InfraCredit Gets Highest Rating Score, Stable Outlook
Nigeria: An emerging market-focused ratings agency, GCR, has affirmed Nigeria’s Infrastructure Credit Guarantee Company (InfraCredit) its highest credit rating score of AAA with a stable outlook, the same record achieved a year ago.
According to the ratings agency, InfraCredit rating is underpinned by the uniqueness of its operations as a credit guarantee provider, and the company’s strong capitalisation, liquidity, and asset quality position, albeit counterbalanced by its self-regulated status.
In a new report posted on its website, it was noted that the stable outlook reflects GCR’s expectation that InfraCredit would ensure strong capitalisation characterised by significant core equity components, and maintain strong asset quality despite the expected rapid guaranteed portfolio growth and the strains in the operating environment.
In its explanatory note, the rating agency explained that InfraCredit operational uniqueness offers some monopolistic privileges to the company with no direct competitor in the country presently.
However, it said the company reflects a low level of diversification by product and customer base, and its operations are limited to Nigeria.
In financial year (FY) 2020, InfraCredit earnings growth was mainly fuelled by foreign exchange (FX) gains in as the COVID-19 pandemic impacted on finalisation of potential mandates.
“We expect the gradual normalisation in the economy to result in a material growth in earnings in FY21 and FY22 respectively post adjustment for FX gains”, the report said.
GCR Ratings hinted that the company’s overall capitalisation is a significant rating positive.
It added that a moderate negative adjustment was made due to the low core equity component of the qualifying tier-1 capital, with the GCR calculated core capital ratio standing above 20% at FY20 and year to date but expected to moderate to around 16-17% in FY21 and FY22.
Revenue is considered stable, according to GCR, given the recurring nature and particularly the annuity-like nature of guarantee and monitoring fees, which are usually amortised and earned over the life of the guaranteed transaction.
Although, this is counterbalanced by increased exposures to market sensitive income, which constituted 42.7% of total operating income in FY20 compared with 0.5% recorded in FY19 thus constituting a moderate rating negatively.
Meanwhile, the ratings agency added that InfraCredit risk is viewed to be somewhat contained through the adoption of stringent underwriting criteria.
“So far, there has been no payment default under any of the guaranteed transactions, hence no recourse to InfraCredit for repayment under any of its guaranteed transactions to date.
“However, note is taken of the concentrated nature of the deal portfolio (comprising four deals as of May 2021), which somewhat elevates the company’s risk profile.
“The United States dollar-denominated cash and liquid asset portfolio (bank balance, money market placements, Eurobonds), due to related parties, and other financial liabilities also expose the company to foreign exchange risk, which appears to be well contained through hedging”, GCR assessment shows.
On the note of the credit guarantee company’s position, GCR maintains that asset quality metrics are expected to remain sound in the foreseeable future.
InfraCredit funding and liquidity are also assessed at a high level, with the funding base comprising mainly equity, preference shares, subordinated long term borrowings and contingent capital, all considered highly stable.
“Concentration risk inherent in the limited borrowing counterparties is offset by funding stability, with the unexpired tenor of the borrowings ranging from seven to nine years”, the report stated.
The GCR calculated long-term funding ratio of 80% and 111% at FY19 and FY20 respectively is considered strong and expected to remain robust over the next 12-18 months.
InfraCredit Gets Highest Rating Score, Stable Outlook
