Rating Action: Moody's affirms Eurofima's Aa2 ratings, maintains stable outlook
Global Credit Research - 24 Jul 2020
Frankfurt am Main, July 24, 2020 -- Moody's Investors Service, ("Moody's") has today affirmed Eurofima's long-term issuer rating at Aa2. Moody's has also affirmed Eurofima's senior unsecured rating for bonds issued in foreign currency after 1 January 2018 at Aa2 as well as the senior unsecured MTN programme in foreign currency at (P)Aa2. The senior unsecured foreign currency rating of bonds issued prior to 1 January 2018 has been affirmed at Aa1, as these bonds continue to benefit from the subsidiary shareholder guarantee established in Article 26 of Eurofima's statutes. The commercial paper P-1 rating has been affirmed. The outlook remains stable.
The affirmation of Eurofima's ratings at Aa2 is underpinned by the following two key drivers:
High asset quality and performance, elevated liquid resources and solid track record of capital market funding are key credit strengths;
Support ability from highly rated shareholders is strong and compensates to some extent Moody's assessment of low contractual support.
The stable outlook reflects Moody's expectation that the creditworthiness of Eurofima's borrowers will not materially change as the institution's lending operations continue to adapt to the liberalization of the railway sector under the EU's 4th railway package. Similarly, Moody's does not expect the introduction of new shareholders backed by regional governments to fundamentally change Eurofima's excellent asset quality. While it may lead to a delay in projects, the coronavirus-induced recession in many countries in 2020 is unlikely to significantly affect Eurofima's credit profile given the organisation's business pipeline in the coming years.
RATIONALE FOR AFFIRMING THE RATING AT Aa2
FIRST DRIVER: HIGH ASSET QUALITY AND PERFORMANCE, ELEVATED LIQUID RESOURCES AND SOLID TRACK RECORD OF CAPITAL MARKET FUNDING ARE KEY CREDIT STRENGTHS
The first driver underpinning the rating affirmation is based on Eurofima's generally strong intrinsic financial strength, in particular its strong asset quality and excellent asset performance. Standing at A3 in 2019, the weighted-average borrower rating -- Moody's key indicator for asset credit quality -- of the shareholder's respective sovereigns has risen materially compared to the 2011-2013 trough of Ba1. At the same time, the exposure of Eurofima's loan book to non-investment-grade backed borrowers has declined markedly from the 2013 peak of 12% to 1.7% in 2019. Eurofima's credit profile is also supported by its preferred creditor status and the collateralization of its loan portfolio by the rolling stock it finances. The strong asset quality mitigates Eurofima's highly concentrated loan book, with 89% of its development-related assets concentrated in its top 5 borrowers (Austria, Italy, Spain, Switzerland, Belgium).
In addition, Eurofima's track record in terms of asset performance is particularly strong. Since the organisation's inception in 1956, Eurofima has never recorded a non-performing loan. While the coronavirus outbreak is putting financial pressure on railway companies given the sharp drop in the number of passengers, Moody's does not expect this to significantly affect Eurofima's credit profile. Eurofima's shareholders could benefit from the European Commission's temporary framework on State aid as well as from Member States' ability to provide direct aid to the railways to compensate the direct damages resulting from the pandemic.
However, Moody's assessment of Eurofima's capital adequacy is weighed down by the institution's substantial leverage. Development-related assets and treasury assets rated A3 and lower as a percentage of useable equity, Moody's key measure for leverage, stood at 776% at the end of 2019, slightly down from 810% at the end of 2018. Despite declining from over 1,500% since 2009, this percentage remains high and exceeds the leverage ratio of all other Multilateral Development Banks (MDBs) rated by Moody's. Going forward, Moody's expects Eurofima's leverage to stabilise at the current elevated level. New business with current shareholders is supporting lending activity in 2020, while useable equity is likely to remain stable given Eurofima's limited profitability. This said, measured by the Basel III capital adequacy ratio, Eurofima's Core Tier 1 capital stood at 55.4% in 2019, up from 51.9% in 2018, 41.3% in 2017 and 36.2% in 2016. The improvement was mainly driven by the decline in Eurofima's loan book, in tandem with an increasing volume of liquid assets.
The rating affirmation is also based on Eurofima's elevated liquid resources and its solid track record of capital market funding. Eurofima's robust position reflects its prudent liquidity policy and the strict back-to-back asset liability management of its core lending businesses. Eurofima has no maturity mismatches, and thus no funding gap, assuming that borrowers reimburse on time. Coverage of net cash outflows by liquid resources is very solid at a ratio of 252% for the next 18 months. In addition, its treasury portfolio is both highly liquid and highly rated. 54% of Eurofima's liquid assets are invested in Aaa-rated securities, and 8% in Aa-rated securities, with the remaining 38% allocated to the non-rated category, which in 2019 consisted mostly of fixed income instruments issued by Swiss cantons and cities. Despite a more turbulent financial environment, Moody's expects Eurofima's liquidity and funding position to remain resilient to the coronavirus-induced recession in 2020. This expectation is underpinned by the institution's prudent and robust risk management policies. Finally, Eurofima is a well-established issuer on the international markets, reflected in its diversified investor base by geography, currency and investor type, as well as its very low cost of funding.
