Fitch Affirms GuarantCo at IFS ‘AA-‘; Outlook Stable
Fitch Ratings - Frankfurt/London-08 May 2019: Fitch Ratings has affirmed GuarantCo Ltd.'s Insurer Financial Strength (IFS) Rating at 'AA-' (Very Strong). The Outlook is Stable
KEY RATING DRIVERS
The affirmation reflects the financial soundness of GuarantCo’s sponsors, as well as the company’s ‘Very Strong’ risk-based capitalisation, strong risk management capabilities, and low investment risk.
Fitch’s assessment of the sponsors’ ability and willingness to support GuarantCo results in a two-notch uplift to GuarantCo’s standalone credit profile. However, GuarantCo’s IFS Rating is not aligned with that of the sponsors’ due to the absence of explicit unconditional and irrevocable guarantees on GuarantCo’s liabilities.
GuarantCo is indirectly owned by the development agencies of the UK (AA/Negative), Switzerland (AAA/Stable), the Netherlands (AAA/Stable), Sweden (AAA/Stable) and Australia (AAA/Stable) via the Private Infrastructure Development Group Trust (PIDG Trust; 89% at end-2018) and directly by the Nederlandse Financierings-Maatschappij voor Ontwikkelingslanden N.V. (FMO; AAA/Stable; 11% at end-2018).
The paid-in capital contributions GuarantCo has received from its sponsors, together with GBP40 million callable capital from the UK’s Department for International Development (DfID) via PIDG in January 2017, as well as plans for future capital increases support Fitch’s view of the sponsors’ commitment to the company.
GuarantCo’s risk-based capitalisation is ‘Very Strong’ based on a net par-to-capital ratio of 1.3x at end-2018 (end-2017: 0.8x) including callable capital provided by the DfID and a USD30 million stand-by facility provided by the FMO. Fitch expects net par-to-capital leverage to increase (and capitalisation to decline) as GuarantCo grows its guarantee portfolio.
The company provides guarantees for mainly non-US dollar-denominated debt issued by speculative-grade names (“high frequency, high severity” guarantee portfolio as defined in Fitch’s Insurance Rating Methodology) and is exposed to currency risk. Fitch views this risk as manageable due to GuarantCo’s strong capitalisation. However, it is possible that currency risk will increase as the company grows and Fitch will continue to closely monitor this exposure.
Fitch assesses GuarantCo’s risk selection and risk mitigation practices as strong. GuarantCo has significant expertise in managing and restructuring stressed development projects, which is an important risk-mitigating tool. Recourse agreements in place with borrowers enable GuarantCo to recover incurred losses in case a guarantee is called upon. GuarantCo has achieved strong recoveries and has not written off exposures since its inception.
GuarantCo’s investments are managed by PIMCO and Fidelity in two separate portfolios. Both portfolios consist of predominantly short-duration government and non-government bonds and money market instruments. Exposure to risky assets as defined by Fitch remains negligible and only includes USD1 million in non-investment grade bonds. Fitch expects GuarantCo’s investment risk to remain low.
GuarantCo’s primary objective is to support infrastructure projects and to promote capital markets development in low- and lower middle-income countries; therefore the level of profitability is not a key performance metric for the company. GuarantCo’s owners expect the company to be managed on a commercial basis and to achieve a modest profit but it remains secondary to fulfilling the company’s development objectives.
Fitch views GuarantCo as a small, highly specialised financial guarantor. Fitch ranks GuarantCo’s business profile as ‘moderate’ compared with that of financial guarantors on a global basis, reflecting Fitch’s view of GuarantCo’s competitive positioning as ‘most favourable’, operating scale and business risk profile as ‘less favourable’, and diversification as ‘favourable’.
GuarantCo’s rating would be downgraded should the UK sovereign rating be downgraded by more than one notch.
A downgrade may also result from a weakened capital position evidenced by a net par-to- capital ratio, including callable capital and the stand-by facility, exceeding 3x.
Any reduction in the commitment by the sponsors to GuarantCo, possibly as a result of a change in government policy priorities could also trigger a downgrade.
Fitch views an upgrade of GuarantCo’s rating as unlikely.
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