Corporación Andina de Fomento Supranational

Transcription

1 SEPTEMBER 3, 2013 SOVEREIGN & SUPRANATIONAL CREDIT ANALYSIS Corporación Andina de Fomento Supranational Table of Contents: SUMMARY RATING RATIONALE 1 ORGANIZATIONAL STRUCTURE AND STRATEGY 2 STRENGTH OF MEMBER SUPPORT 3 CAPITAL ADEQUACY 5 LIQUIDITY AND FUNDING 7 GOVERNANCE AND RISK MANAGEMENT 9 ASSET COMPOSITION AND QUALITY 12 PROFITABILITY 14 RATING HISTORY 15 ANNUAL STATISTICS 16 MOODY S RELATED RESEARCH 20 SOURCES OF INFORMATION USED IN THIS REPORT 20 Analyst Contacts: NEW YORK Aaron Freedman Vice President - Senior Analyst aaron.freedman@moodys.com Mauro Leos Vice President - Senior Credit Officer mauro.leos@moodys.com Bart Oosterveld Managing Director - Sovereign Risk bart.oosterveld@moodys.com This Credit Analysis provides an in-depth discussion of credit rating(s) for Corporacion Andina de Fomento and should be read in conjunction with Moody s most recent Credit Opinion and rating information available on Moody's website. Corporación Andina de Fomento Category Outlook Long-Term Issuer Rating Summary Rating Rationale Moody's Rating Stable The Corporación Andina de Fomento s (CAF) Aa3 rating reflects its broadening membership and improved credit quality of its members, its improved capital adequacy ratios, and its increased portfolio diversification. The rating also considers the Bank's history of strong support from its primary shareholder, its prudent financial management, and the strong performance of its loan portfolio. Credit challenges include the Bank's continued high exposure to its lower-rated members, its lack of Aaa-rated members, low levels of callable capital, and relatively weak capital adequacy ratios. In addition, liquidity, although strong by ordinary standards, is relatively weak compared to more highly rated MDBs. The Corporation's capital base has grown dramatically in recent years, with the addition of several new full members and two general capital increases. In Moody s opinion, together with the Bank s very high level of paid-in capital, the capital increases are an indication of the very strong willingness of CAF's members to provide support for the institution. At the same time that the number of full-member countries has increased, the credit quality of CAF's members has improved considerably. CAF's prudent financial and risk management is reflected in its well balanced assets and liabilities, conservative investment practices, and diversified funding sources, which have enabled it to continually access markets even in times of stress and tight market liquidity. As is the case with other MDBs, the Corporation's preferred creditor status ensures that debt owed to the CAF is excluded from debt restructurings carried out by official debtors. The special status has contributed to CAF's history of very strong loan performance notwithstanding the poor credit quality of many borrowers. The Corporation's credit challenges derive from its development mandate. The mandate exposes the loan portfolio to a high degree of regional concentration and results in narrow profitability as the institution seeks to provide its members with the lowest possible cost of funds. Additionally, CAF is distinguished from more highly rated MDBs by its lack of Aaa and Aa-rated members. As a result, its capital adequacy levels (which include callable capital from highly rated members) remain relatively weak despite recent improvements. Finally, CAF's liquidity ratios are also weaker than those of most more highly rated MDBs due in part to its relatively heavy reliance on short-term funding. Aa3

2 The stable outlook reflects Moody's expectation that CAF's capitalization and liquidity levels will remain adequate to the rating category even as CAF continues to expand rapidly in the coming years, and that the institution will successfully negotiate the increased operating and credit risk this entails. The rating could see upward pressure if CAF meaningfully reduces its exposure to its lowest rated borrowers, decreases its dependence on short-term funding and deposits, and strengthens its liquidity and investment policies. There could also be upward pressure if its capitalization and liquidity ratios improve significantly further, or if it obtains highly rated new members responsible for a significant amount of callable capital. There could be downward pressure on the rating if CAF faces a credit event involving any of its major borrowers, or if it suffers an unexpected drop in liquidity or capitalization levels. Organizational Structure and Strategy CAF was established in 1970 to promote sustainable economic development and regional integration for its five original member countries: Bolivia, Colombia, Ecuador, Peru and Venezuela. CAF s Establishing Agreement was amended in 2005 to allow other Latin American countries to become full members. As a result, Argentina, Brazil, Panama, Paraguay and Uruguay have joined as full members with series A shares since 2010, and CAF expects that Trinidad and Tobago will have become the 11th full member by the end of In addition, the Dominican Republic and Portugal have joined as class C members with limited rights and last year Mexico increased its Class C membership stake by $100 million from just $22 million, which made it the second largest Class C shareholder after Spain. While it is still officially named Corporación Andina de Fomento, CAF now prefers to go by its acronym and refers to itself as the Latin American Development Bank to reflect its broadening membership, which is no longer confined to the Andean region. Including class C members, CAF s total membership has expanded to 18 countries. In addition, Italy and Guatemala have signed Letters of Intent to become future shareholders; Suriname, El Salvador, Guatemala have approached CAF about the potential of becoming members; and the Bank is in discussions with Chile about increasing the size of that country s participation. CAF s mission is to support sustainable development and economic integration among its shareholder countries by helping them to make their economies diversified, competitive and more responsive to social needs. CAF seeks to encourage foreign investment and capital markets development, promote the expansion of regional trade and exports, and support the development of small and medium-size enterprises. However, its principal activity is to provide loans to finance economic and social infrastructure projects as well as working capital and trade activities in its shareholder countries. Available products include short-, medium-, and long-term loans, co-financing arrangements, guarantees and selected equity investments. While the large majority of its loan operations are to the public sector, CAF offers its products to both its member states and to the public and private financial institutions and corporations that operate within them. 1 The five original countries plus Argentina, Brazil, Panama, Paraguay and Uruguay are both "A" and "B" shareholders. The new full members are each allowed to appoint to the Board of Directors one principal director, while the founding members are allowed to appoint two directors each. Commercial banks from member countries also are able to be members and hold series "B" shares. The other member counties hold series "C" shares which entitle them to elect two principal directors collectively. 2 SEPTEMBER 3, 2013 CREDIT ANALYSIS: CORPORACION ANDINA DE FOMENTO

