Emerging Africa Infrastructure Fund -- Moody's assigns first-time A2 rating to the Emerging Africa Infrastructure Fund, with a stable outlook
Rating Action: Moody's assigns first-time A2 rating to the Emerging Africa Infrastructure Fund, with a stable outlookGlobal Credit Research - 19 Aug 2022London, August 18, 2022 -- Moody's Investors Service ("Moody's") has today assigned an A2 foreign currency long-term issuer rating to the Emerging Africa Infrastructure Fund (EAIF or the Fund), with a stable outlook.The main factors underpinning the EAIF's A2 rating are:1. A strong capital position that reflects moderate but rising leverage, and a diversified lending portfolio notwithstanding weak asset credit quality;2. A robust base of liquid assets stemming from highly-rated development finance institutions and commercial lenders;3. A high level of member support from a base of highly-rated shareholders, reflecting EAIF's strategic position in the broader Private Infrastructure Development Group (PIDG). The stable outlook reflects Moody's expectation that the risks associated with the Fund's leverage-driven expansion of the lending portfolio in the coming years will be managed without significant detriment to asset quality and liquidity parameters. Moreover, Moody's expects EAIF will fund its expansion mainly by mobilising additional financing from new and existing highly-rated investors.RATINGS RATIONALERATIONALE FOR THE A2 RATINGSTRONG CAPITAL POSITION REFLECTS MODERATE BUT RISING LEVERAGE, AND DIVERSIFIED PORTFOLIO NOTWITHSTANDING WEAK ASSET QUALITYThe EAIF's capital adequacy is assessed at "baa2", which balances its strong capital position and a diversified lending portfolio with weak asset quality.Taking into account only the disbursed share of the lending portfolio, EAIF's leverage under Moody's definition stood at 159% at the end of 2021. Leverage is likely to rise in the future, as the Fund plans to increasingly rely on debt financing to grow its balance sheet and loan portfolio over the coming years. Moody's leverage ratio focuses on useable equity as the relevant capital buffer in the denominator against development-related assets and treasury assets rated A3 and lower.The Fund's mandate, focused on long-term lending to support privately owned infrastructure projects in Africa and the Levant, results in relatively low development asset credit quality. The weighted average borrower rating in Moody's assessment stood at B3 as of end-2021, with the ratings of many projects effectively capped by the sovereign ratings of the countries in which they are located. Key mitigants to the fund's low borrower credit quality are the existence of sovereign or quasi-sovereign guarantees on a significant portion of the loan portfolio, as well as the secured nature of the project finance transactions that form the majority of EAIF's lending.Moreover, the lending portfolio benefits from strong diversification, notably in terms of country exposure. The top 10 exposures represent 44% of disbursed development assets as of the end of 2021, and the largest project accounts for only 5.7% of the disbursed portfolio. A longstanding concentration on the power and energy sector, which accounts for 47% of total disbursed loans, masks an important degree of diversification between solar and hydro power projects, gas, biomass, and oil. Although the disbursed lending portfolio is currently fully concentrated in Africa, an expansion to Asia is under consideration and could eventually lead to further geographical diversification.EAIF's focus on a region with challenging macroeconomic and operating conditions has translated historically into a relatively high level of non-performing loans. Under Moody's definition, the ratio of non-performing assets (NPAs) to development-related assets averaged 6.7% between 2019 and 2021. The ratio is predominantly comprised of three long-standing, but fully provisioned, impaired exposures. The Fund expects to resolve one of these exposures with a low recovery which would result in a lower NPA ratio going forward. The Fund's ratio compares to a median NPA ratio of around 4.8% in 2021 for A-rated peers. Although the pandemic has not had a direct impact on the NPA ratio, an important share of the disbursed lending portfolio is currently on watchlist. While EAIF takes a conservative approach and exposures on the watchlist are performing, in Moody's view there is a risk that asset performance could deteriorate over the remainder of 2022 and 2023.A ROBUST BASE OF LIQUID ASSETS STEMMING FROM HIGHLY-RATED DEVELOPMENT FINANCE INSTITUTIONS AS WELL AS COMMERCIAL INVESTORSEAIF's liquidity and funding position of "baa1" is underpinned by a robust base of liquid assets stemming from highly-rated development finance institutions and commercial lenders. The EAIF is funded through debt facilities consisting of a mix of US dollar and euro, both in fixed and floating interest rate long-term debt instruments, raised from Kreditanstalt fuer Wiederaufbau (KfW, Aaa stable), the African Development Bank (AfDB, Aaa stable), FMO, the development bank of the government of the Netherlands (Aaa stable), and Allianz SE (Aa3 positive), as well as a Revolving Credit Facility from Standard Chartered Bank (A1 stable).Based on Moody's estimates, available cash and liquid assets rated A2 or higher ($326 million) at the end of 2021 would be sufficient to cover around 98% of net outflows over the following 18 months Moody's key ratio to determine the size of the liquidity buffer in a stressed scenario. An internal liquidity policy requirement ensures that the Fund must have sufficient liquidity to honour existing signed portfolio project commitments over the next 12 months.The company's planned portfolio expansion will rely on its ability to raise additional financing. Moody's expects this funding to come from a limited number of new highly-rated institutional or commercial investors or existing relationships, with discussions currently ongoing. In Moody's view, the company would be able to raise funding in the capital markets should it want or need to do so in the future, albeit likely paying a moderate risk premium.A HIGH LEVEL OF MEMBER SUPPORT FROM A BASE OF HIGHLY-RATED SHAREHOLDERSMoody's assesses EAIF's strength of member support as "High". At 'aa3', EAIF has one of the highest average shareholder ratings among Moody's rated supranational institutions. The