paraguay, Perú, Uruguay, Venezuela, Spain, Dominican Republic JULY 31,

8 Table 3 History Of CAF's Capital Increases Since 1999 (cont.) 2007/2008 1,588 Argentina, Brazil, Chile, Uruguay, Panamá, Paraguay, Portugal, Trinidad and Tobago 2001/ Argentina, Bolivia, Brazil, Colombia, Ecuador, Perú, Uruguay, Venezuela, Spain, Costa Rica Bolivia, Brazil, Colombia, Ecuador, Perú, Venezuela Table 4 CAF s Shareholder Base Full members % of shares Year of incorporation to CAF Peru Venezuela Colombia Argentina Brazil Ecuador Bolivia Uruguay Panama Paraguay Associate members Spain Trinidad and Tobago Mexico Dominican Republic Chile Costa Rica Portugal Commercial banks* 0.1 N/A Jamaica As of Dec. 31, *14 commercial banks within Latin America are shareholders of CAF. N/A--Not applicable. CAF has three different classes of shares (A, B, and C), with full-member shareholder countries having A (and B) shares; associate member countries have no A shares. As of year-end 2014, the five original Series A shareholders--peru, Venezuela, Colombia, Ecuador, and Bolivia--collectively owned 65% of CAF's paid-in capital (down from 77% in 2009 when membership expansion accelerated). CAF's head office is in Caracas, Venezuela. It has a total of 13 offices, including three regional offices. As part of its natural disaster plan management, CAF has established back-up informational and operational facilities among its several offices. We expect the bank could be operational within hours should the bank need to evacuate its headquarters. Unlike most MLIs, CAF pays a dividend. This permits its commercial financial institution shareholders to report a JULY 31,

9 profit on their equity investments in CAF. However, since the dividend is a stock dividend, it has no effect on total shareholders' equity (it merely increases the paid-in capital component of CAF's shareholders' equity). Like many other MLIs, CAF also makes annual distributions from its retained earnings to a variety of development-related funds. These include the Fund for Human Development, which targets the neediest rural sectors in member countries. In March 2014 and 2013, the stockholders' assembly approved the distribution of $69,000 and $119,998, from retained earnings as of Dec. 31, 2013, and 2012, respectively, to the stockholders' special funds. Additionally, in March 2014, the stockholders assembly approved, effective 2015, the change in the accounting record of distributions to stockholders' special funds, recognizing them as expenses rather than as a decrease in retained earnings. Since 2014, CAF's operation strategy has modified, reflecting the new economic context in the region. There has been a reduction in portfolio growth to around 6.8% in 2014 from 11% on average since 2005, which we expect to be sustained in 2015 and 2016 as well. This approval and disbursement adjustment was done particularly in corporate loans and equity investments. The bank aims to maintain its 80%/20% balance between its sovereign and nonsovereign risk while keeping adequate geographic and sector diversification. CAF also sets exposure limits, which reflect the membership status and relative capital contributions of its constituent countries: For full-member countries: a single-country exposure limit (represented by loans, guarantees, equity and securities investments, or purpose-related exposure [PRE]) that may not exceed either 25% of total exposure or 100% of CAF's shareholders' equity (whichever is less). For nonfounding full-member countries: a single-country exposure limit of 15% of total PRE. Aggregate loans to entities in any associate shareholder country may not exceed 8x of that country's paid-in capital contributions plus any assets entrusted to CAF under a fiduciary relationship, and they may not exceed 5% of CAF's exposure. With higher spreads on loans and somewhat higher funding costs, the "all-in" cost of CAF's sovereign loans is substantially higher than that of other MLIs, such as the European Bank for Reconstruction and Development and IADB. CAF's members had generally viewed loans from the corporation as complementary to those from the larger MLIs. However, in recent years, borrowings from CAF by full-member shareholder countries--and increasingly by associated shareholder countries--have increased with respect to those from other MLIs. CAF, like other MLIs, does not vary the pricing of sovereign loans of comparable maturities from country to country. However, unlike some other MLIs, CAF charges higher spreads for longer-maturity loans. CAF's treasury unit is located in Caracas and Lima. CAF's liquidity policy aims primarily at capital preservation, while the management of liquidity and profitability are additional objectives. Deloitte (Venezuela), the independent external auditors of the bank, issued a clean opinion of CAF's annual financial statements, prepared in accordance with accounting principles generally accepted in the U.S. JULY 31,