3 Strength of Member Support Ability to Support Remains Limited despite Improved Member Credit Quality The credit quality of CAF s members has improved considerably in recent years. Among CAF s founding members, since 2005 Bolivia has been upgraded to Ba3 from B3, Colombia to Baa3 from Ba2, and Peru to Baa2 from Ba3. Together, these three members account for 45% of total shareholdings and 39% of the loan portfolio (down from 57% of the shareholdings and 63% of the loan portfolio in 2005). All of the Bank s new full members except Argentina have also been upgraded since 2005, by as many as six notches, and their membership stake has increased from 5% to 25%. Though Jamaica, Spain, and Portugal were downgraded, together these countries account for just 4.4% of CAF s member capital. Generally speaking, the upward trend is continuing Bolivia, Ecuador, Panama, Paraguay, Peru, and Uruguay were all upgraded since the beginning of 2012, and Brazil, Colombia, and Peru all have positive outlooks (although Argentina and Venezuela, as well as Portugal and Spain, have negative outlooks). EXHIBIT 1 Membership Continues to Grow and Diversify Spain Aaa 3% Brazil Ba3 3% Bolivia B3 7% Ecuador Caa1 7% Colombia Ba2 24% Argentina B3 2% Other SG 3% Other IG 1% Peru Ba3 25% Venezuela B2 25% Source: CAF Reflects % of Paid-in Capital; 2012 includes unpaid subscribed capital Panama Paraguay Baa2 Ba3 3% 2% Uruguay Baa3 3% Spain Baa3 4% Bolivia Ba3 6% Ecuador Caa1 6% Brazil Baa2 10% Argentina B3 8% Other IG 2% Other SG 1% Peru Baa2 17% Venezuela B2 19% Colombia Baa3 19% In 2005 CAF s only shareholder countries with investment grade ratings were Chile, Mexico and Spain. It now has 10 member countries with investment grade ratings: Brazil, Chile, Colombia, Costa Rica, Mexico, Panama, Peru, Spain, Trinidad and Tobago, and Uruguay. However, CAF is distinct from all of the more highly rated MDBs in that it has no Aaa shareholders and its only current Aa shareholder is Chile, which has less than a 1% share. Despite the increase in the number of shareholders with investment grade ratings, CAF s weighted average shareholder rating has improved just modestly since 2005, rising from B1 to Ba3. However, its weighted median rating has risen much more markedly, to Baa3 from Ba3, which is as high as the weighted average median ratings of both the Aaa-rated Islamic and African Development Banks. In other words, over half of CAF s callable capital now derives from members with investment grade ratings, up from just 4% in Nevertheless, the ability of CAF s members to provide financial support to the institution remains limited compared to that of more highly rated MDBs. 3 SEPTEMBER 3, 2013 CREDIT ANALYSIS: CORPORACION ANDINA DE FOMENTO

4 Very Strong Willingness to Support CAF s greatest credit weakness, the absence of highly rated non-borrowing members from outside the region and significant levels of callable capital, is arguably also the root of one of its key strengths. CAF is a development institution of its borrowers, for its borrowers, and by its borrowers, free from outside interference. As a result, while its lending rates are relatively high due to its lower credit rating, CAF is more flexible than other MDBs in terms of environmental requirements and other restrictions attached to its loans. Furthermore, CAF serves as a lender of last resort to its members, providing them access to funding when markets are closed to them. This role results in a very high level of member support for the institution. The Bank s very high level of paid-in capital reflects the support, as do the significant capital increases that have been subscribed to over the last few years and the growth in the Bank s membership. EXHIBIT 2 Subscribed Capital Has Increased Dramatically $ 000s 9,000,000 8,000,000 7,000,000 6,000,000 5,000,000 4,000,000 3,000,000 2,000,000 1,000, Year End Capital Increase 2009 Capital Increase 2011 Capital Increase 2012 Capital Increase Source: CAF Figures reflect total paid-in capital and subscribed capital not yet paid. Some subscriptions may not have been received by year end. Excludes callable capital. Since 2005, when total paid-in capital equaled less than $2 billion, the bank s shareholder countries have approved a series of capital increases for both original and new members totaling $6 billion. In 2007 and 2008, five Class C members (Argentina, Brazil, Panama, Paraguay and Uruguay) signed agreements with the Bank for contributions to paid-in capital totaling approximately $1.6 billion to be paid between 2008 and 2014, as well as $360 million in callable capital. These agreements enabled the five countries to become full members. In 2009, following the onset of the global economic crisis, CAF s Board of Directors approved a $2.5 billion general increase in paid-in capital to be paid between 2010 and 2017 to bolster CAF s ability to withstand a potential credit crunch and further support its growing role in the region. Finally, in November 2011, in recognition of the vulnerability of CAF and its members to external events (and in particular to a potential loss of market access) precipitated by the ongoing sovereign debt crisis in Europe, the Board of Directors unanimously agreed to an additional $2 billion increase in paid-in capital, to be paid between 2013 and 2016, again affecting both the original and new members. Between 2013 and 2017, CAF will receive an additional $3.6 billion in capital payments, including $845 million this year alone. In addition to the $2.2 billion in paid-in capital it has already received since 2005, these pending capital payments will increase CAF s total paid-in capital by more than 300% over 2005 levels. CAF s new full members will provide 35% of this increase, but the original full members paid-in capital will also increase by nearly 175%. The new full members have also committed to an additional $360 million in callable capital to bring them into line with the original full members commitments all additional capital provided by the original full members will be paidin. 4 SEPTEMBER 3, 2013 CREDIT ANALYSIS: CORPORACION ANDINA DE FOMENTO

