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 reflect CGIF's strong capital position and claims-paying resources relative to its risk exposure, underpinned by its sound leverage policy and governance structure.
Established in November 2010 as a trust fund of Asian Development Bank (ADB), CGIF provides guarantees mainly on local currency bonds issued by creditworthy corporations domiciled in thirteen member countries of ASEAN+3 (Association of Southeast Asian Nations + China, Japan and Korea). CGIF has continued to make steady but slower-than-expected progress, achieving a guarantee portfolio issuance size of US$505 million for six issuers as at end-December 2014 (end-2013: US$125 million; two issuers). CGIF was formed by ASEAN+3 together with ADB to develop and strengthen local currency and regional bond markets. MARC understands that the fairly lengthy legal documentation process for issuing entities, mainly due to the different jurisdictions within the ASEAN region, has also been a factor for the slower pace of issuances. To expedite the bond transaction process, CGIF is establishing standard documentation for each country in the region. CGIF also remains highly selective in its guarantee business, emphasing on quality rather than volume. While a revision in prudential limits in November 2013 has resulted in an increase in its capacity to guarantee up to US$1.75 billion with country and currency limits of US$350 million and US$700 million respectively, CGIF continues to maintain a fairly stringent internal rating system to assess the credit risk of potential issuers.
MARC observes that CGIF's leverage position remains sound with a leverage ratio of about 0.72:1 as at end-December 2014, well below its maximum leverage ratio of 2.5:1. During 2014, CGIF was able to widen its pool of issuers to include those operating in Laos and Vietnam, namely Kolao Holdings (Kolao) and Masan Consumer Holdings Company Limited (MCH) respectively. CGIF provided guarantees on Kolao's SGD60 million (US$48 million) and MCH's VND2.1 trillion (US$100 million) issuances; other guaranteed issuances are PT BCA Finance's (BCAF) Rp120 million (US$12 million), Protelindo Finance BV's (Protelindo) SGD180 million (US$140 million), and PT Astra Sedaya Finance's (ASF) SGD100 million (US$80 million) issuances. MARC notes that BCAF, Protelindo and ASF operate in Indonesia. MARC expects CGIF to continue to be prudent by mitigating business and geographic concentration risks. In seeking a more diversified portfolio, CGIF recently established a strategic collaboration agreement with financial guarantee insurer Danajamin Nasional Berhad in Malaysia for co-guarantee opportunities.
CGIF maintains a conservative investment approach, prioritising investment liquidity and capital preservation. Its investment portfolio predominantly comprises highly rated debt obligations issued by government and government-related entities, rated at a minimum AA- on the international rating scale with short-term maturities of less than three years. The annualised investment rate of return, excluding the changes in fair value, remained modest at 1.26% in 1H2014 (1H2013: 1.11%) due to CGIF's prudent investment approach and the low interest rate environment.
CGIF's revenue continues to be driven by investment income that contributed 92.1% of total income of US$4.9 million in 1H2014 (1H2013: 95.8%, US$4.1 million). This notwithstanding, MARC notes that CGIF posted higher guarantee income (1H2014: US$386,000; 1H2013: US$108,000) in line with the increase in its guarantee portfolio. Overall, net profit increased to US$2.0 million (1H2013: US$1.5 million) as income growth outpaced the rise in operating expense arising from an increased staff force. MARC opines operating profit will remain healthy in the near term as investment income is more than sufficient to cover operating expenses, barring any guarantee claims.
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: Oo Chin Kai, +603-2082 2260/ chinkai@marc.com.my; Sharidan Salleh, +603-2082 2254/ sharidan@marc.com.my.
© Press Release 2015
