(The following statement was released by the rating agency)
Overview
-- Following a review of the Council of Europe Development Bank (CEB)
under our revised criteria for multilateral lending institutions, we are
lowering our long-term issuer credit rating on the CEB to 'AA+' from 'AAA'.
-- The stand-alone credit profile for the CEB is 'aa', reflecting our
assessment of both its business and financial profiles as "very strong," as
our criteria define these terms.
-- Our ratings on the CEB incorporate one notch of potential
extraordinary shareholder support because of callable capital from 'AAA' and
'AA+' rated sovereigns.
-- The stable outlook reflects our view that the CEB's credit strengths
will remain in place.
Rating Action
On Dec. 27, 2012, Standard & Poor's Ratings Services lowered its long-term
foreign currency issuer credit rating (ICR) on the Council of Europe
Development Bank (CEB) to 'AA+' from 'AAA'. At the same time, we affirmed our
'A-1+' short-term rating on the bank. The outlook is stable.
Rationale
The rating actions reflect the adoption of our revised criteria for rating
multilateral lending institutions (MLIs) and not a recent deterioration in the
CEB's creditworthiness. (For more details of our related criteria, see
"Multilateral Lending Institutions And Other Supranational Institutions
Ratings Methodology," published Nov. 26, 2012, on RatingsDirect on the Global
Credit Portal.) The ratings derive from our assessment of the CEB's "very
strong" business profile and its "very strong" financial profile, as our
criteria define these terms. In combining these assessments, we consider the
CEB to have a stand-alone credit profile (SACP) of 'aa'.
We base our "very strong" business profile assessment on our view of the CEB's
governance, role, and public policy mandate. The CEB was established in 1956
as the Resettlement Fund for National Refugees and Over-Population in Europe,
with a mandate to help refugees and other displaced persons after World War
II. Today, the CEB's focus is to help address the social problems that
European countries face as a result of refugees, displaced persons, or
migrants from forced movements of population, or natural or ecological
disasters. In operational terms, this means the CEB makes loans to support job
creation in small and midsize enterprises (SMEs), vocational training, social
housing, health care, environmental projects, natural catastrophe relief, and
educational reform.
As of Sept. 30, 2012, the CEB's total assets were EUR27 billion, of which 46%
were loans. Its outstanding loans have increased by 3% per year on average
over the past decade. Our assessment of the CEB's financial profile as "very
strong" rests on our calculation of the CEB's risk-adjusted capital ratio of
22% before, and 14% after, adjustments for concentration risk and preferred
creditor treatment, as well as the bank's funding and liquidity profiles. We
anticipate that the CEB will continue to improve its capital ratios over the
medium term as the rate of internal capital generation outpaces expected loan
growth.
Our funding ratios indicate that the CEB is structurally able to cover its
scheduled short-term debt repayments and scheduled loan disbursements without
recourse to new issuance. Furthermore, we note that it maintains relatively
higher liquid assets relative to its total exposures than do most other
highly-rated MLIs. Under our liquidity stress scenario, the bank would be able
to continue fulfilling its mandate, even under extremely stressed market
conditions, without access to the capital markets.
On Feb. 4, 2011, the CEB's governing board approved a sixth capital increase
for the bank, which took effect on Dec. 31, 2011. A 98% subscription rate by
the CEB's member states had raised subscribed capital by 67% to EUR5.5 billion
as of Dec. 21, 2012 (Switzerland and Liechtenstein did not participate.) This
increase in subscribed capital requires no disbursement of cash and will have
no effect on shareholders' equity.
We assess the CEB's financial profile as "very strong" without extraordinary
shareholder support. Incorporating the CEB's callable capital from 'AAA' and
'AA+' rated shareholders into its equity base would raise our financial
profile assessment to "extremely strong," yielding a one-notch uplift to the
ICR from the SACP. In determining both the SACP and the ICR, we consider the
placement of a MLI within a given assessment for its business and financial
profiles.
Currently, the CEB has nine 'AAA' shareholders and one 'AA+' shareholder. The
rating on latter, the Republic of France, which holds 17% of the CEB's
capital, carries a negative outlook. However, should we lower our rating on
France to below 'AA+', we would expect the CEB's capital adequacy uplift to be
maintained, so long as our expectations regarding the CEB's cash equity trends
are met. The nine 'AAA' rated shareholders could be called on to provide up to
EUR1.3 billion of callable capital (representing 5% of total liabilities at
year-end 2011) to support the CEB's debt service.
Outlook
The stable outlook reflects our view that the CEB's business profile, capital
levels, funding, and liquidity are sufficiently robust--and its 'AAA' and
'AA+' callable capital sufficiently ample--that there is less than a
one-in-three chance of us lowering our 'AA+' issuer credit rating on the CEB
within the next two years.
We could lower the rating if management--contrary to our expectations--were to
adopt a more aggressive funding strategy or failed to improve its capital
adequacy. The rating could also come under pressure if some borrowing members
ceased treating the CEB as a preferred creditor.
We could raise the rating if the CEB were to enhance its public policy role
and mandate, and strengthen its relationships with all shareholders, while
meeting our expectations for improved capital adequacy and continuing to be
treated as a preferred creditor.
Related Criteria And Research
All articles listed below are available on RatingsDirect on the Global Credit
Portal, unless otherwise stated.
-- Into The Weeds Of The Revised Multilateral Lending Institutions
Criteria, Dec. 19, 2012
-- Multilateral Lending Institutions And Other Supranational Institutions
Ratings Methodology, Nov. 26, 2012
Ratings List
Downgraded; CreditWatch/Outlook Action; Ratings Affirmed
To From
Council of Europe Development Bank
Issuer Credit Rating AA+/Stable/A-1+ AAA/Negative/A-1+
Senior Unsecured AA+ AAA
Ratings Affirmed
Council of Europe Development Bank
Commercial Paper A-1+
(Caryn Trokie, New York Ratings Unit)