10 Financial Profile: Very Strong In our opinion, CAF has a very strong financial profile, reflecting its capital adequacy and funding profile and balance-sheet liquidity. Capital Adequacy While CAF's RAC ratio before adjustments increased to 26% as of Dec. 31, 2014, from 25% at the end of 2013, the RAC after adjustment declined to 14% from 15%. (These risk-adjusted capital ratios are based on the institution's balance sheet as of year-end dates and sovereign foreign-currency ratings as of the date of our affirmation.) These adjustments--like those applied to its peers with large sovereign loan portfolios--consist mostly of increases to risk-weighted assets for sovereign concentration risk, which PCT, in part, offsets. The decline in CAF's RAC ratio from fiscal year-end 2013 to year-end 2014 reflects principally the February 2015 downgrade of Venezuela to 'CCC' from 'CCC+'. Although CAF's 2014 RAC ratio of 14% is below the 15% threshold that we associate with very strong capital adequacy, we project that CAF will regain the 15% threshold by the end of 2016; our rating affirmation was premised on this assumption. The scheduled capital instalments under GCI number VIII and GCI IX, combined with expected annual comprehensive income in excess of $100 million, should support management's expected single-digit loan growth, assuming no deterioration of credit quality of CAF's major borrowers. Management's long-standing efforts to diversify its portfolio away from its original members will continue to reap the benefits of lowering concentration risk in the institution's portfolio. In March 2015, CAF's board of directors approved an increase in authorized capital to $15 billion from $10 billion. Although authorized capital has no direct bearing on CAF's cash equity nor its callable capital, we see it as a harbinger that it will favorably consider a proposal for a tenth general capital increase, which we expect management to finalize and present in the next 12 months. That said, there are risks to CAF restoring its RAC ratio to 15%. Collectively, the Argentina and Venezuela sovereign exposures accounted for 29% of CAF's loans as of Dec. 31, Argentina is currently in default on some of its commercial debt, and we do not expect the government to remedy the default this year. Venezuela's economy is experiencing severe distress; a further fall in oil prices could result in economic collapse, creating not only asset-quality issues for CAF but operational issues for the Caracas-based institution. As for most other MLIs, CAF's capital is of a high quality. Stockholders' equity reached $8.8 billion as of year-end 2014, of which $6.2 billion was paid in capital, and retained earnings and reserves accounted for the remaining $2.6 billion. We do not deduct any noncash items from CAF's shareholders' equity to calculate adjusted common equity (ACE). Earnings Similar to other supranational financial institutions serving a public-policy mandate, CAF does not seek to maximize income. CAF's net income return on average ACE declined to 1.7% in 2014, versus 2.8% in Even though net interest income over operating revenues increased to 44.2% in 2014 from 40.1% in 2013 and administrative expenses remained stable relative to assets, provisions for loan losses explained the drop in net results. JULY 31,

11 During 2013, CAF modified its loan loss reserve (LLR) calculation methodology. Consequently, the bank released $87 million release of provisions from its general LLR to income, a large portion of it retained within shareholders' equity. In 2014, the bank provisioned $21.5 million. The institution's net interest income per average net loans was 1.4% in 2014, slightly increasing from 1.2% in CAF's business remains efficient, with administrative expense of 1.4% of average ACE in 2014, similar to past years. Although CAF does not pay a cash dividend, it annually transfers a portion of earnings and paid-in capital receipts to off-balance-sheet funds to assist its member countries. This practice of transferring a portion of earnings to concessional loan and grant facilities is common among multilateral development banks. These transfers can be sizable relative CAF's net income, but they do not exceed it. Table 5 Profitability --As of Dec Net income / average adjusted assets (%) Net income / average adjusted common equity (%) Comprehensive income / average adjusted assets (%) Comprehensive income / average adjusted common equity (%) Net interest income / average net loans (%) Interest expense / average borrowings (%) Administrative expense / average adjusted common equity (%) Interest expense / average borrowings (%) Memo: Net income (US$) Net increase (decrease) in cash and cash equivalents during the year (US$ mil.) (272) 60 (169) Table 6 Country Data And Projections For CAF's Top 10 Borrowing Members --Real GDP growth (% change)-- GDP per capita (US$) Net general government debt (% GDP) General government interest paid / revenues (%) f Argentina 0 (1) 12, Bolivia 5 5 3, Brazil 0 (2) 11, Colombia 5 3 8, Ecuador 3 1 6, Panama , Peru 2 4 6, Spain , Uruguay , Venezuela (4) (6) 22, f--forecast. JULY 31,

