ECONOMY

Black Sea trade bank is graded Baa2 by Moody’s; outlook stable

LONDON – International credit rating agency Moody’s Investors Service has assigned a Baa2 long-term issuer rating and a Prime-2 short-term issuer rating to the Black Sea Trade & Development Bank (BSTDB). The outlook on the ratings is stable. Following is part of the agency’s release: The bank was founded in 1997 as a multilateral development bank (MDB) with the mandate to promote economic development and regional cooperation among the member states of the Black Sea Economic Cooperation (BSEC), an intergovernmental organization launched in 1992. The members of the BSTDB, which has its headquarters in Thessaloniki, include three current or soon-to-be European Union (EU) member states, Greece, Bulgaria and Romania, as well as Turkey, Russia, Ukraine, Albania, Armenia, Azerbaijan, Georgia and Moldova. Moody’s says its ratings are supported by the bank’s preferred creditor status and its capital structure. The rating agency also points out that the BSTDB is a well-run institution, staffed with qualified professionals knowledgeable of their area. Its internal guidelines are prudent and consistent with best practices for an MDB, its asset quality good, and its liquidity comfortable. Profitability is a concern – the bank has posted net losses from 2001 and expects to do so until 2006 – but this is mitigated by the bank’s asset quality and its position as a start-up institution. Net income has been impacted by conservative provisioning and a low interest-rate environment. Moody’s believes the bank’s goal of achieving profitability as of 2006 should be attainable. The ratings also consider the political turbulence of the Black Sea region. Moody’s rates seven of the 11 member countries, and only two – Greece (A1) and Russia (Baa3) – are rated investment grade. However, over time, this may improve as more countries become involved with the EU integration process. Becoming operational only in 1999, the BSTDB has been slow and purposefully cautious in building up its loan portfolio, focusing primarily on establishing a solid reputation as a well-run MDB, says Moody’s. The bank extends primarily project financing and corporate loans (70 percent of portfolio), and short-term trade financing (26 percent) to public and private sector entities within its member countries; the remainder of its operations consists of guarantees, equity investments and special services, such as leasing. Although profit maximization does not govern its activities, the bank’s lending is priced on commercial terms and does not include program or concessional lending. It focuses on priority sectors of energy and manufacturing, which account for over 60 percent of approved projects. Lending to small and medium-sized enterprises is another priority area. BSTDB also favors cross-border projects. The bank finances trade through selected financial intermediaries in its countries of operation. It participates in larger projects with other international financial institutions (IFIs) through co-financing agreements and guarantees. The BSTDB’s preferred creditor status eliminates transfer risk in the event of an external payments moratorium in a member state, regardless of whether a loan is to a public entity or private company. Greece, Russia, Turkey, Romania, Bulgaria and Ukraine account for 90 percent of its capital base. The BSTDB faces some capital arrears from four of its poorest members, but these are in the process of being resolved, including by voluntary reduction in share capital. With overall arrears accounting for less than 5 percent of the capital base, the shares in question are small enough to be absorbed by current or expected new members. The member countries appreciate the role of the bank in helping promote regional stability, says Moody’s, as well as the benefits of having a professional staff with deep regional and country knowledge. Although the bank does not enjoy the membership of a strong non-regional donor, Moody’s finds that international support for the institution is steadily growing, especially in the context of the current geopolitical environment. The BSTDB, which started operations only five years ago, has built solid co-financing relationships with the European Bank for Reconstruction and Development (EBRD), its most important partner, the International Finance Corporation (IFC), banking group KfW, and Japan Bank for International Cooperation (JBIC). It has also established institutional relations with, among others, the EU, the European Investment Bank, the World Bank and the United States Export-Import Bank. Finally, the bank has recently established «observer status» to which it will be inviting international financial institutions, EU countries and other countries showing an interest in the Black Sea region, in order to improve prospects for co-financing operations and to help facilitate access to investors.