International Finance Facility for Immunisation Ratings Affirmed At 'AA/A-1+'; Outlook Remains Negative

  • The International Finance Facility for Immunisation's (IFFIm's) purpose is to provide funding to the Vaccine Alliance (Gavi) for immunization and programs related to Gavi's mission.
  • The ratings balance our view of IFFIm's policy importance and the creditworthiness of its main donor countries.
  • We are affirming our 'AA/A-1+' ratings on IFFIm.
  • The outlook on IFFIm remains negative, reflecting the negative outlook on the long-term rating on the U.K., IFFIm's largest donor and therefore its largest source of contribution receivables (or pledges).
NEW YORK (S&P Global Ratings) Dec. 7, 2018--S&P Global Ratings today said it 
affirmed its 'AA/A-1+' long- and short-term issuer credit ratings on the 
U.K.-based multilateral agency International Finance Facility for Immunisation 
(IFFIm). The outlook remains negative.

The ratings on IFFIm reflect our view of the commitment of its highly rated 
contributors to its mandate of supporting child immunization programs in the 
world's poorest countries and takes into account the risks stemming from the 
creditworthiness of its main donor countries. 

Founded in 2006 with US$4 billion pledged over 20 years by six sovereign 
donors, IFFIm, an innovative financial tool, has issued a variety of debt 
instruments against future donor pledges to provide annual grants over two 
decades to the Vaccine Alliance (Gavi)--a public-private partnership whose 
partners include the World Health Organization, the U.N. Children's Fund, 
International Bank for Reconstruction and Development (IBRD, commonly referred 
to as the World Bank), the Bill and Melinda Gates Foundation, governments of 
both developing and industrialized countries, research and health institutes, 
vaccine producers, and civil society organizations.

Since inception, donors' pledges have increased to US$6.6 billion, of which 
US$3.8 billion will be paid from 2018 to 2037. In October 2018, Brazil signed 
a grant agreement for $20 million paid over 20 years in support to IFFIm. This 
makes it the 10th government donor to IFFIm overall and the second donor of 
emerging market countries Brazil, Russia, India, China, and South Africa 
(known as "BRICS") after South Africa. France, The Netherlands, and Australia 
committed future pledges to IFFIm, in addition to their already existing 
long-term pledges, as part of Gavi's replenishment for 2016-2020.

As of November 2018, the U.K. is the largest donor to both IFFIm and Gavi. Its 
pledges represent 49% of donor receivables at IFFIm, and we expect it will 
fund 27% of activities under Gavi's 2016-2020 funding cycle. Consequently, we 
consider that the credit quality of pledges from the U.K. is in line with 
IFFIm's credit quality. If we were to downgrade the U.K., we would downgrade 
IFFIm. 

Donors' pledges can be reduced, based on how many Gavi-eligible recipient 
countries have protracted arrears to the International Monetary Fund (IMF). As 
of November 2018, Somalia and Sudan were the only countries in arrears to the 
IMF, leading to a 1.5% reduction of total donor sovereign pledges to IFFIm. 
Although this reduction is small, it supports our conservative assumptions for 
long-term donor pledges.

Under our criteria, we determine support for IFFIm by evaluating the support 
of IFFIm's strongest contributors. Apart from the U.K., highly rated 
contributors include Australia, Norway, The Netherlands, and Sweden (all rated 
'AAA'), which as of November 2018 together account for 9% of the contributions 
IFFIm is to receive. The second-largest donor is France (rated 'AA'), which 
provides 31% of the total estimated remaining inflows into IFFIm. Other 
lower-rated contributors are Italy (8%) and Spain (3%), as well as Brazil (1%) 
and South Africa (less than 0.5%). 

To measure IFFIm's risk-adjusted gearing, we calculate the coverage of the 
outstanding debt by total remaining pledges from 'AAA' and 'AA' rated 
sovereigns under a severe stress scenario. We estimate this ratio to be 2.0x 
by Dec. 31, 2018, in line with our previous estimate of 1.8x as of year-end 
2017. In the coming years, we expect the coverage ratio will increase 
slightly, unless Gavi wants to use substantially more of IFFIm's funds. 