government of the United Kingdom (Aa3 stable) via its Foreign, Commonwealth and Development Office (FCDO) currently provides 82% of the paid-in capital, with the remainder provided by the government of Switzerland's (Aaa stable) State Secretariat for Economic Affairs, the government of the Netherlands' Directorate-General for International Cooperation (DGIS), and the aid and development agency of Sweden (Aaa stable), the Swedish International Development Cooperation Agency (SIDA). The presence of highly rated shareholders is a key indication of ability to support.As regards willingness to support, Moody's takes into account both contractual and non-contractual arrangements. The former is weighed down by the absence of callable capital for EAIF, which Moody's takes as an indication of contractual willingness by the shareholders of an MDB to provide support. By contrast, Moody's assesses non-contractual willingness to support as "High". EAIF retains a strategic position within the broader PIDG, both as the largest entity of the group and its main profit generation engine. Shareholders' regular equity injections since inception (particularly the large contribution over 2012-15, which more than doubled paid-in equity) also demonstrates a high degree of commitment to the institution. That said, Moody's does not expect any further material increase in equity over the coming years barring an unexpected shock.RATIONALE FOR THE STABLE OUTLOOKMoody's initiates EAIF's rating with a stable outlook, which reflects the expectation that the risks associated with the Fund's leverage-driven expansion of the lending portfolio in the coming years will be managed without significant detriment to asset quality and liquidity parameters. The EAIF will fund its expansion mainly by mobilising additional financing from new and existing highly-rated investors.ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONSEAIF's credit impact score is neutral-to-low (CIS-2), reflecting moderately negative exposures to environmental risks and neutral-to-low exposures to social and governance risks.EAIF's moderately negative exposure to environmental risk score (E-3) predominantly reflects the exposure of many borrowers to physical climate risks, mitigated to some extent by a highly diversified lending portfolio. While the Fund retains exposure to several carbon intensive sectors, the share of renewable energy projects has been increasing and is now 60% of the total power generation portfolio.EAIF's social issuer profile score is neutral to low (S-2), reflecting its close alignment with key stakeholders and role as an established long-term lender to the African infrastructure sector. The company's focus on improving the provision of infrastructure and a diversified country portfolio ensure a high developmental impact, engendering continued support for its mandate.EAIF's governance issuer profile score is neutral to low (G-2), reflecting the established track record of the Fund and its demonstrated ability to attract highly-rated development finance institutions and commercial lenders into the capital structure. The entity also benefits from the technical support of the broader PIDG group, which also provides governance, policy and strategy direction.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGUpside pressure on EAIF's rating could emerge in the event of substantive additional equity injections from shareholders, that substantially improve the Fund's capital adequacy metrics and provide additional funding for the planned portfolio expansion. The ability to achieve a further material diversification of the Fund's highly-rated investor base would also be positive.Downside pressure on EAIF's rating could materialise if asset performance deteriorates significantly, characterized by mounting stressed and impaired exposures that exert pressure on the Fund's capital position as leverage increases. Similarly, signs of waning shareholder support although unlikely would exert downward pressure on the rating.PRINCIPAL METHODOLOGYThe principal methodology used in this rating was Multilateral Development Banks and Other Supranational Entities Methodology published in October 2020 and available at https://ratings.moodys.com/api/rmc-documents/69182. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.ISSUER PROFILEThe EAIF, operational since 2002 and established as the first company within the PIDG, provides long-term loans to private sector-led infrastructure companies and projects in Africa and the Levant, with a particular focus on least developed, low income, and lower middle income countries. The Fund aims to address the lack of available long-term debt finance and support infrastructure projects that promote economic growth, reduce poverty and benefit broad-based population groups.Since its establishment up to end-2021, EAIF has closed 90 projects for a total investment of $2.1 billion, which in turn has mobilised private sector investment commitments of $15.2 billion. Profits are reinvested in order to make more capital available to support project financing and reduce the need for additional capital calls from the Fund's shareholders.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found on https://ratings.moodys.com/rating-definitions.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the issuer/deal page for the respective issuer on https://ratings.moodys.com.For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.The rating has been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.This rating is solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website https://ratings.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://ratings.moodys.com/documents/PBC_1288235.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on https://ratings.moodys.com.Please see https://ratings.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.Please see the issuer/deal page on https://ratings.moodys.com for additional regulatory disclosures for each credit rating. Mickael Gondrand Analyst Sovereign Risk Group Moody's Investors Service Ltd. One Canada Square Canary Wharf London, E14 5FA United Kingdom JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454 Marie Diron MD - Sovereign Risk Sovereign Risk Group JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454 Releasing Office: Moody's Investors Service Ltd. 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