Scope assigns European Investment Bank first-time credit rating of AAA with Stable Outlook
Scope Ratings GmbH has today assigned the European Investment Bank a first-time AAA long-term issuer and senior unsecured foreign-currency ratings, along with a short-term issuer rating of S-1+ in foreign currency. All Outlooks are Stable.
Scope’s assignment of the European Investment Bank’s (EIB) AAA rating reflects the supranational’s highly rated key shareholders, strong liquidity profile driven by high and prudently managed liquid assets, and excellent access to capital markets including to the refinancing operations of the European Central Bank (ECB). The EIB’s asset quality is also very high with negligible non-performing loans, its portfolio is well diversified, and the institution has been profitable every year since its inception in 1958. The EIB is highly leveraged, and in line with its mandate, also increasing the risk profile of its exposures. Finally, in case of a Brexit, the EU-27 member states have agreed to replace the UK’s capital in a broadly credit-neutral way, but Brexit may result in higher dependence on fewer strong shareholders in case of a potential capital call. The Stable Outlook reflects Scope’s assessment of the EIB’s inherent financial buffers to withstand external and balance-sheet-driven shocks, including a ‘hard’ Brexit.
The EIB’s AAA rating is supported by the institution’s highly rated shareholders. Specifically, the EIB’s highest decision-making body, the Board of Governors, is composed of ministers designated by each of the EU-28 member states, whose voting rights correspond to the countries’ respective shares of the EIB’s subscribed capital. On this basis, the seven largest European economies – France (AA/Stable), Germany (AAA/Stable), Italy (BBB+/Stable), the UK (AA/Negative), Spain (A-/Stable), Belgium (AA/Stable) and the Netherlands (AAA/Stable) – together account for around 83% of the EIB’s capital. These sovereigns thus constitute the EIB’s key shareholders with a weighted-average rating of AA-.
From this starting point, the EIB’s rating is further underpinned by its strong institutional setup, including its high capitalisation level under the assumption of full leverage in line with its Statute and the benefit of having preferred creditor status. Specifically, the EIB’s available and credible resources amount to around EUR 219.5bn. These include paid-in capital (EUR 21.7bn), accumulated reserves and retained earnings (EUR 47.3bn), retained profits as at 2018 (EUR 2.3bn), and the callable capital of the 11 shareholders rated AA- or above (EUR 148.1bn). Dividing these assets by the maximum potential liabilities as defined in the EIB’s Statute (EUR 660.9bn as of end-2018) results in a ratio of 33.2%. This implies that if the EIB were to operate at full capacity as allowed under its Statute, its institutional set-up can ensure that available and credible resources would cover around one-third of all potential liabilities; a strength which Scope accounts for with a one-notch positive uplift.
In addition, while the EIB is not a lender of last resort (it does not have a mandate to lend to sovereigns in distress), Scope acknowledges the institution’s clear track record of being exempt from debt restructurings. This was most recently evidenced during the debt restructuring in Greece (BB/Positive) and Cyprus (BBB-/Stable), for which the EIB’s debt securities portfolios of government bonds were exempt from any haircut to principal or interest. On this basis, Scope assigns the EIB a one-notch uplift for benefiting from preferred creditor status. These considerations provide the EIB with a very strong institutional setup compared to peers.
The EIB’s AAA rating also reflects its conservative liquidity management, which results in a high and stable level of liquid assets. Considering the EIB’s cash and deposits as well as its securities with a maturity of less than or equal to 12 months, Scope estimates the EIB’s liquid assets at around EUR 77.5bn for end-2018. Conversely, EIB liabilities maturing within a 12-month period amounted to around EUR 80.0bn while disbursements of loans and advances to credit institutions and customers were EUR 46.7bn. This brings total liabilities due within one year to around EUR 126.7bn at end-2018; this amount includes past disbursements to reflect the EIB’s mandate to continue activities precisely when economic and financial circumstances deteriorate. On this basis, Scope calculates a three-year weighted average liquid assets ratio, for the years 2016-18, of around 58%, markedly above the 2014 level of 42%. This ratio implies that all outstanding liabilities and all committed disbursements due within a year can be financed with available liquid assets for more than six months without a need to access capital markets; a very high liquidity coverage among peer supranationals.