5 EXHIBIT 3 High Paid-in Capital Reflects Strong Member Support % EDB IFC IIC FLAR CAF Shelter Afrique APICORP BSTDB CABEI IsDB CDB EBRD EIF Eurofima PTA NADB CEB AfDB NIB IBRD (World Bank) ADB EIB IADB A3 Aaa Aa2 Aa2 Aa3 Ba1 Aa3 A3 A2 Aaa Aa1 Aaa Aaa Aaa Ba1 Aaa Aaa Aaa Aaa Aaa Aaa Aaa Aaa Source: Moody's Calculations Paid in Capital as a % of Total Subscribed Capital Paid-in capital represented 62% of total subscribed and additional paid-in capital as of Q1 2013, a percentage we expect to rise somewhat by 2017 once all the recently authorized capital has been paidin. CAF has the highest ratios of paid-in capital among rated MDBs. This is another indication of the high level of member support for the institution. The willingness of CAF s members to contribute so much additional capital suggests that they would also be more willing to heed a capital call should one ever be issued than members of other institutions that rely more heavily on callable capital might be. Capital Adequacy Because a number of CAF s borrowers have been upgraded to investment grade, its risk asset coverage ratio (the sum of shareholders equity and callable capital from Aa and Aaa members divided by loans to non-investment grade borrowers) has improved from 47% in 2005 to 72% in (In fact, all of this improvement has taken place since 2008.) Nevertheless, due to CAF s low levels of callable capital and the absence of highly rated members (with the exception of Chile), the ratio remains well below those for all the higher rated MDBs, which have a median of 270%. After CAF, the next lowest of these was the Aa1 rated CDB, which had a ratio of 115% in Although CAF s callable capital from Aaa/Aa members has actually dropped from $204 million to just $4 million following Spain s downgrade in 2011, callable capital of investment grade members more than quadrupled between 2008 and 2012, when it reached $914 million. However, the ratio of the sum of usable equity and callable capital from all investment grade members to risk assets is just ten percentage points higher than CAF s risk asset coverage ratio. 2 As do most MDBs, CAF has a share of its capital that is callable an unconditional and full-faith obligation of each member country to provide additional capital for the sole purpose of servicing debt, the fulfillment of which is independent of the action of other shareholders. 5 SEPTEMBER 3, 2013 CREDIT ANALYSIS: CORPORACION ANDINA DE FOMENTO

6 EXHIBIT 4 Capital Adequacy Significantly Improved 75 Risk Asset Coverage Ratio [1] % [1] Sum of shareholders equity and callable capital of Aaa/Aa members divided by loans to non-investment grade borrowers Source: CAF, Moody's Calculations Excluding callable capital, CAF s ratio of usable equity to risk assets of 72% compares favorably with that of many Aaa-MDBs, given their relatively heavy reliance on callable capital. CAF s ratio is stronger than those for the Asian Development Bank, the European Investment Bank (EIB), and the Inter-American Development Bank. In other words, in terms of capitalization, the key difference between CAF and many Aaa-MDBs is CAF s lack of callable capital from highly rated members. EXHIBIT 5 Excluding Callable Capital, CAF's Capitalization Comparable to Many Aaa MDBs Risk Asset Coverage Ratio Incl. Callable Capital from Aaa/Aa Members Risk Asset Coverage Ratio Excl. Callable Capital FLAR [1] ADB [2] APICORP [1] IBRD [2] AfDB [2] NADB [2] NIB [2] EBRD [1] IADB [2] EIB [2] IsDB [1] CEB [2] CDB [2] IIC [2] CAF [2] CABEI [2] Aa2 Aaa A1 Aaa Aaa Aaa Aaa Aaa Aaa Aaa Aaa Aaa Aa1 Aa2 A1 A2 [1] 2011 [2] 2012 Note: FLAR's Risk Asset Coverage Ratio equaled 1257; Including callable capital, the ADB's Risk Asset Coverage Ratio was 757. Source: Moody's Calculations A significant scheduled increase in capital over the next five years will permit CAF to modestly improve its capital adequacy ratios while continuing to grow its loan portfolio at a rapid clip. Assuming that loans continue to grow at 12.4% annually, equal to the compound average annual growth rate over the past seven years, and that the percentage of loans to investment grade borrowers increases to 45% from 42% as of the end of 2012 as we currently anticipate (a reasonable assumption given an expected increase in lending to Trinidad and Tobago), the risk asset coverage ratio should 6 SEPTEMBER 3, 2013 CREDIT ANALYSIS: CORPORACION ANDINA DE FOMENTO

