Moody’s Affirms Emerging Africa Infrastructure Fund’s A2 Rating
Moody’s Ratings has affirmed the Emerging Africa Infrastructure Fund’s (EAIF) long-term foreign-currency issuer rating at A2 with outlook remains stable.
In the rating note, Moody’s said the main drivers of the affirmation of the A2 rating relate to the EAIF’s strong capital position and funding provided by a solid base of commercial and institutional investors.
It also reflects a high level of member support underpinned by a highly-rated shareholder base. The global rating agency added this is balanced against relatively weak development asset credit quality.
The stable outlook reflects Moody’s expectation that the risks associated with the Fund’s debt-driven expansion of the lending portfolio in the coming years will be managed without significant detriment to asset quality and liquidity parameters, notwithstanding a challenging operating environment given the current focus on Africa.
Moody’s said in the rating note that the EAIF will fund its expansion mainly by mobilising additional financing from new and existing highly-rated investors.
A gradual expansion to Asia will over time support further portfolio diversification and improvements in asset quality, but remains at an early stage, the rating agency stated.
The EAIF’s leverage ratio has been gradually increasing as the company expands its operations, reaching 189% in 2023 from 159% in 2021.
“..We expect the EAIF to manage its continued expansion without significant detriment to the capital position going forward.
“Although we do not expect any substantive additional equity injections from shareholders, a consistent track record of retained earnings will support the Fund’s capital base over time, and provides additional confidence over its ability to manage risks associated with a portfolio characterised by relatively weak borrower credit quality”.
EAIF net profit reached a record $37.1 million in 2023, adding to cumulative retained earnings of $153.4 million since inception. Retained earnings now account for 28% of useable equity, a rapid increase from 6% in 2017.
An expansion to Asia was approved in 2023, aligning the geographical mandate to that of the rest of the Private Infrastructure Development Group (PIDG).
Moody’s revealed that the transactions will focus on emerging and frontier markets across South Asia, with financial close on several new projects targeted by the first half of 2025.
The gradual expansion to Asia, while still at an early stage, will further strengthen EAIF’s portfolio diversification over time, the rating note said.
EAIF’s portfolio is already well diversified, notably in terms of country exposure: the Fund has committed loans in 20 countries as of end-2023, as well as a number of exposures spanning multiple African countries.
EAIF’s focus on countries with challenging macroeconomic and operating conditions translates into a relatively high level of non-performing loans, but asset performance is on an improving trend.
The ratio of non-performing assets (NPA) to development-related assets stood at 6.0% in 2023 under Moody’s definition, predominantly comprised of two long-standing, but fully provisioned, impaired exposures and the associated suspended interest.
With a settlement agreement reached in the first half of 2024 on one of the legacy exposures and against the background of a growing portfolio, analysts expect the company’s NPA ratio to improve over time.
As of the year end 2023, EAIF was funded through around $860 million of debt facilities, raised from Kreditanstalt fuer Wiederaufbau (KfW), the African Development Bank (AfDB), FMO, the development bank of the government of the Netherlands, and Allianz SE, and including a $75 million Revolving Credit Facility and Term Loan from The Standard Bank of South Africa Limited.
The long term debt facilities match the long disbursement periods to the infrastructure projects that EAIF finances.
“Based on our estimates, the Bank’s availability of liquid resources (ALR) ratio at the end of 2023 stood around 110%, indicating that liquid resources would be sufficient to more than cover net cash outflows over 18 months.
“The ALR is however subject to some volatility due to the Fund’s reliance on raising new debt facilities to fund its planned balance sheet expansion, and in the absence of large cash holdings or a treasury portfolio that could serve as liquidity buffers.
“EAIF faces additional funding requirements in the coming years in order to meet loan commitments and the targets set in its medium-term business plan.
“An earlier round of financing took place over 2023, and resulted in additional or expanded long-term debt facilities being raised from Allianz, KfW and SBSA.”
The Fund is currently in the process of raising additional debt funding. We expect new funding to remain drawn from a limited but expanding base of new highly-rated institutional or commercial investors or existing relationships.
In the interim, we expect the undisbursed portion of the EAIF portfolio to be funded by portfolio loan repayments, cash flow from operations and existing undrawn debt facilities.
EAIF has one of the highest average shareholder ratings among Moody’s rated supranational institutions. The government of the United Kingdom via its Foreign, Commonwealth and Development Office (FCDO) currently provides 82% of the paid-in capital.
The remainder is provided by the government of Switzerland’s State Secretariat for Economic Affairs, the government of the Netherlands’ Directorate-General for International Cooperation (DGIS), and the aid and development agency of the government of Sweden, the Swedish International Development Cooperation Agency (SIDA).
Moody’s said the presence of highly rated shareholders is a key indication of ability to support. EAIF retains a strategic position within the broader PIDG, both as the largest entity of the group and its main profit generation engine.
The Fund now has an established track record of lending operations spanning two decades, and its expertise in private-sector lending to infrastructure and crowding in private capital is highly valued by shareholders. #Moody’s Affirms Emerging Africa Infrastructure Fund’s A2 Rating
