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

  • Following a review of International Finance Facility for Immunisation (IFFIm) under our revised criteria for multilateral lending institutions (MLIs), we are affirming our 'AA/A-1+' ratings on IFFIm and removing them from under criteria observation.
  • The ratings balance our view of IFFIm's policy importance and the creditworthiness of its main donor countries.
  • 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) March 14, 2019--S&P Global Ratings today said it 
affirmed its 'AA/A-1+' long- and short-term issuer credit ratings on 
U.K.-based multilateral agency International Finance Facility for Immunisation 
(IFFIm). The outlook remains negative.

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. 

We affirmed our ratings on IFFIm based on our view of the commitment of its 
highly rated contributors to its mandate of supporting child immunization 
programs in the world's poorest countries. We also consider in our ratings the 
risks stemming from the creditworthiness of its main donor countries in 
relation to the debt that IFFIm has incurred based on these commitments. The 
ratings affirmation follows the publication of our revised criteria, "
Multilateral Lending Institutions and Other Supranational Institutions Ratings 
Methodology," Dec. 14, 2018. 

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 the BRICS) after South Africa. France, The Netherlands, and 
Australia committed future pledges to IFFIm, in addition to their 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 its 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. 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 same level as IFFIm or 
above (that is, currently 'AA' or above).

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

IFFIm has its own 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 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 because, as we understand, the pledges are legal obligations of the 
sovereigns. Moreover, 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 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 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.