12 Treasury risk CAF uses several treasury management policies to manage its interest rate, foreign currency, and counterparty credit risk. Credit risk. As demonstrated by our liquidity stress test, CAF invests in cash, deposits in highly rated global banks, and high-grade liquid securities to reduce the credit risk of its liquidity investments. CAF had $10.1 billion in liquid assets as of end 2014, equivalent to 33.3% of total assets. Almost 97% of liquid assets were rated 'A-' or above, with an overall 'AA' average. From its liquidity portfolio, CAF held 30% in U.S. Treasury, corporate, and financial bonds, 30% in time deposits, 22% in certificates of deposit, 11% in commercial paper, and the remaining 2% in money market funds, liquidity funds, and supranational securities. Since 2014, the bank's new liquidity policy requires that it maintains sufficient liquid assets to cover at least 12 months of net cash requirements. As of year-end December 2014, total liquidity (as calculated by the bank) covered 24 months of net cash requirements. At the same time, during the past four years, the bank has consistently improved its liquidity ratios; liquid assets over total assets reached 33.3% as of the end of 2014, from 22.3% in 2010, while liquid assets covered 48.5% of financial liabilities as of the same date from 33.1%. CAF issues in an array of capital markets worldwide to lower its cost of funds. It uses derivative instruments to mitigate its interest rate and currency risk for its operational U.S. dollar floating-rate position. CAF does not take speculative positions on its derivative positions, and their unrealized gains and losses do not contribute significant earnings volatility to the bank's comprehensive earnings. Interest rate risk. Although CAF's leverage, 1.97x gross debt to ACE, is similar to that of peers, the institution's use of several short-term financing instruments requires greater expertise to manage maturity mismatch risk. Short-term debt over adjusted total assets has been steadily diminishing to 23% of adjusted total assets as of year-end CAF offsets its asset-liability mismatch risk by matching most to investments of similar maturity. CAF finances its long-term loan and equity investment portfolio with shareholders' equity and long-term liabilities (72% of adjusted total assets). It funds short-term credits (primarily trade finance via commercial banks) with a combination of time and demand deposits plus commercial paper. CAF invests its remaining deposits in a liquid intermediation portfolio with duration of approximately 0.5 years. Since 2011, CAF has also held a larger stock of liquid assets relative to its short-term financing. The bank's liquid assets net of deposits rose to 21% of total assets as of Dec. 31, 2014, from less 18% as of year-end Exchange rate risk. CAF acts to minimize its foreign currency risk of its foreign-currency-denominated loan assets and foreign-currency-denominated capital market issues. The U.S. dollar is the institution's operational and reporting currency. Almost all, 99%, its loans are denominated in U.S. dollars. Where CAF provides financing to clients in local currency (Bolivia, Paraguay, Colombia, Peru, and Mexico), it matches this, where possible, with local-currency issuance. As of Dec. 31, 2014, and 2013, loans in other currencies were granted for an equivalent of $41,780 and $60,038, respectively, principally in Bolivian bolivianos, Peruvian nuevos soles, Paraguayan guarani, Mexican pesos, and Colombian pesos. This market-making activity by CAF and other supranationals benefits the domestic capital market development of their host countries. CAF denominated 62.6% of its liabilities in U.S. dollars, as of Dec. 31, After matching its local currency financing (0.1% of liabilities) to local currency loans, CAF effectively swaps the remaining foreign currency financing to U.S. dollars: 99.7% of its liabilities were U.S.-dollar denominated, after swaps, as of Dec. 31, JULY 31,

