International Islamic Trade Finance Corp — Moody’s affirms ITFC’s A1 rating, maintains stable outlook

Rating Action: Moody’s affirms ITFC’s A1 rating, maintains stable outlookGlobal Credit Research – 16 Feb 2021New York, February 16, 2021 — Moody’s Investors Service, (« Moody’s ») has today affirmed the International Islamic Trade Finance Corporation’s (ITFC) A1 long-term foreign-currency issuer rating. ITFC’s short-term foreign-currency issuer rating was also affirmed at Prime-1. The outlook remains stable.The rating affirmation reflects ITFC’s strong capital position, which balances the corporation’s very low leverage against its weak asset quality and weak, albeit improving, asset performance. The affirmation is also supported by its very robust liquidity position and the nascent track record of accessing market financing. ITFC’s membership in the Islamic Development Bank (IsDB, Aaa stable) group underpins the corporation’s high strength of member support even in the absence of callable capital.The stable outlook reflects Moody’s expectation that the corporation’s planned leveraging of its balance sheet will remain gradual and that the formation of new non-performing exposures (NPE) will remain subdued, which should result in a further decline in the NPE ratio in the next few years.RATINGS RATIONALECAPITAL POSITION IS SUPPORTED BY VERY LOW LEVERAGE AND IMPROVING ASSET PERFORMANCEITFC’s almost entirely equity-funded operations anchor its strong capital position, with a three-year average leverage ratio (which compares development assets to usable equity) consistently below 100% over the past several years. While the corporation had started to raise market funding in 2018, the accumulation of Sharia-compliant debt-like obligations, so far exclusively in a short-term Wakala format, has been modest, reaching less than 12% of equity at the end of 2020. Moody’s expects that further leveraging will be gradual in the coming years and the leverage ratio will likely remain relatively low, as the expansion of the balance sheet will be constrained by the corporation’s risk policy, which limits the outstanding stock of external funding to 40% of equity.The low leverage mitigates ITFC’s weak development asset credit quality, which is captured by a « weighted-average borrower rating » of B3, the high concentration of exposures among a relatively small number of beneficiaries, and the fact that the asset exposure remains heavily geared toward the energy sector (around 70% of the entire portfolio). Such concentration highlights the risk that delinquencies in a small number of counterparties or a shock to a single sector could lead to a relatively large deterioration in the performance of the overall book. Nevertheless, this risk is at least partly mitigated by the predominant focus on financing sovereigns and sovereign-guaranteed beneficiaries, which accounted for 86% of total exposures at the end of 2020. Internal risk management linkages between the members of the IsDB group, which prevent new disbursements to entities that are delinquent on financing from any other group member, also mitigate some of the risks stemming from the low credit quality of the beneficiaries.ITFC’s asset performance is comparatively weak, but has been improving with only one new and relatively small non-performing private-sector exposure incurred since 2015. In Moody’s view this underscores the effectiveness of the corporation’s risk management framework, which has been strengthened since 2018. Meanwhile, the write-off in 2018 of one large legacy NPE, booked almost at the corporation’s inception in 2008, has been driving the improvement in the NPE ratio to 6.6% of total exposures in 2019 from nearly 15% in 2017. Despite the incurrence of the new NPE in 2020, the NPE ratio decreased to 5.8% at the end of 2020 and could be even lower if the Audit Committee approves the proposal to write off the new NPE and increase the provisioning for the remaining legacy NPE.Moody’s expects that ITFC’s asset performance will continue to improve as the corporation’s strengthened risk management framework helps to avoid a sharp increase in NPEs, despite the challenging operating environment due to the global economic downturn triggered by the coronavirus pandemic.ROBUST LIQUIDITY COMPENSATES FOR THE SHORT TRACK RECORD OF ACCESSING MARKET FUNDINGITFC’s liquid assets more than doubled in 2020, compared to the level recorded at the end of 2019, as a result of the corporation’s decision to shift its liquid assets towards highly-rated sovereign sukuk while decreasing the share of commodity placements in its treasury portfolio. The latter are not included in Moody’s calculation of liquid assets due to their legally binding contractual term of up to three months. Meanwhile, under Moody’s standard stress scenario which assumes no new external funding but incorporates a continuation of financing disbursements based on the existing pipeline, the corporation’s cash inflows over the coming 18 months would likely exceed expected outflows (including debt service), underscoring ITFC’s very strong liquidity position.Net inflows, rather than outflows, expected under a stress scenario reflect the low level of external funding but also the short-term nature of ITFC’s trade finance portfolio with an average maturity of nine months. They also capture ITFC’s use of short-term Collateralized Commodity Murabaha instruments (commodity placements or Islamic Repo) to store excess liquidity, which would become available as soon as the instruments mature, typically within 1-3 months. The short-term nature of the portfolio also allows the corporation to adjust the size of its overall exposure at a comparatively short notice to safeguard its liquidity buffers.ITFC’s robust