Moody’s casts shadow on EIB’s AAA rating

Ratings agency Moody’s issued a note last Friday placing the AAA rating of the European Investment Bank (EIB) on negative watch and outlining possible scenarios that could trigger a downgrade.

“The key rating drivers for changing the EIB’s outlook to negative are […] the potential that low probability but high-impact events, including the possibility of multiple exits from the euro area, would in Moody’s opinion result in significant impairments to the EIB’s assets […] together with the high likelihood that the credit standing of EIB’s largest shareholders, on whom it would need to rely for additional capital in such extreme scenarios, would exhibit strong correlation,” Moody’s said.

Moody’s continues: “As a consequence, Moody’s does not believe that the EIB’s shareholding structure provides sufficient diversification in capital resources to support a stable outlook on its AAA ratings given that almost all of its shareholders have AAA ratings with negative outlooks, or carry ratings lower than AAA.”

Barring any of these “extreme scenarios”, Moody’s otherwise states that the EIB’s AAA rating is in good health. The ratings agency points out that the EIB has a very low share of impaired loans – only 0.1 percent of disbursed loans or €353 million. It also highlights that close to 87 percent of the bank’s risk portfolio is backed by an investment grade borrower.

As of December, 67 percent of the EIB’s callable capital benefits form AAA or AA ratings with 22 out of the bank’s 27 member countries rated AAA. The bank also boasts a strong capital adequacy ratio under Basel II of 24.9 percent, compared with the 8 percent minimum required of commercial banks.

Infrastructure Investor contacted Moody’s and the EIB for comment, but is still awaiting a response.