Caribbean Development Bank 'AA+/A-1+' Ratings Affirmed On Criteria Revision; Outlook Remains Stable

  • Following a review of the Caribbean Development Bank (CDB) under our revised criteria for multilateral lending institutions (MLIs), we are affirming our 'AA+/A-1+' ratings on CDB and removing them from under criteria observation.
  • In our view, CDB's improved capital position is balanced by our expectation of larger lending volumes, given it is a key source of multilateral financing in the region.
  • The stand-alone credit profile for CDB is 'aa+', reflecting our assessment of its strong enterprise risk profile and extremely strong financial risk profile.
  • The stable outlook reflects our expectation that, over the next two years, CDB will maintain high capitalization levels to support growth in its loan book, and that the bank's enterprise profile will remain strong because we expect sovereign borrowers to treat the bank as a preferred creditor.
NEW YORK (S&P Global Ratings) March 14, 2019--S&P Global Ratings today said it 
affirmed its 'AA+/A-1+' long- and short-term issuer credit ratings on the 
Caribbean Development Bank (CDB). The outlook remains stable.

At the same time, we removed the ratings from under criteria observation 
(UCO), where we placed them on Dec. 14, 2018, after publishing our revised MLI 
criteria, "Multilateral Lending Institutions And Other Supranational 
Institutions Ratings Methodology."

We affirmed our ratings on CDB based on its strong enterprise risk profile and 
extremely strong financial risk profile. While CDB benefits from extraordinary 
support in the form of callable capital, this does not provide additional 
uplift to its stand-alone credit profile (SACP) at 'aa+' given its capital 
position; therefore, we are keeping the long-term issuer credit rating at the 
same level as the SACP. (We outline these factors in our revised criteria, "
Multilateral Lending Institutions And Other Supranational Institutions Ratings 
Methodology," published Dec. 14, 2018.)

CDB's risk-adjusted capital (RAC) ratio as of year-end 2017--incorporating 
rating parameters as of March 5, 2019--improved by 160 basis points (bps) to 
32.5%, well above our 23% threshold for extremely strong capital adequacy. The 
improvement reflects changes in our approach to measuring and incorporating 
preferred creditor treatment (PCT).

The bank has demonstrated a strong track record in being afforded PCT by its 
members, which our arrears-calculated ratio of 0.98% reflects. Over the past 
10 years, there was one instance in which arrears exceeded 180 days in 2012, 
when Grenada defaulted on a very small loan. The amount in arrears was 
subsequently cured before year-end 2012, so the bank did not report any 
impairment in the full-year accounts. More recently, the selective default for 
its commercial debt by Barbados (a borrowing member country) in October 2018 
has not resulted in arrears on CDB's outstanding loans. 

We expect that CDB will continue to be an important source of multilateral 
financing in the Caribbean, underpinning its policy importance. The bank's 
board of directors approved the 2015-2019 strategic plan endorsing the goal of 
reducing inequality and halving the incidence of extreme poverty in its 
borrowing member countries by 2025. This, combined with modest growth of CDB's 
ordinary capital resources (OCR) loan book over the past few years, is 
indicative of a consolidation of its position in the region. We expect CDB to 
continue expanding its loan book over the medium term.

In our view, CDB's swift response and expected future efforts in the aftermath 
of the 2017 hurricane season, which severely hit some of its member countries, 
is further evidence of its key role and importance for the member nations. 
Among other efforts, it deployed exceptional financing and emergency response 
grants to various borrowing member countries.  

CDB's members have demonstrated their support to the bank. In May 2010, CDB's 
board of governors approved a $217 million (138% increase over the bank's 
capital) general capital increase (GCI) in paid-in capital. The payment 
occurred in six annual and equal installments from 2011 to 2016. As of 
February 2019, remaining payment delays have been fully cured. The bank also 
has a growing shareholder base. Brazil became a member in 2015, Suriname 
joined in 2013, and Haiti joined in 2017. CDB maintains ongoing discussions 
with sovereigns interested in joining, which we view as positive. 

