By Marc Jones
LONDON, – Rating agency Fitch expects to finalize changes in the next 6-9 months that should allow the world’s largest multilateral development banks (MDBs) to significantly expand lending without jeopardizing their prized credit scores.
Ratings firms have looked at how they rate the World Bank and other major MDBs amid a global push for the banks to triple their lending to fight poverty and climate change.
At the heart of the discussion are proposed changes such as modification of the compensations given for “callable capital”, commitments of shareholder governments to provide additional resources in the event of severe financial problems.
Fitch analyst Arnaud Louis said it is also looking at increasing the weight given to its “usable capital to risk-weighted assets (FRA) ratio” to potentially make it the “main anchor” of MDB’s capitalization rating.
An initial consultation period on the changes ends on January 24. They will then be refined and another consultation round conducted before the finalized adaptations are announced by the end of “summer”, if not sooner.
“The change, which consists in giving more weight to the FRA, would lead them (MDBs) to have more capital space, perhaps to extend their balance sheet,” added Luis.
Although he would not say how big that expansion might be, a study commissioned last year estimated that reforming the World Bank’s approach to risk could unlock nearly $190 billion in additional loans without jeopardizing its AAA rating.
“We will be able to provide very clear guidance on what would lead to a negative rating action,” Louis said.
Another area that Fitch is looking at is new clauses that MDBs are putting into their loans that allow the borrower to delay repayments if they suffer a natural disaster related to climate change, such as drought or heavy flooding.
MDBs and borrowers want to avoid a situation where these repayment freezes are classified as default by rating agencies.
“In our view, delays, when they are triggered, will not go against the principle of preferred creditor as long as those delays meet a number of conditions,” said another Fitch analyst, Carlos Masip.
“They must be NPV (net present value) neutral. The deferral period cannot be longer than three years. And then we expect that the (original) final maturity will be largely respected.” (Reporting by Marc Jones Editing by Mark Potter)