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European Bank for Reconstruction & Devlpmnt. -- Moody's affirms EBRD's Aaa rating, outlook stable

·17 min read

Rating Action: Moody's affirms EBRD's Aaa rating, outlook stable

Global Credit Research - 15 Jan 2021

London, 15 January 2021 -- Moody's Investors Service ("Moody's") has today affirmed the long-term issuer rating and senior unsecured debt rating of the European Bank for Reconstruction and Development (EBRD) at Aaa. The foreign-currency senior unsecured MTN program rating has been affirmed at (P)Aaa and the short-term issuer rating has been affirmed at Prime-1. The outlook remains stable.

The decision to affirm the rating reflects the following key factors:

(1) EBRD's key credit metrics are in line with other Aaa-rated MDBs, with a somewhat riskier business profile than most compensated for by lower leverage, a very high share of paid-in capital and strong liquidity;

(2) Support from a globally diverse group of shareholders is solid, manifesting itself in repeated extensions of the EBRD's mandate into new countries and regions. The share of highly rated non-borrowing shareholders is very high and reflects a very strong ability to provide support if needed.

The stable outlook on EBRD's ratings reflects Moody's view that these credit strengths will be maintained over the coming years. More specifically, the rating agency expects that the EBRD will manage both the fallout from the coronavirus pandemic and from the current financial stress in Turkey -- its largest country of operations -- with its key credit metrics broadly in line with recent years.

That said, non-performing exposures have increased in 2020 and will probably increase further over the course of this year, once the Covid-19 related payment moratoria and regulatory forbearance currently in place in many countries will come to an end. But in Moody's view there are strong mitigating factors in place, specifically EBRD's high capital buffer which allow the bank time to work out stressed exposures, as well as the high quality of its risk management.

Please click on this link https://www.moodys.com/viewresearchdoc.aspx?docid=PBC_ARFTL438819 for the List of Affected Credit Ratings. This list is an integral part of this Press Release and identifies each affected issuer.

RATINGS RATIONALE

RATIONALE FOR AFFIRMING THE Aaa RATING

FIRST DRIVER: RISKIER BUSINESS PROFILE IS COMPENSATED FOR BY LOWER LEVERAGE THAN PEERS, A HIGH PAID-IN CAPITAL BUFFER AND STRONG LIQUIDITY

The EBRD differs from many of its close peers in that its business focus is on lending to the private rather than the public sector. Around 13-14% of its development assets are in the form of equity investments, which tend to be more risky than loans. EBRD's business focus results in weaker asset performance as well as higher earnings volatility compared to many peers.

However, these relative weaknesses are compensated for by lower-than-average leverage and a very high share of paid-in capital. EBRD's leverage is at the lower end of peers, at just below 206%, defined as development assets over useable equity. EBRD's paid-in capital stands at over 20% of total subscribed capital which compares very favourably to the ratio of 5 to 10% that is standard for Aaa-rated MDBs.

A further strength is EBRD's very solid liquidity position; its liquid assets cover 143% of net cash outflows over the coming 18 months, which is a higher ratio than many peers. In addition, the EBRD has deep and varied access to global capital markets and a widely diversified investor base. Liquidity policies are prudent and overall risk management practices and policies are of very high quality.

SECOND DRIVER: SOLID SUPPORT FROM GLOBALLY DIVERSIFIED GROUP OF SHAREHOLDERS, WITH LARGE SHARE OF NON-BORROWING SHAREHOLDERS

The second driver for the affirmation of the Aaa rating is the strong support from a globally diverse shareholder base, including many highly rated advanced economies which are not borrowing from the EBRD. Their ability to provide support is very solid, as reflected in a weighted average shareholder rating of A2, one of the strongest among Moody's rated MDBs. Also, the EBRD has one of the highest shares of Aaa and Aa-rated shareholders among peers, accounting for 64% of total equity.

Moody's also expects that shareholders' willingness to provide support to EBRD if it ever was needed would be solid. While the EBRD's cushion of callable capital is somewhat lower than many peers, it benefits from a high share of paid-in capital and the solid credit quality of the callable capital.