7 improve to 76% by If the rate of loan growth slows as per management s forecast, the ratio improves a few additional percentage points. Liquidity and Funding Highly Diversified Sources of Funding Given its limited liquidity relative to other MDBs, CAF s management recognizes the importance of establishing and maintaining strong market access and has made significant efforts to develop diversified sources of funding. CAF has an established and recognized presence in the international capital markets and has shown the ability to raise funds in difficult market conditions. The Corporation's broad access to the capital markets has resulted in favorable funding costs and attests to investor appetite for a range of medium and long tenors as well as good secondary market trading for its debt issuances. CAF benefits from significant market diversification. It raised $2.7 billion in 2012 with 12 bond issues in six distinct markets, after raising $3.4 billion with 18 bond issues the previous two years, and in the first six months of 2013 it issued another $750 million. In addition to the United States, the Europe Union, Switzerland, Japan, and Hong Kong, the Corporation issues bonds and notes in the local markets of several of its member countries (Colombia, Mexico, Peru, Uruguay and Venezuela) in order to help develop their capital markets. Last year it placed bonds in renminbi and it recently issued in Australian dollars, in each case for the first time, and management is considering opportunities to tap several additional markets as well. Less than 60% percent of CAF s bonds are currently denominated in US dollars. Nevertheless, management notes that it is primarily interested in diversifying its investor base while minimizing its borrowing costs, as opposed to pursuing currency diversification. As we discuss in greater detail below, virtually all of CAF s debt is swapped to US dollars. In addition, CAF s access to the markets allows it to opportunistically lock in funding costs for its longer-term project financings. Notwithstanding its broad market access, CAF has a bond implied rating that is still well below its actual rating. Although it did rise as high as A1 earlier this year, the bond implied rating has since slipped back to A3, one notch above its level prior to CAF s upgrade last year. Management is hopeful that the upgrade will enable CAF to target a different class of investors namely central banks which it expects will enable it to bring down its yields further. It also plans to increase the size of its issuances to improve secondary market liquidity, though it will take some time before larger issuance sizes will have a meaningful impact on CAF s average cost of funds. While bonds comprise the majority of CAF s financial liabilities, CAF also relies heavily on short-term funding (obtained through its two CP programs) and term deposits, each of which accounted for about 18% of total liabilities as of December It seeks to mitigate the risk of a loss of access to short-term funding by maintaining separate commercial paper programs in the US and Europe, which are sized at $2 billion and $3 billion (following a recent expansion) respectively; it uses both actively. As of December 31, 2012, it had a total of nearly $3.1 billion in CP outstanding, up from $2 billion a year earlier. The balance of CAF s funding consists of medium-to-long-term borrowings, primarily from other development banks and export finance agencies. 3 It should be noted that management s medium-term planning assumption is for average annual loan growth of just 10.75% and the current year s budget contemplates loan growth of just 9%. According to management, the purpose of the most recent capital increase was not to increase lending so much as to provide the Bank the capacity to do so if it proved necessary due to exigent circumstances. 7 SEPTEMBER 3, 2013 CREDIT ANALYSIS: CORPORACION ANDINA DE FOMENTO

8 EXHIBIT 6 Liquidity Adequate, But Heavily Dependent on Short-Term Financing % EIB [1] NIB [1] IADB [1] CABEI [2] CAF [2] IBRD [2] ADB [2] AfDB [2] CDB [2] CEB [2] BSTDB [2] EBRD [1] IFC [2] APICORP [2] IIC [2] FLAR [1] Aaa Aaa Aaa A2 Aa3 Aaa Aaa Aaa Aa1 Aaa A3 Aaa Aaa A1 Aa2 Aa2 [1] 2011 [2] 2012 Source: Moody's Calculations Short-Term Debt + Current Maturities of Long-Term Debt/Liquid Assets CAF's liquidity ratio of 59% (the sum of current maturities of long-term debt and short-term debt divided by liquid assets) indicates that it has enough liquid assets to cover more than 20 months of its average funding requirements, and is comparable to that of many of its rating peers, However, compared to most other MDBs, CAF has a much higher level of deposit funding, which Moody's considers to be less reliable than long-term debt financing, and more comparable to short-term debt financing. This is reflected in the $550 million decline in deposits in 2012 following a $930 million increase the previous year. Together, commercial paper and deposits accounted for nearly one quarter of the Bank's capitalization in If deposits are added to the denominator of the liquidity ratio, it rises to 102%, more than twice the median (higher being weaker) for Aa and Aaa-MDBs and weaker than all more highly rated MDBs except for the European Investment Bank and Apicorp (which relies even more heavily on deposits). Even by this measure, however, CAF still has enough liquid assets to cover a year's potential funding requirements - quite strong by ordinary standards. Moreover, expected annual capital contributions are equal to at least 50% of annual long-term debt repayments over the next five years (and this year they exceed 100% of annual long-term repayments), which significantly reduces CAF s need to rely on internal liquidity in the event it loses market access over that period. Management hopes that CAF s recent upgrade will allow it to raise long-term funds at a lower cost than previously and thereby enable the Bank to carry higher levels of liquidity. Moderate Leverage While its liquidity may be relatively weak, CAF s leverage compares favorably to that of more highly rated MDBs, particularly when callable capital is excluded. CAF s ratio of usable equity to debt of 39% is better than the ratio among half of MDBs rated Aa or Aaa. Even after we take into consideration callable capital from Aaa/Aa members, CAF remains stronger in terms of its leverage than the Aaa-rated Council of Europe Development Bank (CEB) and the NIB. According to management s financial plan, CAF will issue between $1.7 billion and $1.9 billion in bonds annually over the next several years. Together with other long-term borrowings, and net of scheduled amortization payments, management expects long-term debt to grow at an average annual rate of 11.5%, slightly faster than the projected rates of growth of the loan portfolio and equity. (In 2012, long-term debt rose by a considerably higher 21%.) Nevertheless, we expect the leverage ratio to improve slightly to approximately 42% over by 2016 as growth of deposits and short-term debt is projected to be limited. Faster than expected growth of deposits would have a negative effect on the leverage ratio. 8 SEPTEMBER 3, 2013 CREDIT ANALYSIS: CORPORACION ANDINA DE FOMENTO

