MARC has affirmed its long-term and short-term counterparty credit ratings of AAA/MARC-1 on Credit Guarantee and Investment Facility (CGIF) with a stable outlook. The ratings are based on Malaysia's national rating scale. The ratings affirmation reflects CGIF's strong capital position and conservative liquidity management, underpinned by its sound policy guidelines and governance structure. CGIF was established by ASEAN members together with China, Japan, South Korea (ASEAN+3) and Asian Development Bank to promote the development of local currency and regional bond markets by providing guarantees on local currency bonds issued in ASEAN+3 countries.
MARC notes that CGIF's guarantee portfolio has grown at a modest pace since its incorporation in November 2010, with the total guarantee amount standing at US$587 million as at end-October 2015 (end-2014: US$476 million). The moderate business growth has been attributed to CGIF's stringent underwriting policy and process in accordance with its mandate. Additionally, ceiling limits on ASEAN+3 countries to mitigate geographic concentration risks have capped growth in guarantee transactions in countries where demand has been strong.
As at end-October 2015, Indonesian corporates accounted for 39.2% (or US$230 million) of CGIF's total guarantee portfolio, while in terms of currency, Singapore dollar-denominated issuances made up a sizeable 64.9% (or US$381 million). Nonetheless, CGIF's limits for both geographic and currency are within its policy guidelines; its country and currency limits stood at US$357 million and US$715 million respectively as at end-October 2015. CGIF's exposure to currency risk is mitigated by its periodic marked-to-market adjustments of its guarantee exposure to ensure the leverage ratio is within a conservative 2.5:1 ratio. CGIF also requires issuers to hedge their currency exposure in respect of the guaranteed debt throughout programme tenures. MARC notes that among CGIF's seven guaranteed issuers is Noble Group Limited, whose credit profile has weakened in recent months. CGIF has an exposure of THB2.85 billion (or US$80 million) to the issuer through a guaranteed bond which is scheduled to mature in April 2016. However, the increased credit risk is mitigated by CGIF's strong liquidity and capitalisation.
CGIF's strong capital position is reflected by its low leverage ratio which, as measured by the total outstanding guarantee amount to total equity after deducting illiquid investments, stood at 0.82:1 as at end-October 2015 (2014: 0.65:1). While the leverage ratio could rise to 1.19:1 by taking into account CGIF's approved deals, this would remain within its established limit. MARC understands that CGIF intends to seek fresh capital from its contributors over the near term to increase its guarantee capacity which stood at US$1.79 billion as at end-October 2015. For 1H2015, CGIF's guarantee income rose sharply to US$2.2 million on an increase in new deals which were secured in 2H2014. This notwithstanding, investment income remained the main revenue contributor, accounting for a sizeable 63.1% of operating revenue in 1H2015. Net profit doubled to US$4.2 million in 1H2015 from the previous corresponding period last year. This translated into higher annualised returns on asset and equity of 1.13% and 1.17% respectively (1H2014: 0.57%; 0.57%).
CGIF's liquidity position remains healthy, with liquid assets accounting for 97.1% of its total assets as at end-June 2015 (2014: 96.5%). MARC also notes that to reduce the risk of forced sales of securities should guarantees be called, CGIF has an arrangement with a financial institution for a credit line to meet exigencies. In respect of investments, CGIF recently increased its fund allocation to securities with higher credit quality and market liquidity: government debt rated AA+ and above on a global scale increased to 45% of CGIF's total investment portfolio as at end-August 2015 (end-June 2014: 31%). CGIF has also been increasing its investments in longer-term bonds and plans to gradually increase its portfolio duration to 3.0 years from 1.8 years as at end-June 2015 (2014: 1.5 years). This will allow CGIF to benefit from higher investment yields while maintaining a conservative investment approach.
The stable rating outlook reflects CGIF's low-risk business plan and prudent underwriting strategy. MARC believes that CGIF will continue to maintain its capital resources, leverage and future earnings and cash flow at levels commensurate with the current rating band.
Contacts: Joan Leong, +603-2082 2270/ joan@marc.com.my; Sharidan Salleh, +603-2082 2254/ sharidan@marc.com.my.
© Press Release 2016
