(The following statement was released by the rating agency)
Dec 14 - Fitch Ratings has affirmed the International Finance Facility for Immunisation's (IFFIm) Long-term Issuer Default Rating (IDR) at 'AAA' with a Negative Outlook and Short-term IDR at 'F1+'.
The affirmation is largely based on the strong support and committed grant payments from IFFIm's donor countries, and particularly from its two largest donors, the UK ('AAA'/Negative) and France ('AAA'/Negative). Other donors include the government of Australia ('AAA'/Stable), Italy ('A-'/Negative), the Netherlands ('AAA'/Stable), Norway ('AAA'/Stable), South Africa ('BBB+'/Negative), Spain ('BBB'/Negative) and Sweden ('AAA'/Stable). Support from donors is strong because of their high overall credit quality and the legally binding nature of donors' commitments. In Fitch's opinion, repudiation of these commitments would impose severe reputational damage.
Funds raised by IFFIm on the financial markets are disbursed as grants to GAVI, a global health partnership committed to improving access to immunisation for children in impoverished countries, which in turn distributes them to recipient countries. IFFIm has enjoyed strong participation from the international community. The number of donor countries has increased to nine from six since its creation in 2006. IFFIm's resources essentially consist of grants, which have been pledged by donors at inception, and are disbursed over a period of up to 23 years. They also include interest on funds raised on the market and held in trust as a liquidity buffer. New pledges have been received since then, including USD144m from Australia and Italy in 2011. At end-June 2011, the fair value of pledges receivable amounted to USD3.4bn; based on end-October 2012 figures. The UK is the largest contributor, with 47.5% of total pledges, followed by France, with 27.4%.
To limit indebtedness, IFFIm maintains a ratio of net debt (defined as outstanding bonds minus funds placed in a trust) to the net present value of pledges (the gearing ratio) below a threshold that is reviewed regularly. At end-June 2012, the limit for gearing ratio stood at 69.5%, while the actual ratio was 41.2%. Although it has increased markedly since 2006, as IFFIm's indebtedness increases to fund vaccine programmes, there is a comfortable margin for further increases in debt.
Default of donors on their pledged grants constitutes the main source of risk for IFFIm. While the overall credit quality of donors is strong (pledges from countries rated 'AAA' accounted for 85.6% of the total as of end-November 2012), this risk has increased following the successive downgrades of Spain and Italy in the past two years. In 2012, grants pledged by two donor countries were not received on the due date. In addition, according to the arrangement between donors, if one of the 70 countries eligible for IFFIm's grants is in protracted arrears with the IMF, donors may reduce their grants to IFFIm by a set percentage. This risk has improved since the creation of IFFIm, as the overall credit quality of poor countries is on a rising trend. As of end-November 2012, only three countries - with a weight of 1% of the grant portfolio each - remained in protracted arrears with the IMF (Somalia, Sudan and Zimbabwe).
IFFIm's exposure to exchange risk is entirely hedged. Liquidity risk is also marginal, as IFFIm holds a large portfolio of high-grade liquid assets, which must cover its debt service payments over the next 12 months. Liquidity and market risks are being managed effectively by the World Bank ('AAA'), IFFIm's designated treasury manager.
RATING OUTLOOK - NEGATIVE
The Negative Outlook reflects the Negative Outlook on France and the UK. Fitch has linked its assessment of IFFIm's rating directly to that of the sovereign ratings of Republic of France and of the UK, which are the largest contributors to IFFIm, and are among the highest-rated donors. The Outlooks on the 'AAA' ratings of France and the UK were revised to Negative in 2011 and 2012, respectively.
The main factors that could lead to a negative action, individually or collectively, are:
- A downgrade of France or the UK's IDR.
- A breach of the limit set by IFFIm on its gearing ratio. In Fitch's view, a gearing ratio limit of 70% is consistent with a 'AAA' rating for an institution with IFFIm's characteristics.
KEY ASSUMPTIONS AND SENSITIVITIES
The ratings and Outlook are sensitive to a number of assumptions. In particular, Fitch assumes that the eurozone will remain intact and that there will be no materialisation of severe tail risks to global financial stability which would affect donor countries' capacity to pay the grants they have pledged.
(Bangalore Ratings Team, Hotline: +91 80 4135 5898 Debanjali.Ghosh@thomsonreuters.com, Group id: BangaloreRatings@thomsonreuters.com, Reuters Messaging: Debanjali.Ghosh.email@example.com)
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