International Bank for Economic Co-operation -- Moody's downgrades IBEC's rating to Ca from Baa3, outlook changed to negative

Rating Action: Moody's downgrades IBEC's rating to Ca from Baa3, outlook changed to negativeGlobal Credit Research - 11 Mar 2022London, March 11, 2022 -- Moody's Investors Service (?Moody's?) has today downgraded the International Bank for Economic Co-operation's (IBEC) long-term issuer rating to Ca from Baa3. The outlook has been changed to negative from stable.The rating action was triggered by the joint announcement of five European Union (EU, Aaa stable) shareholders to withdraw from the bank, published on 2 March.[1] In their announcement, the Ministries of Finance of Poland (A2 stable), Czech Republic (Aa3 stable), Romania (Baa3 stable), Slovakia (A2 stable) and Bulgaria (Baa1 stable) stated their intention to discontinue their participation in IBEC, aiming for an orderly withdrawal. Consequently, Moody's no longer assumes that these shareholders would provide any additional support to the multilateral development bank (MDB) in a situation of financial stress.Furthermore, this is a strong indication that IBEC is eventually likely to become close to fully owned and supported by Russia, and Moody's view is that holders of IBEC bonds will not be in a better position than holders of Russian government debt. As such, Moody's has aligned IBEC's rating with that of the Government of Russia.The EU member states' planned withdrawal would leave Russia (Ca negative) as the main shareholder in the bank, implying that even if Russia and the remaining shareholders ? Mongolia (B3 stable) and Vietnam (Ba3 positive) ? remained committed to the institution, shareholders' ability to provide support is now significantly lower, in particular following the downgrade of Russia's sovereign rating to Ca on 6 March 2022. This deterioration in shareholder support compounds the already heightened risks to IBEC's asset performance and funding and liquidity related to Western sanctions on Russia. Moody's view is that, in line with the rating on the Government of Russia, the risk of a default occurring has significantly increased and that the likely recovery for investors will be in line with the historical average, commensurate with a Ca rating. At the Ca rating level, the recovery expectations are at 35 to 65%.Moody's has also changed the outlook to negative from stable to reflect the further risks to IBEC's credit profile from the potential ramifications of the shareholder withdrawal. Moody's will use the outlook period to gain further clarity on the process and timing of the planned shareholder withdrawal and its impact on IBEC's operations, IBEC's ability to repay maturing obligations amid heightened risks to its asset quality and liquidity and funding, as well as indications for the future of the bank. A wind-down of the institution is a likely scenario in Moody's view.RATINGS RATIONALERATIONALE FOR THE DOWNGRADE OF IBEC'S RATING TO CaThe announcement by the EU countries to withdraw as shareholders very severely weakens the credit profile of IBEC. The five above-mentioned EU countries are shareholders, currently accounting for 46.7% of IBEC's subscribed capital, and their eventual exit would leave Russia with a 96.8% shareholding in the bank, resulting in a very concentrated ownership. Moody's believes that Russia's ability to support the bank has severely diminished as a result of the severe sanctions imposed on the country. Moody's considers the resulting extreme ownership concentration to be a Governance consideration under its ESG framework.According to the bank's statutes the process of withdrawal, once formally begun, requires the EU countries to give not less than six months' notice to IBEC. As such, it may take some time before these shareholders eventually exit the institution. However, in Moody's view, the strong statement is a clear indication that EU shareholders intend, as of today, to no longer participate in the institution and Moody's no longer factors in any additional support from these shareholders in a situation of financial stress for the bank.Furthermore, Moody's expects that IBEC is eventually likely to become a predominantly Russian owned and supported entity, and therefore will be increasingly exposed to negative credit pressures from the Government of Russia's weakened ability and willingness to pay bondholders. Moody's view is that holders of IBEC bonds will therefore not be in a better position than holders of Russian government debt. As such, Moody's has aligned IBEC's rating with that of the Government of Russia.This deterioration in shareholder support compounds the already heightened risks to IBEC's asset performance from a very challenging operating environment, given that Russia and Belarus (Ca negative) together account for around 43% of total gross loans and guarantees as at end-2021, as well as significant risks to funding and liquidity given IBEC's limited liquidity buffers.In particular, Moody's believes that IBEC's liquidity position is highly stretched. Despite recent efforts to diversify its funding, a substantial portion of its funding still comes from the Russian market and banks, and the likely wider market disruptions and deteriorating investor confidence following Russia's military invasion of Ukraine (Caa2, review for downgrade) will result in funding challenges. IBEC also partly relies on credit lines from European banks which may now become harder to access. These developments could challenge IBEC's first bond refinancing