Moody’s Investors Service has assigned first-time foreign-currency issuer ratings of A3/P-2 to Africa Finance Corporation (AFC). The outlook on the rating is stable.
Moody’s rationale for the AFC’s A3 rating is based on: Sound capital adequacy, low leverage compared to peers, and an absence of non-performing loans (NPLs).
AFC’s Capitalisation is also supported by a good profit margin and significant profit retention, notes Moody’s with its high degree of liquidity, supporting the bank’s resiliency to shocks, especially in light of the planned expansion of its balance sheet.
The AFC was established in 2007 to participate, as a Pan-African institution, in the financing of critical infrastructure in Africa, which is an area of substantial demand.
Structured as a unique form of Public-Private Partnership with commercial banks, AFC is a supranational institution with a private sector majority membership, allowing the bank to maintain some degree of independence from potential political pressure and ensuring the commercial orientation of its business operations.
The bank has three types of lending activities: project, corporate, and infrastructure finance loans (accounting for 38 percent of the bank’s development assets at the end of 2012); structured trade finance operations (accounting for 44 percent); and equity/mezzanine investment (accounting for 18 percent). The bank also provides some advisory services.
“These activities expose AFC to credit risk, especially so in a region that has experienced economic turmoil and crises,” said Aurelien Mali, VP-Senior Analyst, at Moody’s.AFC’s asset coverage ratio — defined as its usable equity as a percentage of development operations (both lending and equity investment) and treasury assets (weighted by credit quality) — is strong (139 percent in 2012) and compares favorably with peers, note Moody’s.
The main constraint to Moody’s assessment of AFC’s capital adequacy is the fact that the average quality of its borrowers is B1, which is a relatively low to its A-rated peers.
Therefore, the preservation of the strong performance of its assets as it substantially grows its balance sheet over the coming year will remain crucial to Moody’s assessment of the bank’s creditworthiness. That being said, the rating agency expects some of AFC’s capital adequacy metrics — notably, its capital position and leverage ratio — to deteriorate gradually as the bank expands its operations.
However, even conservative projections of AFC’s balance sheet evolution suggest that its overall capital adequacy will remain solid.
In particular, Moody’s highlights that the bank’s capitalization is also supported by a good profit margin (return on assets reached 4.9% in 2012) and significant profit retention.
A continued rise in profitability as AFC expands its balance sheet in the coming years without a deterioration of asset quality could exert upward pressure on the rating, according to Moody’s.
However downward pressure could develop on AFC’s rating should it experience a substantial shock to its capital adequacy, liquidity, or member support.
Applicable scenarios could include, an excessively rapid expansion in its loan book (or leverage) that results in a sustained spike in NPLs (or increasingly onerous debt service payments); or a sustained
deterioration in country or regional economic conditions that materially restricts AFC’s access to market funding and/or support from key members, in case of need.