SECOND DRIVER: SUPPORT ABILITY FROM HIGHLY RATED SHAREHOLDERS IS STRONG, AND COMPENSATES TO SOME EXTENT MOODY'S ASSESSMENT OF LOW CONTRACTUAL SUPPORT
The second driver supporting Eurofima's Aa2 rating is the strong support ability from highly rated shareholders. This is reflected in a weighted average shareholder rating of A2, one of the highest in Moody's MDB rating universe. According to this metric, the credit quality of Eurofima's members is among the top 10 in our rated universe and positioned it on a par with supranational entities such as the European Stability Mechanism (ESM) (Aa1 stable), the European Bank for Reconstruction and Development (Aaa stable) and the European Investment Bank (Aaa stable). Moreover, shareholders backed by Aaa and Aa-rated sovereigns account for 73% of subscribed capital, while shareholders backed by non-investment-grade and non-rated sovereigns represent only 4.6%, reflecting shareholders' respective sovereigns' robust ability to provide financial assistance if it ever was needed.
Eurofima's credit profile is also supported by Moody's assessment of high non-contractual support, deriving from an expansion of its membership and the importance of its public interest mission. 11 new members have joined since the institution's creation, expanding Eurofima's footprint across Europe. Looking ahead, Eurofima is actively seeking to broaden its membership further by bringing in new shareholders in the form of regional public transport authorities. In Moody's views, deepening the presence in key markets such as Germany (Aaa stable) is likely to reinforce the institution's role. In terms of mandate, Eurofima's public interest mission to support the development of passenger rail transport aligns well with European governments' commitment to reducing greenhouse gas emissions and is a key business opportunity for the years to come.
However, our assessment of Eurofima's strength of member support is constrained by the low share of callable capital relative to debt obligations. Standing at 13.5% in 2019, the contractual support ratio is currently one of the lowest in our rated universe. The low score reflects Eurofima's substantial leverage, though callable capital accounts for 80% of total subscribed capital.
RATIONALE FOR THE STABLE OUTLOOK
The stable outlook reflects Moody's expectation that the creditworthiness of Eurofima's borrowers will not materially change as the institution's lending operations continue to adapt to the liberalization of the railway sector under the 4th railway package and the introduction of non-sovereign backed shareholders. In the short term, lending to regions in those markets which are already largely liberalized, such as in Germany, could improve already solid asset quality. Furthermore, Eurofima is committed to engage only with shareholders whose respective investment-grade sovereigns issue a guarantee for the financing and who do not acquire rolling stock by themselves. The exclusive engagement with high quality guarantors will ensure continuity with its current prudent lending strategy. Moreover, while it may lead to a delay in projects, the coronavirus-induced 2020 macroeconomic situation is unlikely to significantly affect Eurofima's credit profile given the organisation's business pipeline in the coming years.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS
Environmental considerations have a limited influence on Eurofima's credit profile, but it is a key player supporting the European objective of increasing the share of clean transportation. Within the railway sector, efforts to replace diesel engines with alternative energy sources require investments to modernise the railway fleet, and hence present new funding opportunities for Eurofima. In terms of funding, three successful green bond issuances took place in December 2018, October 2019 and May 2020.
Social considerations are not material to Eurofima's rating. However, Moody's regards the coronavirus outbreak as a social risk under our ESG framework, given substantial implications for public health and safety. The rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, falling oil prices, and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets. Moody's believes that the combined negative effect of these developments will lead to a temporary weakening of economic and fiscal strength in all of Eurofima's countries of operation but does not expect that the pandemic will lead to a weakening of Eurofima's credit profile, considering the institution's non-cyclical business model.
Governance considerations support Eurofima's credit profile. The organisation's prudent lending policy and strict back-to-back asset liability management underpin a very strong liquidity and funding position. The absence of credit losses since Eurofima's inception in 1956 also reflects a structurally solid institution.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
WHAT COULD CHANGE THE RATING - UP
Upward pressure on the rating would arise from an acceleration of the strategy to bring Eurofima's leverage and capital adequacy metrics closer to higher rated peers. Furthermore, a renewed strengthening of member support, including the reinstatement across the balance sheet of protections consistent with those provided by Article 26, would also be credit positive.
WHAT COULD CHANGE THE RATING - DOWN
Conversely, downward rating pressure would likely develop in the event of a pronounced and significant deterioration in asset quality. In particular, the incorporation of a significant share of lower rated or unrated borrowers which impacts on our assessment of capital adequacy, through a deterioration in the Weighted Average Borrower Rating, would be credit negative, considering Eurofima's high leverage ratio. Finally, a deterioration in shareholder's ability or willingness to provide support would also be considered credit negative.
The principal methodology used in these ratings was Multilateral Development Banks and Other Supranational Entities published in June 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1147813. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
For 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 at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
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 ratings tab on the issuer/entity page for the respective issuer on www.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 ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.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://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
Please see www.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 ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.
Olivier Chemla Vice President - Senior Analyst Sovereign Risk Group Moody's Deutschland GmbH An der Welle 5 Frankfurt am Main 60322 Germany JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454 Yves Lemay MD-Sovereign/Sub Sovereign Sovereign Risk Group JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454 Releasing Office: Moody's Deutschland GmbH An der Welle 5 Frankfurt am Main 60322 Germany JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454
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