The "stable" outlook reflects the expectation that CGIF will continue to expand in line with its mission and risk management framework. The rating could face downward pressure if losses in the guarantee portfolio cause CGIF's financial profile to deteriorate significantly, or if there is evidence of weakening support from the contributors.
CGIF was founded in 2010 under the initiative of 10 ASEAN countries, together with China, Japan, Korea, and ADB. CGIF's main objectives are to provide credit guarantees which allow eligible issuers to access regional local currency bond markets. Issuers can thus avoid currency and maturity mismatches by issuing bonds within the region. ADB is the trustee of CGIF. It holds in trust all of CGIF's capital and is responsible for managing the capital. CGIF finances its operations solely from capital contributions. It is not allowed to borrow from any source, except for cash management purposes.
CGIF's strong business profile reflects its business platform, which is adequately structured to support its policy objectives and functions. CGIF's competitive edge is in providing credit guarantees for cross-border transactions, for issuers tapping bond markets in countries with high credit spreads.
CGIF's guarantee portfolio is expected to comprise bonds issued by issuers with credit risks comparable to the international-scale rating of "BB-" or better. For its investment portfolio, a bond issue must have an international-scale rating of at least "AA-" to be a part of CGIF's investment.
TRIS Rating views that CGIF provides mutual benefits for the ASEAN+3 nations that are its contributors. CGIF's objectives and functions play a strategically important role in promoting transactions and enhancing the stability in the regional bond markets. Given the financial strength of CGIF's major contributors and the importance of its policy mandate, TRIS Rating believes there is a high likelihood that CGIF will receive financial support from its major contributors in times of distress.
As of June 2015, CGIF limits its maximum guarantee capacity (MGC) at about US$1.8 billion. The MGC is computed as the product of (1) CGIF's paid-in capital plus retained earnings, less credit loss reserves, foreign exchange loss reserves, and all illiquid investments, and (2) the maximum leverage ratio of 2.5. As of June 2015, CGIF has provided credit guarantees to six issuers, on seven bond issues worth in total US$505 million, or about 28% of the MGC.
Considering CGIF's maximum leverage ratio, its prudential limits, and the credit quality guidelines of issuers for which it provides guarantees, the level of its capital should be enough to cover expected loss of the guarantee portfolio. CGIF's prudential limits specify, among other things, maximum limits for country concentration, currency concentration, aggregate sector concentration, and single borrower concentration. The current level of capital is considered very strong as the size of CGIF's guarantee portfolio is still much lower than the MGC. As CGIF expands and the size of its guarantee portfolio approaches the MGC, the ability of its capital base to sustain losses under adverse conditions will depend on the credit profile of issuers for which it provides guarantees, the tenure of the bonds, and CGIF's ability to charge guarantee fees commensurate with the credit risks it takes.
At the end of 2014, the average effective duration of CGIF's investment portfolio was 1.5 years. CGIF estimated that a uniform one percentage point (100 bps) upward shift in the yield curve at the portfolio level would result in an unrealized loss of about US$10.8 million, or about 1.5% of its capital as at the end of 2014. According to the strategic asset allocation scheme adopted at the beginning of 2015, CGIF aims to gradually increase the average effective duration of its investment portfolio to two to four years. This move is expected to raise the overall return on CGIF's investment portfolio but CGIF may incur a higher level of interest rate risk. The return on CGIF's investment portfolio in 2014 was 1.23% per annum (p.a.).
CGIF's liquidity profile is very strong. Its investment assets mostly comprise marketable fixed-income securities with very high credit ratings. The cash inflows from its investments and guarantee feesare expected to cover the cash outflows for operating expenses over the next 12 months. In addition, CGIF is allowed to engage in repurchase transactions in order to manage its liquidity needs.
In TRIS Rating's view, CGIF will face significant challenges over the next three to five years. The integration of the regional bond market is just beginning and the bond market is dynamic and quite competitive. In addition, according to its business plan, CGIF expects to reach its MGC within two years. The country exposure limit has already, to some extent, constrained the growth of CGIF's guarantee portfolio. At the moment, it remains undecided whether CGIF's contributors will agree to inject more capital, increase the leverage ratio, or cap CGIF's business scale once the MGC is reached.
Credit Guarantee and Investment Facility (CGIF)
Company Rating: AAA
Rating Outlook: Stable