liquidity position also reflects the strengthening of liquidity policies since 2018, following the corporation’s decision to gradually move away from the model in which its operations are exclusively funded by equity. The updated guidelines require that ITFC maintains a minimum 12-month liquidity coverage of net outflows under a stress case scenario, compared to a four-month disbursement coverage policy previously.Moody’s assessment of the quality of ITFC’s funding sources balances the corporation’s relatively short track record of accessing market funding against the reputational benefits derived from its membership in the IsDB group and its relatively high profile within the Organization of Islamic Cooperation community, which allows it to access bilateral credit lines at a favorable cost.The corporation’s focus on Islamic finance naturally restricts the pool of bilateral funding sources, as is the case for the IsDB and its other members. While ITFC has so far raised funding only through short-term Wakala arrangements, which are well aligned with the corporation’s short-term funding business model, the groundwork is being laid for the potential future issuance of a longer-term sukuk, which would help to lengthen the funding profile and diversify the investor base.STRENGTH OF MEMBER SUPPORT BENEFITS FROM INTRINSIC IsDB SUPPORT IN THE ABSENCE OF FORMAL CALLABLE CAPITALGiven ITFC’s weighted average shareholder rating of Ba1, which is lower than most other A-rated peers, the corporation’s high strength of member support primarily derives from the assumed intrinsic support from IsDB, which is ITFC’s largest shareholder (with 36% of paid-up capital) as well as its key investment partner. Reputational risks for the IsDB group as a whole, were ITFC to encounter financial difficulties and receive no extraordinary support, mitigate the absence of formal contractual support in the form of callable capital. In Moody’s assessment, IsDB would be willing and able to deploy a considerable amount of resources to other entities of the group if needed.The ITFC also derives a degree of credit strength from sharing numerous operational, technical and physical assets with IsDB. Although, as is the case with the other members of the IsDB group, IsDB’s goal is to increase ITFC’s financial and operational independence, IsDB does not plan to relinquished its strategic oversight. Currently, four of ITFC’s 11 Board members (including the chair) represent IsDB, which underpins Moody’s expectation of continued intrinsic support from IsDB in the future.RATIONALE FOR THE STABLE OUTLOOKThe stable outlook on ITFC’s rating reflects Moody’s expectation that the corporation’s leveraging of the balance sheet will remain gradual over the next few years, contained by its current policy guidelines regarding external funding. The stable outlook also assumes that formation of new non-performing exposures will remain subdued with the NPE ratio falling over time, reflecting the strengthened risk management framework since 2018.The stable outlook also includes an assumption that the ITFC will manage its liquidity position in a manner that is consistent with a changing structure of its liabilities which, over the next few years, will include incrementally more external funding.ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONSEnvironmental considerations are not material to Moody’s assessment of ITFC’s credit profile. However, heavy concentration of the portfolio in financing trade in oil and gas exposes the corporation to risks stemming from the global transition to a lower carbon intensity economy in the longer term.Social considerations are not material to Moody’s assessment of ITFC’s credit profile.Governance is a key consideration in Moody’s assessment of ITFC’s credit profile. The corporation has an adequate risk management framework and continues to enhance its governance functions, most recently by adopting an Internal Audit Charter.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSWHAT COULD CHANGE THE RATING UPA demonstrated track record of access to diversified funding sources and strong liability management, supported by effective liquidity risk management policies would likely prompt an upgrade provided this is accompanied by a further decline in the non-performing exposure ratio to levels comparable with higher rated peers and a rising likelihood that non-performing exposures will remain low in the medium term.WHAT COULD CHANGE THE RATING DOWNA significantly more rapid increase in the corporation’s leverage than Moody’s currently expects would likely trigger a downgrade, in particular if also accompanied by a material deterioration in the corporation’s liquidity position. A re-emergence of pressures on the corporation’s asset performance could also prompt a downgrade, likely denoting gaps in risk management compared with Moody’s expectations. An indication that intrinsic support from IsDB is weaker than Moody’s currently assumes would also put a downward pressure on the rating.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.The local market analyst for these ratings is Alexander Perjessy, +971 (423) 795-48.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. 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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 Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the UK and is endorsed by Moody’s Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody’s office that issued the credit rating is available on www.moodys.com.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. Elisa Parisi-Capone Vice President – Senior Analyst Sovereign Risk Group Moody’s Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. 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