New York, October 26, 2017 -- Moody's Investors Service has today assigned a first-time long-term issuer
rating of A1 to the International Islamic Trade Finance Corporation (ITFC). The outlook on the rating is stable.
Moody's also assigned a first-time short-term issuer rating of P-1.
The key factors for ITFC's A1 rating are the following:
(1) 'Medium' assessment of ITFC's capital adequacy reflecting significant capital buffers, balanced againts high
concentration levels and a relatively weak track record of asset quality, albeit mostly due to legacy exposures;
(2) 'High' assessment of ITFC's liquidity position, supported by prudent treasury investment practices and
adequate liquidity management policies in anticipation of a moderate build-up of expected debt service
requirements over the next three years;
(3) 'Medium' assessment of strength of member support driven by very high extraordinary support, balancing
the lack of explicit contractual support in form of callable capital.
The A1 rating and the stable outlook take into account ITFC's planned moderate leveraging of the balance
sheet, as well as the gradual improvement in the asset quality performance as legacy exposures are recovered
or written off over the next two years.
FIRST DRIVER: SIGNIFICANT CAPITAL BUFFERS BALANCED BY HIGH CONCENTRATION LEVELS AND
LEGACY ASSET QUALITY CHALLENGES
ITFC's 'medium' capital adequacy assessment reflects a very high asset coverage ratio with equity at about
107% of development operations in reflection of the corporation's absence of leverage. Looking forward, the
corporation aims to expand its leverage ratio up to a debt/equity ratio of 40% over the next three years which
continues to support the corporation's very strong capitalization position.
ITFC's strong level of capitalization is balanced by the elevated concentration levels of the bank's top ten
exposures with the four largest exposures to below investment grade rated sovereigns —namely to Egypt (B3
stable), Bangladesh (Ba3 stable), Pakistan (B3 stable) and Turkey (Ba1 negative)—accounting for 72% of
total trade murabaha finance at the end of 2016 from 77.4% at the end of 2015.
With non-performing financing facilities at 12.9% as of 2016, ITFC's asset quality performs well below the nonperforming
loan median of 0.3% for A-rated MDBs and in comparison to other institutions that focus on trade
finance, a business model that typically benefits from collateralization and government guarantee backstops.
That said, the legacy nature of the ITFC's currently non-performing financing facilities, and the prospect of
significant recoveries in the future mitigate the ITFC's asset quality challenges.
SECOND DRIVER: HIGH ASSET TURNOVER AND LOW EXPECTED COST OF LOAN FUNDING
SUPPORT LIQUIDITY ASSESSMENT
ITFC's liquidity assessment of 'high' is supported by prudent treasury investment practices and adequate
liquidity management policies. ITFC's liquidity position benefits from the absence of debt service requirements
as of 2016, and takes into account the moderate expected recourse to borrowing resulting in a debt service
coverage as a share of liquid assets that Moody's expects to reach up to 180% by the end of 2020, a ratio
comparable to other trade finance peers rated by Moody's, and which reflects the comparatively short average
maturity of liabilities. As is the case with other trade finance institutions, ITFC's liquidity position remains
supported by the low average maturity of the trade finance portfolio, with 73% of exposures liquidating within
Despite ITFC's absence of market issuances and debt management history, Moody's believes that ITFC's
membership in the Islamic Development Bank Group (IsDB, Aaa stable) will allow ITFC to access loan funding
at similarly favorable terms as the Islamic Corporation for Development of the Private Sector (Aa3 stable).
THIRD DRIVER: ABSENCE OF CALLABLE CAPITAL LIMITS STRENGTH OF MEMBER SUPPORT AT
The absence of formal contractual support in form of callable capital limits the contribution of member support
to 'medium' under Moody's methodology. Despite the lack of explicit contractual support, ITFC benefits from
strong implicit support from the IsDB as its main shareholder at 36.7% of paid-up capital, followed by Saudi
Arabia (A1 stable) holding a further 16.5% directly and a further 11% indirectly. Kuwait (Aa2 stable) also holds
a 7% stake in ITFC. In addition, ITFC shares numerous operational, technical and physical assets with IsDB.
As with other associates of the IsDB group, the IsDB's goal is to make ITFC more independent financially,
which they achieve by withholding from general capital increases without however fully relinquishing strategic
oversight, underpinning Moody's assessment of very high extraordinary support.
The International Islamic Trade Finance Corporation is an autonomous entity within the Islamic Development
Bank Group created with the purpose of advancing trade to improve the economic condition and livelihood of
people across the Islamic world. ITFC has consolidated all the trade finance businesses that used to be
handled by various windows within the IsDB group. It commenced operations in Muharram 1429H (January
ITFC's main source of income is Murabaha trade finance, a shariah-compliant form of trade finance. Its primary
focus is to encourage intra-trade among the 57 member countries of the Organisation of Islamic Cooperation
(OIC). As a member of the IsDB group, ITFC has privileged access to governments in its member countries
and it works as a facilitator to mobilize private and public resources towards achieving its objectives of
fostering economic development through trade. The Corporation helps businesses in member countries gain
better access to trade finance and provides them with trade-related capacity building tools.
RATIONALE FOR THE STABLE OUTLOOK
The outlook for ITFC's rating is stable, reflecting Moody's expectation that the corporation's leveraging of the
balance sheet will remain contained and that the formation of new non-performing assets will remain muted
and in line with other trade finance institutions in Moody's rated MDB universe, while the main legacy
exposures are being recovered or written off.
WHAT COULD CHANGE THE RATING UP
The build-up of debt management history in conjunction with the envisioned strengthening of the liquidity policy
would be credit supportive, as would a continued decline in the non-performing asset ratio and a gradual
reduction in exposure concentration levels. A successful diversification of the loan portfolio that considerably
reduces geographic and single-obligor exposure would also be positive.
WHAT COULD CHANGE THE RATING DOWN
A further deterioration in asset quality or a more significant than anticipated pace of borrowing would be credit
negative. An erosion of shareholder support in form of a lower weighted median shareholder rating or in form
of weaker than anticipated implicit support would also be credit negative.
The principal methodology used in these ratings was Multilateral Development Banks and Other Supranational
Entities published in March 2017. Please see the Rating Methodologies page on www.moodys.com for a copy
of this methodology.