We expect that IFFIm will issue enough debt to maintain its planned 
disbursements to Gavi and sustain its liquidity requirements to cover 12 
months of upcoming debt service payments. Our estimated coverage ratio 
includes only pledges from contributors rated at the rating level of IFFIm 
itself or above (that is, currently 'AA' or above).

The ratio falls sharply if we exclude pledges from the U.K., putting the full 
coverage of debt payment at risk.

IFFIm has its own internal gearing ratio to manage credit risk and protect the 
facility from insolvency--calculated and presented to the board quarterly by 
IBRD. It includes a gearing ratio limit, which limits net financial 
obligations to the present value of scheduled payments from grantors. The 
limit is currently set at 58.3% and includes a risk management buffer in the 
calculation due to IBRD's large uncollateralized swap exposure to IFFIm. The 
actual gearing ratio has been significantly below this limit--the ratio was 
18.8% as of December 2017 and 9.7% as of September 2018. Still, we expect it 
will increase somewhat toward the end of the funding cycle, as IFFIm continues 
to disburse funds to Gavi. 

We use our sovereign ratings as proxies for the credit quality of donor 
pledges, as we understand that the pledges are legal obligations of the 
sovereigns. Moreover, we consider that IFFIm retains policy importance for its 
biggest donors, supporting global vaccinations through Gavi.

During the Gavi replenishment meetings in 2015, only 4% of new pledges to Gavi 
(US$258 million) were made through IFFIm. In our view, this modest percentage 
of new pledges did not enhance IFFIm's policy importance--for future financing 
of Gavi's immunization programs--in the eyes of donor countries. Although 
IFFIm continues to provide Gavi with significant flexibility to accelerate 
immunization programs if needed, most donor countries have judged that it is 
not necessary to increase IFFIm's capacity. 

The institution is exploring ways to expand its role by leveraging its unused 
capacity with market-shaping activities to more directly support Gavi in 
reducing the cost and increasing the availability of vaccines, as well as 
additional financing to help countries install modern cold chain equipment 
(storage for vaccines). Additionally, its unused capacity can support rapid 
deployment of financing in the event of emergency disease outbreaks. However, 
if no further replenishments are made, we expect IFFIm to enter a wind-down 
mode in the mid-2020s, where most of its commitments would be financed out of 
accumulated liquid assets, the remainder of which would ultimately be 
transferred to Gavi.

Although IFFIm had previously experienced payment delays from several 
contributors, we understand that it had received all current payments in full 
as of Nov. 30, 2018. Delays of more than a few days have generally arisen only 
from donors rated lower than IFFIm. We consider the rare delays from highly 
rated countries to have been administrative in nature and not to have 
reflected the contributors' ability or willingness to support IFFIm.

IFFIm also incurs rollover risk as its debt financing is for shorter tenors 
than its receivable pledges. To allay part of this funding risk, IFFIm 
maintains minimum liquidity equivalent to its cumulative contracted debt 
service payments for the next 12 months. In addition, management can stop 
disbursements if the 12 months' debt service is not covered. IBRD recalculates 
and resets this limit quarterly.

As of Dec. 31, 2017, and 2016, the calculated minimum liquidity was US$366.5 
million and US$568.6 million, respectively, and the value of IFFIm's liquid 
assets was US$912 million and US$863 million, respectively. IFFIm last issued 
debt in November 2017, when it issued a US$300 million bond with a three-year 
maturity and a 13-basis-point spread over three-month U.S. dollar LIBOR.

The negative outlook reflects that of IFFIm's main donor, the U.K., 
incorporating risks that we believe could further diminish the credit quality 
of the agency's contribution receivables.

We could revise the outlook to stable if we were to take a similar action on 
our long-term rating on the U.K.

We could lower our ratings on IFFIm in the next two years if we were to lower 
our sovereign credit ratings on the U.K. Ratings downside could emerge if 
highly rated contributors delay donor grants; if, due to political events, we 
change our view that the credit quality of the countries' pledges is equal to 
their sovereign debt obligations; or if IFFIm experiences a funding squeeze.