Research: Rating Action: Moody’s Confirms Agencia Financiera de Desarrollo’s Ratings and Changes Outlook to Positive
New York, July 25, 2022 — Moody’s Investors Service (“Moody’s”) today confirmed all ratings and assessments assigned to Agencia Financiera de Desarrollo (AFD), including its Ba1 issuer rating in local currency, as well as local and foreign currency counterparty risk ratings of Ba1 and Not Prime. Moody’s also affirmed ba2 Base Credit Rating (BCA) and Adjusted BCA and Long and Short Term Counterparty Risk Ratings at Ba1 (cr) and Not-Prime (cr), respectively. The outlook for AFD’s ratings has changed from stable to positive.
These actions follow the affirmation of the Ba1 sovereign debt rating of the Government of Paraguay and the outlook changed from stable to positive, on July 22, 2022. For more information, please refer to the related press release: “Moody’s Affirms Paraguay’s Ba1 Rating; changes the outlook to positive from stable” (https://www.moodys.com/research/Moodys-affirms-Paraguays-Ba1-ratings-changes-outlook-to-positive-from–PR_467030).
The following ratings and assessments given to Agencia Financiera de Desarrollo have been confirmed:
– Long-term issuer rating in local currency of Ba1, outlook changed from stable to positive,
– Not Prime Short Term Local Currency Issuer Rating
– Long-term and short-term local and foreign currency counterparty risk ratings of Ba1 and Not-Prime
– Assessment of long and short term counterparty risk of Ba1(cr) and Not-Prime(cr)
– Adjusted basic credit rating of ba2
– Basic credit score of ba2
Outlook, changed to positive from stable
By confirming AFD’s Ba1 issuer rating, Moody’s recognizes the entity’s role as a development bank wholly owned by the Government of Paraguay (Ba1 positive), confirming the long history strong asset quality indicators and a strong capital position. Acting as the only second-tier development finance institution in the country, AFD is mainly financed by institutional resources and multilateral agencies, and profitability is not its main strategic objective, which results in levels relatively low income compared to its banking peers in Paraguay.
Primarily focused on providing lines to various financial institutions that on-lend to local borrowers in various sectors of the economy to support the economic development objectives of the Paraguayan government, AFD has played a key role during the pandemic through three products launched in 2020: 1) Financiamiento para la Reconversión de Operaciones Crediticias, aimed at converting short-term debt into long-term debt, with grace periods; 2) Proreactivation, consisting of new loans; and 3) Fideicomiso Fisalco, which provides working capital financing to SMEs and the self-employed. In March 2022, 79% of AFD’s PGY 6.6 trillion ($948 million) loan portfolio went to banks, 18% to cooperatives and the rest mainly to finance companies (empresas financiers). AFD maintains prudent underwriting standards, which have supported the high quality of its portfolio in 2020 and 2021. Since AFD does not bear any credit risk related to the end borrowers of its funds, the level of provisions for loan losses is consistently low compared to that of commercial banks in Paraguay. In addition, in accordance with the law, AFD’s loans to financial institutions also have privileged status and, in the event of bankruptcy, AFD would have a higher claim ranking than the depositors and secured creditors of this entity.
The Ba1 issuer rating is also supported by AFD’s historically adequate financial situation. As of March 2021, tangible common stock (TCE), as measured by Moody’s, represented 23% of total assets. Despite the acceleration in credit growth in recent years, AFD has maintained a comfortable capitalization supported by its results.
The Ba1 rating also reflects the limits linked to its predominantly commercial financing structure, inherent to a development agency. As a non-deposit taking institution, AFD’s financing mix is mainly composed of local currency bonds and cross-border loans denominated in US dollars. Despite its heavy dependence on wholesale resources, refinancing risk is limited because its funding is guaranteed by the Paraguayan government (positive Ba1) and nearly half of its obligations are funded by the deposit guarantee fund of the Central Bank of Paraguay (Fondo de Garantía de Depositos) and other public pension funds such as the lnstituto de Previsión Social. The rest of the funding provided by multilateral agencies. AFD’s liquidity is relatively low despite its dependence on market funding, with liquid assets equivalent to only 16.1% of its tangible assets in March 2022.
The change in AFD’s ratings outlook to positive, from stable, incorporates the government’s track record of solid growth and prudent fiscal policy, which underpin Paraguay’s positive credit dynamics and structural and fiscal reforms that will support the institutional strength and governance. AFD’s issuer ratings incorporate Moody’s assessment that the agency is backed by the government based on the government’s guarantee of its financial obligations, its legal status as a 100% owned development bank government and its important political role. The rating of the agency is therefore aligned with that of the government and the positive outlook on AFD’s ratings is in line with the positive outlook on the government of Paraguay.
FACTORS THAT MAY LEAD TO IMPROVEMENT OR DEGRADATION OF RATINGS
Given its government support, AFD’s ratings would come under upward pressure if the Paraguayan government’s rating were upgraded. AFD’s autonomous BCA could also be upgraded if it were to improve its profitability and/or increase its cash holdings. However, as the agency’s issuer rating is already aligned with the government’s, this would have no effect on the issuer rating in the absence of an upgrade to Paraguay’s sovereign rating.
Although unlikely at present given the positive outlook, a downgrade in Paraguay’s bond rating would lead to a downgrade in AFD’s issuer ratings. AFD’s BCA could also be downgraded in the event of a sharp deterioration in the risk of its assets and/or its equity. In the absence of a downgrading of Paraguay’s sovereign rating, this should not however affect AFD’s issuer rating.
The main methodology used in these ratings is the Methodology for Banks published in July 2021 and available on https://ratings.moodys.com/api/rmc-documents/71997. Otherwise, please see the Scoring Methodologies page on https://ratings.moodys.com for a copy of this methodology.
For details on key rating assumptions and Moody’s sensitivity analysis, see the Methodological Assumptions and Sensitivity to Assumptions sections in the Disclosure Form. Moody’s rating symbols and definitions can be found at https://ratings.moodys.com/rating-definitions.
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