13 Risk Position Weakening creditworthiness--signaled by sovereign downgrades--of several of CAF's largest sovereign borrowers, including Argentina and Venezuela, has been deteriorating CAF's capital ratio in the past 12 months. The RAC after adjustment declined to 14% from 15%, principally reflecting the February 2015 downgrade of Venezuela to 'CCC' from 'CCC+'. We expect the bank to continue strengthening its capital position in the next two years. Recent downgrades have shifted CAF's capital adequacy below that of larger, regional peers. A comparative look at the diversification of its balance sheet relative to peers explains part of this shift. Among MLIs, regional institutions typically maintain moderate sovereign concentration of 10%-15% of exposure at default (EAD) among their largest sovereign exposures. A significant change of the creditworthiness of one these risk-weighted exposures can shift a regional MLI's capital ratio, as was the case of Argentina and Venezuela for CAF. Smaller, subregional MLIs, such as CABEI and BSTDB, that have less borrower diversification, carry larger sovereign concentration adjustments and are more susceptible to rating movements on their borrowers. Table 7 CAF s Risk-Adjusted Capital Adequacy As Of Dec. 31, 2014 (Mil. US$) Exposure Standard & Poor's RWA Average Standard & Poor's RW (%) Credit risk Government and central banks 22,664 21, Institutions 8,697 2, Corporate 2,387 3, Retail Securitization Other assets Total credit risk 34,333 27, Market risk Equity in the banking book 292 3,062 1,047 Trading book market risk -- 1, Total market risk -- 4, Operational Risk Total operational risk -- 1, RWA before MLI adjustments -- 33, MLI adjustments Industry and geographic diversification (3,709) (11) Preferred creditor treatment (3,164) (9) Single-name concentration 35, High-risk exposure cap (1,010) 169 Total MLI adjustments 28, RWA after MLI adjustments 61, JULY 31,

14 Table 7 CAF s Risk-Adjusted Capital Adequacy As Of Dec. 31, 2014 (cont.) Adjusted Common Equity Standard & Poor's RAC ratio (%) Capital ratio before adjustments 8, Capital ratio after adjustments 14 RAC ratio--risk-adjusted capital ratio, defined as adjusted common equity (ACE) divided by risk-weighted assets (RWA). RW--Risk weighting. MLI--Multilateral lending institution. Ratings parameters as of June 23, Chart 1 Exposure concentrations Although CAF continues to diversify its loan portfolio, five sovereigns represented 65% of CAF's sovereign exposure at default as of year-end 2014, according to our risk-adjusted capital methodology. This sovereign concentration, coupled with the credit risk embedded in the lower-rated governments, leads to a large sovereign single-name concentration adjustment to CAF's capital ratio. JULY 31,

15 Chart 2 Asset quality: loan loss experience and equity investment performance CAF's members have a solid track record of affording the bank PCT, which supports its historically low loan loss experience. None of CAF's sovereign members were in arrears to the bank as of the end of 2014, and they remained current on their debt service to CAF through the first half of The asset quality of CAF's private-sector loan portfolio declined only modestly during the crisis of Impaired private-sector loans peaked at less than 1% of loans in 2011, and the bank has been overprovisioned for these exposures over the past three years. CAF restructured its last remaining $7.8 million impaired loan, recognizing an impairment of half the book value from LLR, during In 2014, nonaccrual loans and loans written off represented 0.09% and 0.02% of the total portfolio, respectively. Guarantees In addition to its balance-sheet assets, CAF provides lines of credit, letters of credit typically for trade finance, and guarantees. Altogether, CAF reported contingent commitments amounting to 13% of its expected exposure at default (EAD) balance sheet as of Dec. 31, We consider only the signed, committed portion of this contingent exposure for purposes of our RAC ratio calculation. During 2014, no third party called a guarantee underwritten by CAF for its customers. JULY 31,