9 Governance and Risk Management Moody s assessment of CAF s governance and risk management is based on a review of its by-laws and internal policies, and their consistency with industry best practices. Risk management is overseen by CAF s controller. Responsible for ensuring compliance with the Bank s financial policies and guidelines, the Controller reports directly to the president and the board of directors. The Controller s office includes a Risk Management Unit, Internal Auditing Unit and Ex-Post Evaluation Unit. On top of the risk management functions overseen by the controller, CAF has a separate Treasury Risk Management Unit that operates within the Treasury Department and overseas the bank s trading and investing activities, but reports to the Vice President of Finance rather than the Treasurer. Over the past three years, risk management controls have been fully integrated into the bank s IT systems to provide real time reporting of compliance. Any breaches are required to be rectified immediately. CAF s key financial policies related to minimum required levels of liquidity and capitalization and lending and borrowing limits are enshrined in its constitutive agreement or approved by its Board of Directors. These are complemented with a more comprehensive set of detailed financial guidelines related to the bank s investments and asset-liability management practices that have been approved by the CEO. The Bank has additional CEO-approved guidelines that address some of the same issues as its financial policies but are more restrictive, though even these are relatively liberal compared to the policies of most more highly rated MDBs. In practice the Bank generally operates to a much more conservative standard than either its policies or guidelines require. However, Moody s notes that this arrangement provides management the flexibility to meaningfully increase the risk profile of the bank without seeking board approval should its strategies change (though we do not currently anticipate any such change). CAF s liquidity guidelines require that at a minimum liquidity should cover the greatest of 35% of debt service plus gross expected disbursements over the next 12 months (), 45% of the undisbursed total of committed project loans, or 25% of total financial liabilities (the latter, a board-approved policy requirement). While these requirements are modest relative to most more highly rated MDBs, many of which require that liquid assets equal a minimum of 100% of the next 12 months debt service and (net) expected disbursements, in practice CAF maintains liquidity levels that are significantly greater than required. As of the end of 2012, liquid assets equaled 115% of total undisbursed commitments and 110% of the sum of the next 12 months debt service and expected disbursements, and 40.5% of financial liabilities (up from 28.6% in 2005). Financial Policies The gearing 4 policy limits the sum of loans, equity securities and guarantees to four times net worth, while the leverage policy limits the ratio of financial liabilities to net worth to 3.5:1. As of December 31, 2012, the ratios were 2.4:1 and 2.5:1 respectively, in both cases well under the policy limits. Similarly, CAF s capitalization policy requires that it maintain a minimum ratio of Tier 1 capital to total risk of 30% but as of the end of 2012, its actual ratio was 40%. In addition to the overall lending limit in the Banks gearing policy, the Bank also has limits on lending to individual borrowers that vary depending on the class of borrower. According to the Bank s new credit manual, loans to the original Class A Shareholders are limited to 25% of the Bank s total loan portfolio and the new Class A Shareholders are limited to just 15%. While these new limits are considerably more restrictive than those in the Bank s board-approved policies, which cap exposure to 4 Gearing ratio refers to the comparison of owner's equity (or capital) to borrowed funds. 9 SEPTEMBER 3, 2013 CREDIT ANALYSIS: CORPORACION ANDINA DE FOMENTO

10 a single country at 35% of the loan portfolio and 100% of net equity, they remain very liberal compared to those of most more highly rated MDBs. In practice, however, CAF s exposures to its founding members are well below even the new lower limits and, as noted earlier, management plans to limit its largest exposure to 15% of its portfolio going forward. Class C shareholders borrowing privileges are limited to the eight times the amount of resources they have committed to the bank, and four times for projects that are strictly national in nature. Loans to individual non-guaranteed public sector borrowers and private sector borrowers are limited to 15% and 10% of CAF s net equity respectively, and the Bank can only debt finance up to 50% of a particular project s cost on a limited recourse basis, but there is no aggregate limit on such lending. CAF may also invest up to 10% of its net worth in equities, with a cap of 1% of CAF s net equity for any individual company (except for investment funds), up to 20% of that company s total net equity. Asset-Liability Management CAF's asset/liability management seeks to minimize roll-over, interest rate and exchange rate risks and avoid maturity mismatches. The Bank s policy limits unhedged foreign exchange exposure to 5% of its externally managed investment portfolio and just 1% of its internally managed portfolio, and it is not permitted to take on unhedged foreign exchange risk under any of its loans (though it is permitted to do so on its equity investments). While the Bank is not required to hedge its interest rate risk, or foreign exchange risk on its debt obligations, in practice it frequently does so. Over 99% of the bank s loans are floating rate and denominated in dollars, and after swaps are taken into consideration, close to two-thirds of its debt is floating rate and 98% is denominated in US dollars. CAF is only permitted to enter into derivative contracts for hedging purposes. In addition, CAF's asset and liability portfolios are fairly well diversified and balanced in terms of tenors. Its liquid investments are roughly equal to the sum of its outstanding commercial paper and deposits. Its loans have an average term of 5.9 years, and are roughly equal in amount to the sum of its long-term debt, with an average maturity of approximately 5.7 years, and equity. As the average term of CAF s loan portfolio grows, management is working to extend the average maturity of its funding as well, an effort reflected in the Bank s recent issuances, which have ranged from 10 to 30 years. Under many of the hedge agreements, both CAF and its counterparties are required to post collateral if their mark-to-market exposure exceeds certain thresholds that vary depending upon their credit ratings. As of the end of 2012, the Bank was holding approximately $215 million in collateral from its hedging counterparties. Management calculates that interest rates would have to increase by 250 basis points for this position to drop to $0. Under current market conditions, the Bank would not be required to post collateral under any of its swap agreements unless it were downgraded to Baa1, and even then collateral posting requirements would be limited to a maximum of $100 million. Notwithstanding the collateral posting requirements, the Bank s President approves exposure limits for each of its counterparties (subject to general Board approved limits) based upon the recommendations of the investment, asset-liability, credit, and management committees, and taking into consideration the advice of the controller s office. 10 SEPTEMBER 3, 2013 CREDIT ANALYSIS: CORPORACION ANDINA DE FOMENTO

