THE CARIBBEAN DEVELOPMENT BANK’S (CDB) RESPONSE TO MOODY’S INVESTORS SERVICE PRESS RELEASE ON CDB
CDB notes the Release issued by international credit rating agency, Moody’s Investors Service, on February 3, 2012 that it has placed the Aaa rating of the Bank under review for possible downgrade. The Release notes that “the review will consider the CDB’s strategy for refinancing its upcoming maturities and structuring its amortization profile going forward. The review will also include an in-depth assessment of the bank’s governance and risk management policies and practices, with a focus on asset/liability and liquidity management relative to that of other Aaa-rated multi-lateral development banks (MDB’s)”.
The Bank takes careful note of the concerns raised in the Release which revolve around two principal issues, namely the front-loading of its short-term maturities and its liquidity ratio falling below the policy minimum in 2010. In its discussions with Moody’s, the Bank indicated that there were well-founded reasons that led to the two issues under discussion.
On the issue of the bunching of its maturities, the Bank notes that it faced a difficult market in 2011 when the European sovereign debt crisis was at its peak. As a consequence, the Bank opted to raise shorter term funding due to the lack of investor appetite for longer-term funding, and had it gone that route, it would have incurred significantly higher borrowing costs. This would have resulted in the Bank having to pass on this higher cost to its borrowers, predominantly the Governments of the Region, at a time when their fiscal situation could not accommodate such an increase.
With respect to the concern regarding the Bank’s liquidity ratio falling below the policy minimum, it should be noted that the shortfall resulted from the exercise of a put option by one of its investors. In the Bank’s view, because of the small size of the absolute shortfall in its liquidity requirement and the then prevailing market conditions, it was not financially efficient to go to the market to raise what would have been a sub-optimal size borrowing. In the circumstances, the Bank took the decision to delay its approach to the market to a more opportune time.
In July 2011, the Bank took action to correct its liquidity shortfall and the current level is well in excess of its policy minimum while it is currently engaged in discussions aimed at addressing the current front-loading of its short-term maturities. As the Release notes, the Bank’s liquidity never fell to levels that would endanger the Bank’s ability to fulfil its financial obligations.