Moody's Cuts Council of Europe Development Bank to 'Aa1'

Moody's Investors Service has downgraded by one notch the long-term issuer rating of the Council of Europe Development Bank (CEB) and debt ratings to Aa1/(P)Aa1 from Aaa/(P)Aaa. The rating agency has concurrently affirmed CEB's P-1 short-term rating. The outlook on all ratings has been changed to stable from negative.

While the rating agency notes improvement in some key credit metrics, today's rating action reflects a repositioning of CEB's rating vis-à-vis its peer group and is driven by the following two factors:

1) CEB's high leverage weighs on intrinsic financial strength, particularly relative to other highly rated multilateral development banks (MDBs)

2) Weaker shareholder support -- especially extraordinary support -- than Aaa-rated MDBs.

Supporting the Aa1 rating is the CEB's still exceptionally strong liquidity levels and conservative risk management policies and practices, which has ensured good performance of its loan book.

RATIONALE FOR DOWNGRADE

--FIRST DRIVER: CEB's HIGH LEVERAGE WEIGHS ON INTRINSIC FINANCIAL STRENGTH

Despite a decline of 17.5 % from its 2011 peak, CEB's leverage -- as measured by debt to usable equity -- stood at 813.3% in 2013, which is significantly higher than the Aaa-rated MDB median of around 350%. Moreover, Moody's expects its leverage will remain at these elevated levels and thereby continue to be a credit constraint. CEB also scores weaker than Aaa-rated MDBs in terms of capital adequacy, with usable equity to loans standing at 19.3% in 2013, again being weaker than the Aaa-rated MDB median ratio of around 30% in 2013. These two factors adversely affect capital adequacy, limiting its overall intrinsic financial strength to high. The rating agency further notes that all Aaa-rated MDBs have stronger intrinsic financial strengths -- assessed to be very high.

--SECOND DRIVER: WEAKER SHAREHOLDER SUPPORT

The second driver of Moody's rating action is the rating agency's assessment of CEB's relatively weaker shareholder support as compared to Aaa-rated MDBs. Our medium assessment of contractual support is informed by the sizeable debt-to-callable capital ratio, which at 489% exceeds those of most Aaa-rated MDBs.

Moreover, Moody's considers CEB's access to extraordinary support as somewhat constrained by the multiple and more sizeable obligations of its largest shareholders towards other MDBs, which could affect priority of support in a stress scenario that features several MDBs in need of assistance. That being said, Moody's acknowledges that CEB's shareholders have demonstrated high propensity to support with six general capital increases (the most recent one completed in December 2012) and the track record of supporting an expanding mandate of CEB's development objectives is also noteworthy. Moreover the high weighted median rating of its shareholders at Aa3 suggests strong ability to support CEB and its activities.

FACTORS SUPPORTING THE Aa1 RATING

Moody's highlights that the CEB's exceptionally strong liquidity levels -- i.e., debt-service coverage ratio -- make it one of the most liquid MDBs in its rated universe. Additionally, the bank follows a very conservative liquidity framework, under which its available liquidity (i.e., its cash position, which consists of deposits and available-for-sale financial assets with a maturity lower than 18 months) is not allowed to fall below 50% of its net liquidity requirements over the next three years. The CEB also operates well above its self-imposed limit, with a strengthened liquidity ratio in the vicinity of 116% at the end of December 2013. This exceptionally high level of liquidity provides it with ample scope to accommodate a severe scenario of a loss of market access lasting three years. Furthermore, in this sort of scenario, the CEB could also draw upon support through callable capital.

Additionally, the strong and conservative risk-management policies and practices that the CEB has implemented and follows is reflected in a strong asset quality and no non-performing loans have been recorded in the past three years. This is a particularly strong record given the challenging operating environment the bank has faced over the past three years. In recent times, the defaults in Cyprus (Caa3 positive) and Greece (Caa3 stable) have not caused any impairments in its development assets.

RATIONALE FOR STABLE OUTLOOK

The stable outlook on the CEB's Aa1 rating reflects its resilience to shocks afforded by its strong liquidity levels, and the bank's conservative risk-management policies and practices that effectively limit the potential deterioration in its financial metrics.

WHAT COULD CHANGE THE RATING -- UP/DOWN

An improvement in the leverage and capital adequacy related metrics more in line with higher rated peers would exert upward pressure on the Aa1 rating.

A significant deterioration in asset quality and performance of the CEB's loan portfolio could prompt a rating downgrade.

You May Also Be Interested In

• Advance Auto Parts (AAP) PT Lowered to $48 at DA Davidson Following 25% Selloff Post Q2 Results
• Deere (DE) PT Raised to $585 at JPMorgan
• Walmart (WMT) PT Lowered to $125 at JPMorgan, Overweight Rating Maintained as 'Short Case Feels Greedy'