CAF Takes Ecuador Hit

S&P has slapped a negative outlook on CAF’s A+/A-1 rating amid concerns about exposure to Ecuador, which is in default, as well as Venezuela and Argentina. “We revised the outlook to negative because the credit risk embedded in CAF’s portfolio rose sharply following Ecuador’s decision to default on its bonded debt,” says S&P credit analyst Lisa Schineller. Lending to Ecuador’s public and private sectors constitutes CAF’s single largest country exposure, at 20.8% of the multilateral’s loan portfolio and 46.3% of shareholder equity as of September 30, says S&P. Embedded credit risk has also risen with the revision of S&P’s outlook on Venezuela to negative (14.8% of CAF’s loan portfolio, 32.9% of equity) and lowering of Argentina to B minus from B (4.9% of CAF’s loan portfolio, 10.8% equity). “The ratings on CAF continue to incorporate our expectation that CAF’s debtors will treat it as a preferred creditor,” says Schineller. “In particular, we assume that Ecuador will remain current on its payments to CAF, as CAF could be the country’s only source of external financing,” she adds. Nonetheless, risk embedded in CAF’s core lending portfolio has increased, as it continues to lend to Ecuador during what S&P expects will be a period of pronounced macroeconomic stress. “We could lower the A+ long-term and A-1 short-term ratings on CAF if Ecuador were to run arrears with the bank,” says Schineller. “We would also consider a downgrade if the ratings on one or more of CAF’s other large borrowers are lowered or if CAF’s currently strong financial profile weakens materially,” she adds. CAF is among the region’s highest rated borrowers and typically leads the way back for issuers when markets slam shut. The multilateral earlier this week tapped the COP market.