Fitch Ratings has affirmed African Development Bank (AfDB)’s Long-Term Issuer Default Rating (IDR) at ‘AAA’ with a Stable Outlook.
According to the rating agency, AfDB’s ‘AAA’ rating is driven by the extraordinary support the bank receives from its non-regional shareholders, which we assess at ‘aaa’.
“The shareholders’ ‘strong’ propensity to support the bank translates into a zero-notch adjustment to our assessment of the capacity to support (aaa). The rating is also supported by the bank’s Standalone Credit Profile (SCP), reflecting the lower of its assessments of ‘aa’ for solvency and ‘aaa’ for liquidity”, it explained.
Fitch placed the US’s ‘AAA’ Long-Term IDR on Rating Watch Negative (RWN). The US is AfDB’s second-largest shareholder, accounting for 6.3% of total capital and 38% of ‘AAA’ rated callable capital at end-2022.
The rating action however puts pressure on the coverage of net debt by ‘AAA’ rated callable capital, the key metric to assess support under Fitch’s criteria. The coverage of net debt by ‘AAA’ rated callable capital improved to 217% at end-2022 from 189% at end-2021, reflecting new capital subscriptions under the bank’s seventh general capital increase (GCI).
Fitch expects that the bank’s net debt will remain fully covered by callable capital from ‘AAA’ rated member states over the forecast period, even in the case of a downgrade of the US. This assumes that AfDB will receive additional support from its remaining ‘AAA’ rated shareholders as it did in 2021 when the Outlook on the US rating was Negative and other shareholders subscribed to temporary callable capital.
Strengthening capitalisation
In 2022, AfDB’s capitalisation metrics markedly improved owing to capital payments under the seventh GCI plan.
This contributed to the improved equity to assets (E/A) ratio of 26% at end-2022, up from 24% at end-2021.
Fitch’s usable capital-to-risk-weighted assets (FRA) ratio also improved to 52% at end-2022 from 49% at end-2021.
High Credit Risks Mitigated:
The weighted average rating of loans and guarantees before any adjustments for preferred credit status (PCS) was estimated at ‘B+’ at end-2022, unchanged from the previous year.
AfDB implemented a risk transfer mechanism (“Room2Run”) to cover UA1.5 billion of sovereign loans in 2022.
The transaction is with Lloyd’s of London for UA300 million (on a first loss basis) and UK’s Foreign Commonwealth & Development Office for UA1.2 billion (second loss).
According to the rating agency, AfDB’s ‘AAA’ rating is driven by the extraordinary support the bank receives from its non-regional shareholders, which we assess at ‘aaa’.
“The shareholders’ ‘strong’ propensity to support the bank translates into a zero-notch adjustment to our assessment of the capacity to support (aaa). The rating is also supported by the bank’s Standalone Credit Profile (SCP), reflecting the lower of its assessments of ‘aa’ for solvency and ‘aaa’ for liquidity”, it explained.
Fitch placed the US’s ‘AAA’ Long-Term IDR on Rating Watch Negative (RWN). The US is AfDB’s second-largest shareholder, accounting for 6.3% of total capital and 38% of ‘AAA’ rated callable capital at end-2022.
The rating action however puts pressure on the coverage of net debt by ‘AAA’ rated callable capital, the key metric to assess support under Fitch’s criteria. The coverage of net debt by ‘AAA’ rated callable capital improved to 217% at end-2022 from 189% at end-2021, reflecting new capital subscriptions under the bank’s seventh general capital increase (GCI).
Fitch expects that the bank’s net debt will remain fully covered by callable capital from ‘AAA’ rated member states over the forecast period, even in the case of a downgrade of the US. This assumes that AfDB will receive additional support from its remaining ‘AAA’ rated shareholders as it did in 2021 when the Outlook on the US rating was Negative and other shareholders subscribed to temporary callable capital.
Strengthening capitalisation
In 2022, AfDB’s capitalisation metrics markedly improved owing to capital payments under the seventh GCI plan.
This contributed to the improved equity to assets (E/A) ratio of 26% at end-2022, up from 24% at end-2021.
Fitch’s usable capital-to-risk-weighted assets (FRA) ratio also improved to 52% at end-2022 from 49% at end-2021.
High Credit Risks Mitigated:
The weighted average rating of loans and guarantees before any adjustments for preferred credit status (PCS) was estimated at ‘B+’ at end-2022, unchanged from the previous year.
AfDB implemented a risk transfer mechanism (“Room2Run”) to cover UA1.5 billion of sovereign loans in 2022.
The transaction is with Lloyd’s of London for UA300 million (on a first loss basis) and UK’s Foreign Commonwealth & Development Office for UA1.2 billion (second loss).