11 Investment Guidelines Underpinning CAF s P-1 commercial paper rating is its conservative liquidity management. CAF s investments consist almost entirely of high quality, short-term securities. Largely thanks to this, the financial crisis did not hurt CAF s investment portfolio. Although the Bank had some exposure to European financial institutions, it did not take any losses on these investments, which were all shortterm and subject to limits that were reduced in a timely manner. Currently, the Bank has minimal exposure to banks in Spain, Italy, or peripheral Europe. The primary objective of CAF s investment strategy is preservation of capital, with maintenance of liquidity a secondary objective and profitability coming in last. Investments are also required to be managed within the context of the Bank s overall asset-liability management strategy. To this end, the Bank s investment guidelines are reviewed and revised every two years. The portfolio is subject to a Value at Risk limitation, the calculations for which are reviewed by the Bank s controller. The limitation requires a minimum 95% probability that losses within a 12 month period be no more than 2% of the portfolio s market value. (According to management, VAR is currently just 0.36%.) In order to help achieve this objective, CAF s has policies on the duration, credit quality, and concentration of its investments. These policies protect the portfolio against market, liquidity, and credit risk, and senior management is provided a liquidity report on a daily basis. CAF has strengthened its investment policies by establishing that at least 90% of its liquid assets have to be rated A3 or better previously, the investment policy simply required that at least 80% of its liquid assets be rated investment grade. However, the remaining 10% of the portfolio need only be rated a minimum of B2. This provision is intended to enable CAF to make investments in its borrowing member countries. Use of the investment portfolio to promote the economic development of the Bank s member countries typically the role of the loan portfolio is a credit negative, in Moody s view. While CAF s investment policy remains more liberal than the policies of most more highly rated MDBs even after recent revisions, in practice CAF maintains much more conservative standards than required by the policy. As of March 31, 2013, 98% of CAF s liquid assets were rated A3 or better, with an average rating of Aa2, and CAF had just $28.4 million invested in borrowing member countries, equal to just 0.4% of the bank s total liquid assets. Except for obligations of the US government and the Bank for International Settlements (which are each subject to a 50% limit), no more than 5% of the Bank s investments can be in any single sovereign issuer s long-term obligations and no more than 3% in those of any single private issuer. While the investment policy does permit the Bank to invest in various structured instruments, including ABS, MBS, and CMOs, these are indirectly limited to a small portion of the portfolio, must be overseen by third-party asset managers, and must be rated Aaa. The asset managers may also invest up to 3% of their respective portfolios in macro portfolio hedges utilizing derivative instruments with open positions, not including interest rate futures. (The Bank currently has 18% of its liquid investments managed externally, though it is permitted to invest up to 30% with third-party managers.) The bank marks its investments to market on a daily basis and must liquidate positions that violate its investment guidelines within timeframes specified by its liquidity guidelines. The portfolio is subject to a maximum maturity of 10 years and is effectively limited to an average duration of 1.5 years (although currently it is just 0.7 years), helping to ensure that the Bank s investments remain highly liquid and helping to shield the value of its portfolio from interest rate risk. Two thirds of the liquid assets mature in less than five weeks. 11 SEPTEMBER 3, 2013 CREDIT ANALYSIS: CORPORACION ANDINA DE FOMENTO

12 Operational Risk Management In addition to its financial policies and guidelines, CAF has a detailed methodology for the management of operating risk involving the identification of key risks, the development of controls, and the evaluation of those controls for effectiveness. The methodology was developed by CAF s Office of Risk Control (which reports to the Controller), which is also responsible for monitoring compliance with the methodology, while the President is ultimately responsible for implementation and ensuring compliance. One specific measure that CAF has implemented in response to concerns about operating risk is its business continuity strategy, which involved the creation of a second trading desk in Lima. CAF relies on the criteria of effective internal control determined in the Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Asset Composition and Quality After seven years of growth averaging 12% annually, CAF s loan portfolio totaled $16.4 billion by the end of As a result, it had doubled since Given the rapid growth of the institution, the bank is disbursing more loans to most of its members than it is receiving from them in loan payments. The public sector was the recipient of 85% of the loans (96% of which had a sovereign guarantee). Of the 15% to the private sector, 50% was to financial institutions. The majority of the private sector lending is concentrated in just three countries Brazil, Colombia, and Peru. (While private sector loans accounted for approximately 50% of total disbursements, these loans tend to have shorter tenors than public sector loans. In addition, this figure includes co-financing provided by other lending institutions. As a result, the private sector continues to represent a much smaller portion of the total loan portfolio.) The private sector portfolio also included $39 million in direct equity investments and $108 million in equity investment funds. EXHIBIT 7 Loan Portfolio Has Diversified and Credit Quality Improved % of Gross Loans 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Colombia Venezuela Peru Ecuador Argentina Bolivia Brazil Other Investment Grade Source: CAF, Moody's Despite the upgrades to many of its members and the addition of new members, the weighted median rating of CAF s loan portfolio is the same now as it was in 2005, at Ba3. However, the weighted average rating improved slightly to B1 from B2 and over 40% of CAF's loans are now to members with investment grade ratings, up from just 0.01% in SEPTEMBER 3, 2013 CREDIT ANALYSIS: CORPORACION ANDINA DE FOMENTO

