(The following statement was released by the rating agency)
Sept 26 -
Summary analysis -- Council of Europe Development Bank ------------ 26-Sep-2012
CREDIT RATING: AAA/Negative/A-1+ Country: Supranational
Primary SIC: Sovereign owned
Mult. CUSIP6: 222213
Mult. CUSIP6: F61115
Credit Rating History:
Local currency Foreign currency
29-Jul-1993 AAA/A-1+ --/--
17-Jan-1989 AA+/A-1+ --/--
The ratings on the Council of Europe Development Bank (CEB) reflect the bank’s strong financial profile, and conservative liquidity and risk management policies. However, CEB’s weak level of capitalization partly offsets these strengths.
CEB was established in 1956 as the Resettlement Fund for National Refugees and Over-Population in Europe, with a mandate to help refugees and other displaced persons after World War II. CEB’s focus today is to help address the social problems with which European countries are or may be faced as a result of the presence of refugees, displaced persons, or migrants resulting from forced movements of population, or natural or ecological disasters. In operational terms, this means CEB makes loans to support job creation in small and midsize enterprises (SMEs), vocational training, social housing, health care, environmental projects, natural catastrophe relief, and educational reform.
CEB had total assets outstanding of EUR26.1 billion at year-end 2011, of which EUR12.3 billion were gross loans. The bank’s shareholders’ equity totaled EUR2.1 billion in 2011, buttressed by callable capital from ‘AAA’ rated member states totaling EUR1.3 billion. Nevertheless, the bank is one of the least-well-capitalized of MLIs rated by Standard & Poor‘s. Paid-in capital increased by EUR185 million in 2011, funded by a transfer of reserves, which resulted in no net impact on shareholders’ equity.
CEB’s capital adequacy ratios remained largely stable in 2011 as outstanding loans increased by a modest 1.4% year-on-year. As a consequence, its ratio of shareholders’ equity plus provisions for losses (narrow risk-bearing capacity; NRBC) to CEB’s development-related exposure (DRE: basically loans) marginally improved but remain low (17%) in comparison with a 2010 average of 55% for ‘AAA’ rated MLIs.
On Feb. 4, 2011, CEB’s governing board approved a sixth capital increase for the bank, which took effect on Dec. 31, 2011. A 95% subscription rate by CEB’s member states had raised subscribed capital by 63% to EUR5.3 billion as of end-June 2012. This increase in subscribed capital requires no disbursement on the part of the member states and will have no effect on shareholders’ equity.
In addition to cash equity, Standard & Poor’s considers callable capital in some of its analysis of a MLI’s capital position. Broad risk-bearing capacity (BRBC) comprises equity plus callable capital from ‘AAA’ rated shareholders. CEB’s BRBC remained at EUR3.4 billion at year-end 2011, the same level as in 2010 (the 2011 increase in CEB’s subscribed capital [with no paid-in component] was offset by the lowering of the ratings on France on Jan. 13, 2012, which reduced callable capital from ‘AAA’ rated members). Accordingly, we estimate that CEB’s ratio of BRBC to DRE remained at around 28%, low in comparison with the average of other ‘AAA’ rated MLIs (73% in 2010).
CEB’s relatively high leverage has, in our view, been offset by a very high quality loan portfolio. Since inception, only two CEB loans have defaulted. The first was to the former Yugoslavia, following the civil war that erupted in 1991, which was fully repaid in 2004 (principal, interest, and arrears) by the successor republics. The second was a very small loan (EUR1.8 million, or 0.01% of outstanding loans in 2008) to an Icelandic private commercial bank that defaulted in 2008. CEB’s policy is not to reschedule debt agreements and we expect that the bank will continue to be treated as a preferred creditor in its loans to or guaranteed by member states.
In our view, CEB’s liquidity position benefits from perceived shareholder support and its good access to several funding markets. The ratio of liquid assets to total debt remained broadly stable at around 50%. This is stronger than the average of 37% for other ‘AAA’ rated MLIs in 2010. Liquidity needs are also kept in check by CEB’s policy of making no binding commitments to fund approved but undisbursed future loans. CEB, however, is not an eligible counterparty in the European Economic and Monetary Union’s monetary policy operations and so does not have access to liquidity from the European Central Bank (unsolicited ratings; AAA/Stable/A-1+).
The negative outlook reflects our view of at least a one-in-three chance that we could lower the ratings on CEB in 2012 or 2013 if we believe that the embedded credit risks in CEB’s loan or securities portfolios has risen, that CEB’s NRBC in relation to DRE is unlikely to improve, or that higher funding costs decrease CEB’s net interest margin and thus its capacity to generate equity internally. The ratings could also come under pressure with a further decrease in BRBC through declining callable capital from ‘AAA’ rated members. Currently, three of CEB’s nine ‘AAA’ shareholders have ratings with negative outlooks: Finland, Luxembourg, and The Netherlands.
In addition, our new criteria for multilateral lending institutions, which we expect to adopt later this year, could affect our ratings on CEB.
Related Criteria And Research
-- Sovereign Rating And Country T&C Assessment Histories, Sept. 10, 2012
-- Criteria For Rating Multilateral Aid Agencies, July 6, 2009
-- Criteria For Multilateral Lending Institutions, Oct. 19, 2007
-- Sovereign Defaults And Rating Transition Data, 2009 Update, March 17, 2010
-- Sovereign Defaults At 26-Year Low, To Show Little Change In 2007, Sep. 18, 2006.