16 Funding And Liquidity Funding Our funding assessment for MLIs considers their funding mix and profile using quantitative and qualitative measures. Thanks to its global investor base, CAF maintains a well-diversified funding profile composed 66.2% by bonds, 17.7% by term deposits, 8.9% by commercial paper, and 7.2% by long-term loans as of year-end The share of bonds in total funding has increased since 2013, while commercial paper has declined. Total funding reached $20.9 billion as of year-end 2014, of which 63% was denominated in U.S. dollars, while 17% was denominated in euros, 10% in swiss francs, and the remaining in several different currencies. Slightly more than 34% of total funding was due in more than five years, 33.7% in less than one year, and 20.1% between one and three years. CAF has $13.8 billion outstanding bonds in 13 different currencies, dollars and euros being the largest, at 44% and 26%, respectively. Almost 50% of its outstanding bonds were due in more than five years, while 9% were due within one year. As of December 2014, 94% of its outstanding bonds had fixed interest rates. During 2014, the bank issued several bonds. In August 2014, the bank issued a $1 billion 1.5% fixed coupon maturity 2017, the largest single issuance with the lowest coupon. At the same time, the investor base has broadened both by type of investor and by geography since two years ago. CAF also issued seven additional bonds in diverse markets, such as Europe, Norway, Switzerland, South Africa, among others. CAF was able to continue reducing the interest paid on its bonds. During the first half of 2015, the bank has already issued several bonds. Over the past three years, term deposits, rather than demand deposits, have formed the lion's share, more than 95%, of CAF's deposit liabilities. The largest depositors with CAF by volume are central banks, although several treasury ministries, corporations, and small banks also use this service. The bank has diverse loans from multilaterals and export credit agencies, such as AFD, Caribbean Development Bank (CDB), Official Credit Institute (ICO), Japan Bank for International Cooperation (JBIC), most of its denominated in U.S. dollars. CAF had a 1.7x static funding gap at one year without loan disbursements and 1.1x with half of scheduled loan disbursements, as of Dec. 31, Our funding gap analysis looks at the structure of the assets and liabilities mismatch, on a static basis, without refinancing under normal interest rate conditions. CAF uses total leverage of 2.0x (gross debt and deposits relative to ACE). Its level of pure debt financing (including long-term debt and commercial paper) is less than most of its higher-rated regional and global MLI peers. Table 8 Funding Ratios --As of Dec Static funding gap without loan disbursements at one year (x) N.M. Short-term debt (by remaining maturity) / adjusted total assets (%) Gross debt / adjusted total assets (%) Gross debt net of liquid assets / adjusted total assets (%) JULY 31,

17 Table 8 Funding Ratios (cont.) Short-term liabilities (by remaining maturity) / total liabilities (%) Total liabilities / adjusted total assets (%) Gross debt / adjusted common equity (x) Short-term debt (by remaining maturity) / gross debt (%) The static funding gap is maturing assets divided by maturing liabilities. It is cumulative and based on scheduled receipts and payments. Note: Short-term debt by remaining maturity includes short-term debt (maturing in less than 12 months) and long-term debt maturing in the next 12 months. N.M.--Not meaningful. Chart 3 Liquidity CAF's institution's liquidity levels--as measured by our extreme capital markets and economic conditions stress test--remain supportive of its mandate and have improved since 2013 but remain weaker than those of larger regional development banks, such as IADB. CAF's liquid assets are of sufficient quantity and quality that we expect it would, under our stress scenario, be able to service its debts and maintain operations for one year without capital market access. Similar to many MLIs, however, CAF would have to defer a portion of its loan disbursements under such conditions. Because of their mandate, national governments call upon multilateral development banks, such as CAF, and JULY 31,

18 monetary institutions to lend during financial and economic crises, such as the Latin American debt crisis of the 1980s, the Asian financial crisis of the 1990s, and the Great Recession of We therefore set a higher liquidity standard for supranational financial institutions than we do for nationally regulated commercial banks that tend to have access to emergency liquidity facilities from their respective central banks. Table 9 Liquidity Ratios --As of Dec (%) Liquid assets / adjusted total assets (%) Cash and cash equivalents / liquid assets (%) Securities / liquid assets (%) Liquid assets / gross debt (%) Liquid assets / short-term debt by remaining maturity* (%) *Short-term debt by remaining maturity includes short-term debt (maturing in less than 12 months) and long-term debt maturing in the next 12 months. Chart 4 JULY 31,

