The bilateral creditor initiative would see interest and principal payments
suspended from May until at least end-2020. Delays of principal or interest
payments on an MDB sovereign loan lasting more than six months would lead Fitch
to classify the MDB's full exposure to this sovereign as impaired. In line with
our supranationals criteria, such a delay would affect an MDB's credit profile
through three key metrics.
First, the impairment of sovereign loans would constitute a breach of the MDB's
preferred creditor status (PCS), which gives repayment of loans to MDBs
priority in a sovereign debt crisis. PCS is a key strength in
MDBs' credit profiles. If breached, we would reduce the uplift we apply to the
credit quality of the loan portfolio to reflect PCS, which is based on the
track record of sovereign loan performance. The size of this adjustment would
reflect the size of the impaired sovereign exposure and whether the sovereign
borrower continued to repay other creditors, including private sector
creditors.
Secondly, the ratio of impaired loans to gross loans, a key measure of credit
risk in MDB asset portfolios, would increase. We would revise our medium-term
forecasts for this ratio, which has a relatively high weight in our criteria,
according to the length of the suspension of payments and our expectations of
the sovereign borrower's ability to resume payments to the MDB after the period
of suspension of debt payment is over. Exposures to the affected sovereign
would be assigned a default rating, reducing the average rating of the MDB's
loan portfolio, and weakening capitalisation metrics.
Thirdly, the suspension of debt payments would also adversely affect the MDB's
cash flows and liquidity. Lower-rated MDBs with relatively weak liquidity
profiles, including limited access to capital markets or alternative sources of
liquidity, would be particularly penalised in terms of our liquidity
assessment.
The negative credit impact of debt suspension might be mitigated or fully offset
by support from an MDB's shareholders. Fitch would assess how far additional
shareholder contributions could offset the risk that payment delays extend to
six months or longer, and any medium-term deterioration in loan performance
metrics. In Fitch's view, full compensation by shareholders or other donors in
the form of contributions to cover forgone sovereign debt payments, similar to
that seen at the time of Multilateral Debt Relief Initiative from 2005, would
reduce credit risk to the MDB and offset the impact of debt payment suspension
on its intrinsic rating. If made by shareholders, such contributions would also
be a very strong signal of support.
It is unclear how MDBs will respond to the G20's request. Fitch would expect
regional MDBs to be the most likely to act, as G20 member countries are also
the regional MDBs' largest shareholders. If debt suspension applied to the same
countries as the bilateral debt relief initiative (those eligible for
International Development Association lending and United Nations Least
Developed Countries), the most exposed Fitch-rated regional MDBs would be those
operating in sub-Saharan Africa.
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