In addition, the EIB’s AAA rating is further underpinned by its status as a global benchmark issuer, evidenced by high annual funding volumes of around EUR 60bn, the roughly eight-year maturity of its issuances, and its highly diversified funding strategy in terms of currencies (21 in 2018) and instruments (including around EUR 4.5bn of green and sustainable bonds). Reflecting its appeal to global investors, particularly for US-dollar issuances, the EIB benefits from a broad and very diversified investor base, led by those in Europe (70%), followed by Asia (17%) and the Americas (12%). Bank treasuries (45%), institutional investors (26%) as well as central banks and official institutions (25%) account for most of the EIB’s investors. Finally, Scope notes positively that the EIB is the only supranational worldwide with access to the liquidity facilities of a central bank that issues a reserve currency, namely, the ECB. We acknowledge this unique funding capacity with a one-notch positive adjustment.
The EIB’s AAA rating is further supported by its excellent asset quality, reflecting its conservative lending policies, high asset protection and credit enhancements provided by the EU and its member states – including for non-EU and the European Fund for Strategic Investments (EFSI)-related exposures – and strong collateralisation levels. The EIB’s non-performing loans – defined as amounts more than 90 days in arrears that are not secured by EU or member state guarantees – have increased from around EUR 41.6m in 2012 to EUR 176.4m in 2018. This represents 0.03% of total outstanding signed loans (EUR 557.0bn), one of the lowest ratios among supranationals. In addition, given its mandate to lend to sovereigns, public institutions, financial institutions and corporates across several sectors and jurisdictions, as well as its lending policies establishing counterparty and sector limits, the EIB’s portfolio is highly diversified which reduces risks to its asset performance.
Finally, Scope notes positively that the EIB has been profitable every year since its inception in 1958, with stable annual earnings. These are fully retained and thus contribute to the EIB’s accumulated reserves, and in turn its capitalisation as well as its lending capacity, in line with its Statute. The EIB’s net income in 2018 was EUR 2.3bn, which corresponds to a return on equity of 3.4%.
Despite these credit strengths, the EIB also faces the following credit challenges:
First, Scope notes that the EIB’s total borrowings stood at around EUR 455.4bn as of December 2018, resulting in a leverage ratio of around 660%, still one of the highest among supranationals despite declining from around 1,000% in 2011. The decline in the ratio in 2012 reflects the EUR 10bn paid-in capital increase agreed at the time, while the most recent decreases in 2017 and 2018 are due to an increase in reserves due to stable profits and the decline in lending to the UK.
Second, Scope notes that, at the time of writing this report, there was no clarity on the final outcome of Brexit given the forthcoming general elections in the UK. However, in the eventuality of the UK leaving the EU and thereby no longer being an EIB shareholder, the EU-UK Withdrawal Agreement stipulates that the UK remains liable for its share of the pre-Brexit portfolio and that its paid-in capital will be repaid by the EIB in 12 annual instalments. For this, the EIB Board of Governors approved on 16 April 2019 that the UK capital share in the EIB subscribed capital will be replaced by capital subscribed by the 27 remaining member states on the date of the UK’s withdrawal from the EU. While the paid-in part of that capital replacement (EUR 3.5bn) will be financed out of the EIB’s reserves, the callable part of the capital increase (EUR 35.7bn) will be allocated to the remaining shareholders on a pro-rata basis. In addition, on 18 July 2019, the Council agreed to increase Poland’s subscribed capital by EUR 5.4bn and Romania’s by EUR 0.1bn one month after a Brexit. This capital increase also entails a rise in the EIB’s reserves paid by both countries. Thus, in case of a Brexit, and once these capital changes are implemented, the EIB’s paid-in and callable capital would increase while the reserves would decrease slightly. On this basis, the combined weights of the remaining six key shareholders (excluding the UK) would adjust to around 78%, and, thus, the capital-key weighted rating would still be AA-.
Still, Scope notes that Brexit may result in a reduction of the quality of the EIB’s callable capital because the callable capital of shareholders rated AA- or above will drop from currently EUR 148.1bn to around EUR 134.0bn. Including the expected impact of the capital replacement as well as the capital increases of Poland and Romania, Scope estimates the EIB’s shock-absorption capacity to fall to around 30.3% from the current 33.2%. In addition, the EIB would have to rely on fewer shareholders rated AA- or above for extraordinary capital support, which would result in a weaker assessment of the shareholder concentration.
Third, in line with its mandate, the EIB’s riskier exposures have increased since the deployment of the EFSI, which is implemented by the EIB and the European Investment Fund via the respective Infrastructure and Innovation Window and the SME Window. The average asset quality of EFSI operations is riskier than the average of other EIB operations and classified within the EIB’s ‘Special Activities’. These are defined as either i) debt operations with a risk profile of D- or below based on the EIB’s classification (i.e. expected loss exceeds 2%); or ii) all equity and equity-type operations.