13 Reduced Concentration Risk In addition to improving in quality, CAF s loan portfolio has also become considerably more diverse by some measures as its membership has grown. When measured as a percentage of Tier 1 Capital (or usable equity), its top 5 country exposures declined from 186% in 2005 to 161% in 2009, though it has since crept back up to 176% in Whereas its original five members accounted for 95% of its loan portfolio in 2005, this has been declining steadily. In 2012, they represented less than 50% of loans approved for the first time. As a result, they now account for just 71% of the total portfolio, and this percentage is likely to drop further. However, CAF s five largest borrowers account for a slightly higher 74% of its total loan portfolio as Argentina surpassed Bolivia as the fifth largest borrower in CAF s largest single exposure has also fallen from 25.5% in 2005 (Colombia) to less than 17% in 2012 (Venezuela). In the future, members will be limited to 15% of the bank s total loan portfolio. However, CAF s exposure to countries rated B2 and below has increased. In 2005, there were six such borrowers, whose combined loans equaled 47% of the total loan portfolio and 107% of usable equity. Bolivia, Ecuador and Venezuela alone accounted for 97% of this exposure. In 2012, there were just four borrowers rated B2 or lower, (of which exposure Argentina, Ecuador, and Venezuela accounted for 99.9%), but their combined borrowings again totaled over 45% of the total loan portfolio and had increased to 110% of usable equity. The biggest share of the loan portfolio goes towards funding infrastructure projects (transportation, telecommunications, electricity, gas and water). At the end of 2012, infrastructure accounted for 70% of the total portfolio, followed by social development (19%) and financial intermediation (10%). Over the last decade, CAF reportedly provided more financing for infrastructure in Latin America than any other MDB. However, except for a portion of its private sector loans, CAF does not take on any industry risk. While it has significant credit exposure to countries with very low ratings, these ratings do not reflect the benefit of CAF s preferred credit status. A recent example of this is provided by Ecuador, which defaulted on debt obligations in December 2008 but did not default on its debt to the CAF. CAF is arguably a preferred creditor among MDBs. According to management, both Ecuador and Peru remained current on their obligations to CAF even while they defaulted or were in arrears on their obligation to other MDBs, including the World Bank and the IDB. In order for CAF to agree to participate together with other MDBs in Bolivia s debt relief under the HIPC (highly indebted poor countries) initiative, Bolivia had to obtain third party donations to repay a portion of the amount relieved by CAF and it had to surrender certain shareholder rights in exchange for the remainder, concessions not required by its other MDB lenders. Additional privileges afforded to CAF when operating within shareholder countries include: free convertibility and transferability of assets; exemption from public sector debt restructurings and moratoria; immunity from expropriation: and exemption from taxes. 13 SEPTEMBER 3, 2013 CREDIT ANALYSIS: CORPORACION ANDINA DE FOMENTO

14 EXHIBIT 8 Loan Performance Very Strong Despite Rapid Portfolio Growth 17,000 Gross Loans Outstanding (LHS) NPLs / Gross Loans (RHS) 15,000 ($mm) 13,000 11,000 9,000 7,000 5, % 0.9% 0.8% 0.7% 0.6% 0.5% 0.4% 0.3% 0.2% 0.1% 0.0% Source: CAF, Moody's Calculations Despite the fact that CAF is controlled by its borrowing member countries, it maintains strict underwriting standards, as reflected in the strong performance of its portfolio, including loans to the private sector. CAF has generally had virtually no non-performing loans despite the rapid growth of its portfolio and the poor credit quality of some of its public-sector borrowers. While CAF registered NPLs (totaling 0.05% of its loan portfolio) in 2011and 2012 for the first time since 2005, its sole NPL as of the close of 2012 has since been restructured management notes that even it was never late on interest payments. Moreover, the Corporation s loan loss allowance equaled $126 million, providing a solid cushion against potential credit losses. CAF has been reducing its loan loss allowances for the past three years due to its strong historical loan performance. While CAF does not recognize public sector loans as impaired until they are 180 days past due (a relatively liberal threshold), aside from the impaired loans noted above, no other loans were overdue. In fact, management reports that no public sector loan has ever been more than a few days late, and even then any delay was simply due to administrative problems. Profitability Net income increased slightly to $160 million in 2012 from $153 million the previous year, after four consecutive years of declines. However, it remains well below its 2007 peak of $401 million. The increase in net income in 2012 was primarily attributable to a 10% increase in net interest income, driven by a 13% increase in loans and investments. 5 While operating expenses increased by 8.5% in 2012, the Bank had made significant improvements to its operating efficiency over the previous several years. Despite the improvement in net income, return on assets and return on equity declined slightly last year, though the net interest margin improved. Return on Average Assets (ROAA) fell to 0.69% in 2012 from 0.76% the previous year and the Return on Average Equity (ROAE) declined to 2.42% from 2.52%. However, the net interest margin (net interest income as a percentage of earning assets) increased to 1.03% from 0.99%. Small fluctuations in CAF's profitability should not impact its rating provided net income remains positive and equity is not eroded given its mission of providing the lowest cost funding possible to its members rather than maximizing profitability. 5 Loans grew by 9% and loan interest rose by 21%, but lower yielding cash and marketable securities increased by an even larger 27% and investment income nearly doubled. (Nevertheless, returns averaged just 1.1%.) As a result, while gross interest income rose by a significant 21%, interest expense rose by an even higher 32%. 14 SEPTEMBER 3, 2013 CREDIT ANALYSIS: CORPORACION ANDINA DE FOMENTO

15 Rating History EXHIBIT 9 Corporacion Andina de Fomento Rating Direction LT Issuer ST Issuer Senior Unsecured Outlook Rating Date Rating Raised Aa3 Aa3 Jun-12 Rating Raised A1 A1 Jun-05 Outlook Assigned STA Nov-03 Rating Assigned P-1 Dec-02 Rating Raised A2 A2 May-01 Rating Raised A3 A3 Jun-97 Review for Upgrade Baa2 Baa2 Jan-97 Rating Raised Baa2 Baa2 Jan-96 Rating Assigned Baa3 Dec-94 Rating Assigned Baa3 Jun SEPTEMBER 3, 2013 CREDIT ANALYSIS: CORPORACION ANDINA DE FOMENTO