19 Likelihood Of Extraordinary Shareholder Support The ICR on CAF does not incorporate extraordinary support via callable capital from shareholders. All of CAF's shareholders are rated lower than CAF's 'aa-' SACP. Appendix Table 10 Summary Balance Sheet --As of Dec (Mil. US$) Assets Cash and money market instruments 3,017 2,473 1,733 1,896 1,670 Securities 7,131 5,831 5,453 3,760 2,457 Total deposits 1,279 1,462 1,490 1,544 1,403 Liquid assets 10,148 8,305 7,186 5,656 4,127 Net loans 18,999 17,885 16,153 14,773 13,572 Equity interests Purpose-related assets (gross) 19,347 18,151 16,425 15,016 13,808 Purpose-related assets (net) 19,291 18,113 16,300 14,885 13,666 Derivative assets Fixed assets Accrued receivables Other assets, other Total assets 30,495 27,418 24,604 21,535 18,547 Total adjusted assets* 30,495 27,418 24,604 21,535 18,547 Liabilities Total deposits 3,697 3,264 3,122 3,672 2,739 Other borrowings (gross debt) 17,228 15,758 14,309 11,188 9,735 Other liabilities Memo: Derivative liabilities Total liabilities 21,731 19,602 17,739 15,184 12,794 Shareholders' equity Paid-in capital and surplus 6,162 5,284 4,419 3,969 3,430 Reserves (including inflation revaluations) 2,464 2,326 2,286 2,230 2,157 Retained earnings Shareholders' equity 8,763 7,817 6,865 6,351 5,753 Memo: Total guarantees Letters of credit Undisbursed loans (100%) 8, , , , , JULY 31,

20 Table 10 Summary Balance Sheet (cont.) *Adjustments made to reported shareholders' equity to calculate adjusted common equity (an institution's cash capital) are carried through to total assets. Table 11 Adjusted Common Equity (ACE) Shareholders' equity (reported) 8, , , , ,753.2 Less (-): Adjusted common equity (ACE) 8, , , , ,753.2 Table 12 Summary Statement Of Income (US$ mil.) Interest income Interest expense Net interest income Operating noninterest income Other noninterest income Operating revenues Noninterest expenses Credit loss provisions (net new) 22 (83) (5) (12) (3) Operating income after loss provisions Net income Other comprehensive income 0 (0) N.A. N.A. N.A. Comprehensive income Memo: Net increase (decrease) in cash and cash equivalents during the year (272) 60 (169) N.A.--Not available. Related Criteria And Research Related Criteria Standard & Poor's National And Regional Scale Mapping Tables, Sept. 30, 2014 National And Regional Scale Credit Ratings, Sept. 22, 2014 Methodology For Linking Short-Term And Long-Term Ratings For Corporate, Insurance, And Sovereign Issuers, May 7, 2013 Multilateral Lending Institutions And Other Supranational Institutions Ratings Methodology, Nov. 26, 2012 Bank Capital Methodology And Assumptions, Dec. 6, 2010 Related Research Corporacion Andina de Fomento 'AA-/A-1+' Ratings Affirmed, Outlook Remains Negative, July 2, 2015 Corporacion Andina de Fomento, July, 16, 2014 Supranationals: Special Edition 2013: Comparative Data For Multilateral Lending Institutions, March 10, JULY 31,

21 How An Erosion Of Preferred Creditor Treatment Could Lead To Lower Ratings On Multilateral Lending Institutions, Aug. 26, 2013 Ratings Detail (As Of July 31, 2015) Corporacion Andina de Fomento Counterparty Credit Rating Foreign Currency Commercial Paper Foreign Currency Senior Unsecured CaVal (Mexico) National Scale Senior Unsecured Counterparty Credit Ratings History AA-/Negative/A-1+ A-1+ mxaaa 16-Oct-2014 Foreign Currency AA-/Negative/A Dec Jun-2010 AA- AA-/Stable/A-1+ A+/Positive/A-1 *Unless otherwise noted, all ratings in this report are global scale ratings. Standard & Poor's credit ratings on the global scale are comparable across countries. Standard & Poor's credit ratings on a national scale are relative to obligors or obligations within that specific country. Issue and debt ratings could include debt guaranteed by another entity, and rated debt that an entity guarantees. Additional Contact: Julia L Smith, Buenos Aires (54) ; julia.smith@standardandpoors.com JULY 31,

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