CDB has, over the years, attracted various partnerships, which speaks to its 
unique role. This includes the U.K. giving CDB the mandate to administer a 
£300 million fund (U.K. Caribbean Infrastructure Partnership Fund), which, 
more recently, was increased by an additional £28 million for restoration 
following the hurricanes. In addition, during 2017, CDB signed a memorandum of 
understanding to act as trustee for the Mexico Infrastructure Fund of $70 
million as well as received a $30 million credit facility from the Agence 
Francaise de Developpement with an additional grant of $3 million. While the 
bank's lending to some of its borrowers is surpassed by the Inter-American 
Development Bank and the International Bank for Reconstruction and 
Development, to others, it is the sole lender.  

Significant support from nonregional members also materializes in the funding 
of CDB's special funds resources (SFR), which provide grants and concessional 
loans to the bank's lower-income borrowing member countries. This has helped 
sustain the credit quality of the OCR and is a key part of the bank's business 
model, with SFR 2017 approvals totaling $137 million compared with OCR 
approvals of $227 million. 

We view the shareholder structure, with the majority of voting shares coming 
from borrowing-eligible members (55% as of 2017) combined with, on average, a 
lower ranking in governance compared with highly rated multilateral lending 
institution (MLI) peers, as presenting a certain degree of agency risk. This 
may be counterbalanced by a longer track record of operating in a financially 
sustainable way during times of stress, as well as a further consolidation of 
its financial and risk framework. 

CDB continues to take actions to strengthen its governance and risk 
management. In late 2015, CDB's new strategic framework for integrity, 
compliance, and accountability began operations. CDB has also strengthened its 
internal audit and oversight procedures, as well as created a code of conduct 
for the board of directors. The board sets the governance framework for the 
bank by setting the risk appetite framework, and the underlying policies and 
procedures. 

Furthermore, the bank has made efforts to reduce loan concentration over the 
past few years, through a combination of policy limits, monitoring performance 
of its borrowing members, and blended solutions with its SFR. As of December 
2017, the top three borrowers represented 40% of the total loan portfolio 
(Jamaica 17%, Antigua and Barbuda 12%, and Barbados 11%), compared with a peak 
of 50% in 2013. Our expectation is that these concentration levels will remain 
stable. To offset large concentrations and exposures to several sovereigns 
with relatively high default risk, CDB maintains high levels of 
capitalization. 

CDB continues to report very low impaired and past-due loans, totaling $4.9 
million as of Dec. 31, 2017, and all come from two private-sector loans. 
Currently, the private-sector loan book is 4% of the total, but we expect this 
to grow modestly over the medium term. While expanding lending to the private 
sector comes with higher risk, we expect CDB to move cautiously in this 
venture by strengthening the organization in terms of processes and staff 
before ramping up the lending volumes.    

CDB pursues a conservative funding strategy and maintains relatively low 
leverage compared with its peers. Furthermore, liquid assets as a percentage 
of adjusted total assets held steady at 28% in December 2017 from 28% in 
December 2016 and 19% in December 2015. For year-end 2017 data and 
incorporating our updated liquidity haircuts, our 12-month liquidity ratio was 
2.4x with scheduled loans disbursements while the six-month ratio was 3.6x. 
Under this same stress scenario, CDB could satisfy increased demand for an 
unplanned loan disbursements.

CDB benefits from $206 million in eligible callable capital from its 'AA+' and 
'AAA' rated shareholders (Canada and Germany), which provides a buffer if 
CDB's RAC ratio were to fall below the extremely strong threshold. 

The stable outlook is based on our view that over the next two years, CDB will 
maintain its high level of capitalization. We expect its RAC ratio after 
diversification to remain well above 23%, even if the asset quality of the 
loan book weakens or CDB experiences losses in its derivative book. We expect 
any growth in its private-sector exposure to be gradual, the higher risks 
contained and supported by an appropriate strengthening of the organization. 
Furthermore, the stable outlook incorporates our expectation that PCT will not 
deteriorate and CDB will continue to manage its balance sheet prudently.  

We could consider raising the ratings on CDB if its policy importance 
strengthened further, accompanied by further capital increases that could 
allow CDB to grow its loan book substantially, or if the bank continues to 
strengthen its governance and management expertise by effectively removing 
potential agency risk and strengthening its risk-management framework.

We could lower the ratings on CDB if the relationship with shareholders 
deteriorates or if doubts about the PCT arise. In addition, combined financial 
stress in borrowing members and downgrades of highly rated shareholder 
callable capital could lead us to lower the ratings. A quickly growing 
private-sector exposure with high risk could also lead to downward pressure on 
the ratings. We consider these events unlikely in the medium term.