As such, the volume of new EIB Special Activities signatures increased from EUR 4.5bn in 2014 to around EUR 16.0bn in 2018; of this amount, however, only EUR 1.5bn were at the EIB’s own risk. Still, despite this fourfold increase, the stock of Special Activities declined from the peaks seen during the euro area crisis, reflecting offsetting redemptions and improvements in the credit quality of outstanding loans. As of end-2018, the EIB’s total exposure of Special Activities stands at around EUR 18.5bn. At the same time, Scope notes positively that the EIB’s reserve covering unexpected losses from Special Activities at the EIB’s own risk has steadily increased, from around EUR 3.2bn in 2015 to EUR 5.9bn in 2018. In addition, these exposures also benefit from a guarantee provided by the European Union (AAA/Stable).
Finally, Scope notes that the EIB’s Statute limits the amount of own funds that it can invest into equity participations. While equity type financing has grown steadily since 2010 from around EUR 2.2bn to around EUR 6.9bn, it still constitutes only around 10% of the institution’s equity and reserves (up from 6% in 2010).
Scope’s supranational scorecard
Scope’s supranational scorecard, which is based on clearly defined quantitative parameters, provides an indicative ‘AAA’ rating for the European Investment Bank. Additional considerations allow Scope to incorporate idiosyncratic characteristics that cannot be assessed in a consistent and comprehensive manner across all supranationals, but which may still affect the creditworthiness of the issuer.
For the EIB, the following additional consideration has been identified: i) it is the only supranational worldwide with access to the liquidity facilities of a central bank that issues a reserve currency, namely, the ECB. Scope acknowledges this factor with a one-notch positive adjustment.
A rating committee has discussed and confirmed these results.
For further details, please see Appendix I of the rating report.
Factoring of Environment, Social and Governance (ESG)
Scope considers ESG sustainability issues during the rating process as reflected in its supranational methodology. Governance-related factors are implicitly captured in Scope’s assessment of the ‘fundamental rating’, which Scope assesses for the European Investment Bank with a AA+. Environmental factors are considered during the rating process, including the risk to ‘stranded assets’ and the benefits from issuing green and/or social bonds, but these had no an impact on this rating action. Scope notes positively, however, that the EIB revised its energy lending policy, ending financing for fossil fuel energy from end of 2021. It is also it the largest green bond issuer among supranationals, having raised a cumulative EUR 25.8bn in green bonds across 13 currencies since 2007.
Outlook and rating-change drivers
The Stable Outlook reflects Scope’s assessment of the EIB’s inherent financial buffers to withstand external and balance-sheet-driven shocks, including a ‘hard’ Brexit. The rating could be downgraded if: i) highly rated key shareholders are downgraded; ii) the EIB’s liquidity buffers were significantly reduced; and/or iii) the EIB recorded sustained losses, reducing its capital base.
The main points discussed were: i) key shareholders and institutional set-up; ii) preferred creditor status and mandated activities; iii) liquidity management and buffers; iv) funding activity; v) asset quality, including EIB Special Activities and equity exposures as well as credit enhancements; vi) portfolio diversification vii) profitability; and viii) consideration of peers.
The methodology applicable for this rating and/or rating outlook, ‘Supranational Entities’, is available on www.scoperatings.com. Historical default rates of Scope Ratings can be viewed in the rating performance report on https://www.scoperatings.com/governance-and-policies/regulatory/esma-registration. Please also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope’s definition of default as well as definitions of rating notations can be found in Scope’s public credit rating methodologies on www.scoperatings.com. The rating outlook indicates the most likely direction of the rating if the rating were to change within the next 12 to 18 months.
Solicitation, key sources and quality of information
The rating was not requested by the rated entity or its agents. However, the rated entity and/or its agents did participate in the rating process. Scope had access to accounts, management and/or other relevant public documents for the rated entity or related third party. The following substantially material sources of information were used to prepare the credit rating: rated entities, public domain and third parties. Key sources of information for the rating include: European Investment Bank, Eurostat, Haver Analytics and Bloomberg.
Scope considers the quality of information available to Scope on the rated entity or instrument to be satisfactory. The information and data supporting Scope’s ratings originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data. Prior to the issuance of the rating or outlook action, the rated entity was given the opportunity to review the rating and/or outlook and the principal grounds upon which the credit rating and/or outlook is based. Following that review, the rating was not amended before being issued.
This credit rating and/or rating outlook is issued by Scope Ratings GmbH.
Rating prepared by Alvise Lennkh, Director
Person responsible for approval of the rating: Dr Giacomo Barisone, Managing Director
The ratings/outlook were first released by Scope on 15 November 2019.
Please see www.scoperatings.com for a list of potential conflicts of interest related to the issuance of credit ratings.
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