CARIBBEAN DEVELOPMENT BANK’S RESPONSE TO CREDIT RATING DOWNGRADES FROM STANDARD & POOR’S
On June 12, 2012, Standard and Poor’s downgraded the Caribbean Development Bank (CDB) by one notch to ‘AA+’, while affirming its short-term rating of ‘A-1+’, with a stable outlook. This followed the announcement by Moody’s Investor Service on May 11, 2012, that it had downgraded CDB’s credit rating by one notch from ‘Aaa’ to ‘Aa 1’, with a negative outlook.
In its review, S&P wrote that the downgrade reflected its “… view that CDB’s risk management is not commensurate with other ‘AAA’ rated multilateral lending institutions, particularly given its size and regional economic weakness. CDB has failed to comply with one of its internal liquidity policy guidelines, and borrower concentration remains high.”
With regard to the issue of the liquidity policy, Moody’s noted that the Bank’s ability to service its debt in a timely manner was never imperilled and that CDB’s liquidity policy is very conservative, relative to those of other AAA-rated institutions
CDB notes the concerns raised by the credit agencies and has started to address these concerns. In particular, the Bank is already undertaking an in-depth examination of its risk management framework. Discussions have started with some of the major shareholders with a view to securing assistance in strengthening the internal risk management capacity. CDB intends to implement appropriate recommendations by year end.
With respect to the concern regarding the heavy front-loading of short-term maturities on its borrowings, the Bank is actively engaged in addressing the maturity profile of its borrowings, including making more use of amortised borrowings and, wherever possible, increasing its funding from institutional sources.
S & P highlighted the issue of borrower concentration, with the top five borrowers accounting for 63% of total loans. This is primarily a function of the limited size of the Bank’s borrowing membership (18 borrowing member countries), the ability of these countries to access institutional and market-type borrowing, and the economic situation prevailing in the Region.
Both rating agencies acknowledged a number of significant credit strengths, including strong support from members; preferred creditor status; and strong capital adequacy ratios. As a matter of fact, S&P noted CDB’s risk bearing capacity ratio was higher than many of CDB’s larger ‘AAA’ peers with more diversified membership and funding sources. In addition, the stable outlook reflects S&P’s expectation that the Bank’s financial position will remain in line with its rated peers and that strong shareholder support will be sustained.