The track record of shareholder support has been strong; shareholders have consistently backed the bank in its expansion into new countries and regions, such as Turkey in 2009 and the Southern and Eastern Mediterranean (SEMED) region from 2012 onwards. Following the global financial crisis, shareholders provided the EBRD with a €10 billion capital increase in 2010, raising subscribed capital by 50% and allowing the bank to sustainably double its annual business volumes from €4 to 5 billion to around €10 billion.

RATIONALE FOR THE STABLE OUTLOOK

The stable outlook reflects Moody's view that these credit strengths will be maintained over the coming years.

While the Covid-19 shock will likely weaken asset performance and the credit quality of the EBRD's development assets, Moody's expects any deterioration to remain reasonably contained. Similarly, the bank's large exposure to Turkey -- which accounted for 16.2% of total operating assets but 39% of all of EBRD's non-performing loans as of November 2020 -- is well diversified, with a limited number of non-performing exposures mainly in the infrastructure sector.

In this regard, the bank's historic asset performance during episodes of severe financial stress in important borrower countries gives confidence that any deterioration in asset performance would likely be reversed over the following years. Back in 2014, EBRD's NPA ratio rose to 7.3% of gross exposures from 2.5% the year before, mainly reflecting financial stress in Ukraine and to a lesser extent in Russia at that time. The NPA ratio declined rapidly again to 4.7% and 4.4% in the following two years.

Moreover, EBRD's high buffer of paid-in capital allows the bank time to work out and restructure stressed exposures, while limiting write-offs. Further mitigating factors are the EBRD's long track record of prudent risk management and solid project selection.

ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS

Environmental risks are not material for the EBRD's rating. The EBRD's operations have been increasingly focused on climate change mitigation objectives, as illustrated by its target to achieve a share of "green" investments of at least 50% of annual investments by the end of 2025. The target has been raised from 40% by 2020. While many of the EBRD's borrowers have exposure to environmental risks, the good diversification of the EBRD's development assets provides an important mitigant.

Social risks are not material for the EBRD's rating, given the wide diversification of its development asset portfolio. However, Moody's regards the coronavirus outbreak as a social risk under its ESG framework, given the substantial implications for public health and safety. While Moody's expects a temporary deterioration in the EBRD's asset quality and performance, the impact should remain manageable for the bank.

Governance risks are material for the EBRD's rating, and the bank's sound governance framework and prudent risk management policies are a key credit strength.

FACTORS THAT COULD LEAD TO AN UPGRA DOWNGRADE OF THE RATINGS

Downward pressure on the EBRD's rating would occur in the event of a significant and multi-year deterioration in asset quality and losses in its operations, which would erode the bank's strong capital buffers. While Moody's expects the coronavirus pandemic to negatively affect many of the EBRD's borrowers, the bank's development assets are broadly diversified across countries, which should help to contain the overall deterioration.

A rapid and sizeable expansion into new, and potentially much higher risk regions in which the EBRD lacks expertise would also be negative for the bank's credit profile. However, this is an unlikely scenario in Moody's view. A similarly negative but unlikely scenario is a material weakening in shareholder support, given the EBRD's proven expertise in regions of political importance to shareholders as well as the EBRD's sustained underlying profitability.

The principal methodology used in these ratings was Multilateral Development Banks and Other Supranational Entities Methodology published in October 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1232238. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

The List of Affected Credit Ratings announced here are a mix of solicited and unsolicited credit ratings. Additionally, the List of Affected Credit Ratings includes additional disclosures that vary with regard to some of the ratings. Please click on this link https://www.moodys.com/viewresearchdoc.aspx?docid=PBC_ARFTL438819 for the List of Affected Credit Ratings. This list is an integral part of this Press Release and provides, for each of the credit ratings covered, Moody's disclosures on the following items:

• EU Endorsement Status • UK Endorsement Status • Rating Solicitation • Issuer Participation

• Participation: Access to Management

• Participation: Access to Internal Documents

• Disclosure to Rated Entity • Lead Analyst • Releasing Office

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.

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_1243406.

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.

Kathrin Muehlbronner Senior Vice President 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 Alejandro Olivo MD-Sovereign/Sub Sovereign Sovereign Risk Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: 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

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