16 Annual Statistics Corporacion Andina de Fomento (CAF) Balance Sheet Summary (US$ Mil.) Assets Total 9,482 10,439 12,590 14,272 15,887 18,547 21,535 24,604 Liquid Assets 1,788 1,931 2,458 3,281 3,685 4,127 5,656 7,186 Cash Deposits ,490 1,441 1,550 1,639 1,591 Investments 1,193 1,358 1,983 1,638 2,214 2,457 3,760 5,453 Repurchase Agreements Gross Loans Outstanding 7,347 8,097 9,548 10,184 11,687 13,783 14,981 16,355 Less Loan commissions net of origination costs Interest Receivables Less Allowance for Loan Losses Investment in Other Entities Fixed assets (Net) Other assets Liabilities Total 6,245 6,747 8,463 9,719 10,600 12,794 15,184 17,739 Deposits ,521 2,773 2,651 2,739 3,672 3,122 Commercial Paper ,265 1,524 1,977 3,175 Advances and Short Term Borrowing Bonds Outstanding (Net) 4,061 4,362 4,637 5,207 5,699 7,213 8,072 9,743 Borrowings (Net) ,138 1,391 Accrued Interest Payable Other Liabilities Capital and Reserves Total 3,237 3,693 4,127 4,554 5,287 5,753 6,351 6,865 Paid in Capital 1,921 2,127 2,249 2,457 3,025 3,430 3,969 4,419 Reserves 1,033 1,245 1,477 1,786 2,027 2,157 2,230 2,286 Retained Earnings Total Liabilities & Equity 9,482 10,439 12,590 14,272 15,887 18,547 21,535 24, SEPTEMBER 3, 2013 CREDIT ANALYSIS: CORPORACION ANDINA DE FOMENTO

17 Corporacion Andina de Fomento (CAF) Income Statement Summary (US$ Mil.) Net Interest Income Interest Income Loans Investments and Time Deposits Interest Expense Plus Net Commissions Commission Income Commission Expense Plus Dividends and equity in (losses) earnings of investees Plus Net Other Income Other Income Other Expense Equals Gross Operating Revenue Less Administrative Expenses Less Provisions for loan losses Plus Unrealized changes in fair value related to financial instruments Plus Cum. Effect of Change in Acctng for Derivatives and Hedges Equals Net Income Capital Structure Total Subscribed Capital 2,929 3,045 3,157 3,732 4,084 4,956 5,452 6,291 Less Total Callable Capital 1,112 1,112 1,112 1,112 1,274 1,436 1,553 1,550 (CC of Aaa/Aa members) (CC of Investment Grade members) Less Unpaid Subscribed Capital ,104 Equals Subscribed and Paid-in Capital 1,682 1,871 2,015 2,176 2,486 2,814 3,229 3,637 Plus Additional Paid-in Capital Equals Total Paid in Capital 1,921 2,127 2,249 2,457 3,025 3,430 3,969 4, SEPTEMBER 3, 2013 CREDIT ANALYSIS: CORPORACION ANDINA DE FOMENTO

18 Corporacion Andina de Fomento (CAF) Balance Sheet Analysis Composition of Assets (%) Liquid Assets Gross Loans Outstanding Others Capitalization (%) Deposits Commercial Paper Advances and Short Term Borrowing Bonds Outstanding (Net) Loans and Other Financial Obligations (Net) [Borrowing] Accrued Interest and Commissions Reserves and Retained Earnings Usable Paid-in Capital CC of Aaa/Aa members Total SEPTEMBER 3, 2013 CREDIT ANALYSIS: CORPORACION ANDINA DE FOMENTO

19 Corporacion Andina de Fomento (CAF) Financial Ratios Profitability (%) Return on Total Average Assets Return on Average Equity Net Interest Income on Loans as a % of Average Loans Outstanding Interest Coverage Ratio (Net Operating Income + Interest Expense as % of Interest Expense) (X) Capital Adequacy and Leverage Ratios (%) Usable Equity as a % of Risk Assets [1] Usable Equity as a % of Total Borrowings Usable Equity + CC of Aaa/Aa Members as a % of Risk Assets [1] Usable Equity + CC of Aaa/Aa Members as a % of Total Borrowings Liquidity Ratios (%) Liquid Assets as a % of Total Borrowings ST Debt + CM LT Debt + Deposits as % of Liquid Assets Liquid Assets as a % of Deposits Financial Policy Ratios Loans/Equity [2] Borrowing / Equity [3] [1] Risk assets defined as loans to countries considered by Moody's to be below investment grade. [2] Policy limit of 4 times [3] Policy limit of 3.5 times 19 SEPTEMBER 3, 2013 CREDIT ANALYSIS: CORPORACION ANDINA DE FOMENTO

20 Moody s Related Research Credit Opinion:» Corporacion Andina de Fomento Rating Action:» Moody's upgrades CAF to Aa3, June 2012 Rating Methodology:» Multilateral Development Banks and Other Supranational Entities Request for Comment, August 2013 To access any of these reports, click on the entry above. Note that these references are current as of the date of publication of this report and that more recent reports may be available. All research may not be available to all clients. Sources of Information Used in this Report» Corporacion Andina de Fomento MOODY S has provided links or references to third party World Wide Websites or URLs ("Links or References") solely for your convenience in locating related information and services. The websites reached through these Links or References have not necessarily been reviewed by MOODY S, and are maintained by a third party over which MOODY S exercises no control. Accordingly, MOODY S expressly disclaims any responsibility or liability for the content, the accuracy of the information, and/or quality of products or services provided by or advertised on any third party web site accessed via a Link or Reference. Moreover, a Link or Reference does not imply an endorsement of any third party, any website, or the products or services provided by any third party. 20 SEPTEMBER 3, 2013 CREDIT ANALYSIS: CORPORACION ANDINA DE FOMENTO