due in October 2022 of RUB7 billion or around €50 million as of 8 March 2022 (Moody's takes into account the put option after 3 years rather than the 10-year tenor). The shareholders' withdrawal will also mean that, while not immediate, a Bulgarian lev-denominated bond maturing in 2024 (68 million levs or around €35 million) will eventually become payable at the bondholders' request as and when Bulgaria ceases to be a member in IBEC.The Bank had liquidity buffers available of €67 million at the end of 2021 according to Moody's definition and IBEC benefits from a focus on trade finance, which leads to a naturally high turnover of assets. The bank had already halted planned lending disbursements after Russia's invasion and loans of around €78 million are due to mature in the first two quarters of 2022. However, despite the non-performing asset ratio remaining relatively low as at end-2021, the very challenging operating environment, including a significant amount of IBEC's loans directed to Russia which faces severe risks to its macro-economic stability, may impair the ability of borrowers to repay IBEC on time and in full.RATIONALE FOR CHANGING THE OUTLOOK TO NEGATIVEThe decision to change the outlook to negative reflects the further risks to IBEC's credit profile from the potential ramifications of the shareholder withdrawal on IBEC's asset quality and liquidity. Moody's will use the outlook period to gain further clarity on the process and timing of the shareholder withdrawal and its impact on IBEC's operations, IBEC's ability to repay maturing obligations given the heightened risks to its liquidity and funding, as well as indications for the future of the entity. The departing member states have combined paid-in capital of €93.4 million, which, according to IBEC's statutes, will eventually have to be repaid, subject to any deduction for the member state's outstanding liability to the bank. As such, a further expansion of the asset base is very unlikely and a wind-down of the institution is now a likely scenario in Moody's view.ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONSIBEC's highly negative credit impact score (CIS-4) reflects moderately negative exposure to environmental and social risks and highly negative governance risks.IBEC's issuer profile exhibits neutral to low exposure to environmental risks across most categories except for its moderately negative exposure to carbon transition risks which may pose risks to asset quality. IBEC has significant exposure to commodity dependent countries such as Russia which drives its overall moderately negative environmental issuer profile score (E-3).IBEC's social issuer profile score is moderately negative (S-3) given the planned withdrawal of the five EU shareholders will negatively impact on customer relations and client trust.IBEC's governance issuer profile score is highly negative (G-4). The institution's governance framework will be tested by the planned withdrawal of the five EU shareholders, with likely negative ramifications to the bank's developing governance and risk management framework. Very concentrated ownership by Russia following the planned withdrawal of the five EU shareholders poses a highly negative governance risk.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGFACTORS THAT COULD LEAD TO AN UPGRADEGiven the negative outlook, a positive rating action is highly unlikely. The outlook on IBEC's Ca rating could be changed to stable if Moody's concluded that recovery for investors was likely to remain in line with the historical average for a Ca rating. For example, if the negative ramifications of the planned shareholder withdrawal and its exposure to the deteriorating operating environment in Russia, including the impact on IBEC's operations and liquidity and funding, was likely to be manageable. Clarity over the future of the institution would also likely be a condition for a stabilisation in the outlook.FACTORS THAT COULD LEAD TO A DOWNGRADEMoody's would likely downgrade IBEC's rating if the shareholders' planned withdrawal and its exposure to the deteriorating operating environment in Russia resulted in significant concerns over the bank's ability to repay maturing debt obligations and losses for investors were likely to be greater than assumed in the Ca rating. While IBEC has so far been excluded from sanctions imposed on Russia, any indications that this may change or that counterparties may chose not to do business with IBEC could also put downward pressure on the rating.The principal methodology used in this rating 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 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 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. 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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 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 http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.At least one ESG consideration was material to the credit rating action(s) announced and described above.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 www.moodys.com.The person who approved this credit rating is Alejandro Olivo.REFERENCES/CITATIONS[1] Joint Statement of five EU Member States on withdrawal from post-Soviet banks, https://www.mfcr.cz/en/news/press-releases/2022/joint-statement-of-5-eu-member-states-on-46721 02-Mar-2022Please 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. Releasing Office: Moody's Investors Service Ltd. 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