Moody's: Exclusion of Mongolia government letter of support has no rating implications for TDBM's GMTN program
Hong Kong, July 10, 2014 -- Moody's Investors Service says that the revision of the relevant documentation to exclude a governmental letter of support has no rating implications for the (P)B1 rating on the Trade and Development Bank of Mongolia LLC's (TDBM) $1 billion Global Medium Term Notes (GMTN) Program.
At the same time, Moody's has assigned a B1 rating to TDBM's proposed senior unsecured notes, which will be drawn from the GMTN program.
All ratings have a negative outlook.
Originally, on 16 June, when Moody's had assigned the (P)B1 rating in a press release -- "Moody's assigns (P)B1 ratings to TDBM's GMTN program and B1 to TDBM's proposed drawdown" -- the program carried a letter of support from the Ministry of Finance on behalf of the Government of Mongolia (B1, negative).
However, subsequently, TDBM revised the program to exclude this letter of support.
RATINGS RATIONALE
According to Moody's assessment, the revision of the GMTN Program to exclude the letter of support from the government does not have any rating implications.
Moody's acknowledges that the letter was a credit positive but, as it also did not represent an explicit guarantee, we had not applied credit substitution when originally assigning the program's rating on 16 June. Moreover, TDBM's own senior unsecured debt rating is B1, which is the same as that of the Mongolian government. Therefore, the proposed letter of support did not provide any additional ratings uplift.
TDBM's B1 rating incorporates a one-notch uplift to its foreign currency and local currency debt rating, from its standalone credit profile of b2, based on Moody's assessment of systemic support. The high probability of support from the Government of Mongolia to TDBM is underpinned by the bank's systemically important position, as the largest bank in the country by assets.
Moody's does not consider that the decision to exclude the letter of support from the GMTN program documentation materially undermines our expectation of a high probability of support from the government in times of stress.
TDBM's baseline credit assessment (bca) of b2 reflects its: (1) solid market position as a leading corporate lender in foreign exchange and trade-related businesses; (2) sound profitability and good operating efficiency; and (3) diversified funding sources from both domestic depositors and foreign financial institutions.
However, the ratings are constrained by the bank's: (1) high concentration risk, against the backdrop of the limited diversity of Mongolia's economy, and which renders the economy vulnerable to external factors; (2) substantial capital needs, assuming that the Mongolian economy and the availability of credit continue to grow at a rapid pace; and (3) potential challenges related to corporate governance that could arise from its narrow shareholding structure.
Moody's changed the rating outlooks of all rated Mongolia banks to negative from stable in January 2014, reflecting their vulnerability to the intensification of adverse developments in the operating environment.
In addition, TDBM is vulnerable to a deterioration in asset quality, given its high loan concentration and portfolio of corporate loans.
Moody's notes that TDBM's top 20 group borrower exposures were equivalent to 45.5% of its total loans at end-2013. More than 50% of these borrowers were also in risky sectors, such as mining and construction. The latter accounted for 21.7% and 16.7% of the bank's total loans at end-2013.
An upgrade of the bank's ratings is unlikely, given that the B1 ratings assigned to TDBM are at the same rating level as the sovereign rating and the fact that outlooks on the ratings of both the bank and the government are negative.
Nonetheless, the bca could be raised if the bank substantially reduces its borrower concentration and exposure to risky sectors.
On the other hand, the following factors could exert negative pressure on TDBM's ratings: (1) corporate governance-related problems that cause a loss of depositor confidence, therefore increasing the threat of deposit flight; (2) a significant deterioration in asset quality; for example new non-performing loans to gross loans exceed 4.0%; (3) a rise in concentration, or a rise in exposures to risky sectors, in particular construction; (4) Tier 1 falls below 9%; or (5) a significant deterioration in profitability, such that net income is less than 1.4% of average risk weighted assets.
The bank's other ratings are:
- Bank financial strength of E+; local currency bank deposit rating of B1; foreign currency bank deposit rating of B2; issuer rating of B1; foreign currency long-term senior unsecured debt/subordinate debt of B1/B2; and foreign currency long-term senior unsecured MTN/subordinate MTN of (P)B1/(P)B2.
- Local currency/foreign currency short-term deposit rating of NP; local currency/foreign currency short-term issuer rating of NP; and other short-term rating of (P)NP.
Moody's does not intend to assign ratings to individual notes issued under the program with features linked to the performance of another obligor (credit-linked notes).
Nor does it intend to assign ratings to notes for which payment of principal or interest is variable and contractually dependent on the occurrence of a non-credit-linked event or the performance of an index (non-credit-linked notes).
The only exception will be for notes whose principal and coupon payments are affected by standard sources of variation (for more information, please see Moody's Special Comment, "Moody's Update on Rating Debt Obligations with Variable Promises," June 2009).
The principal methodology used in this rating was Global Banks published in May 2013. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.
Trade and Development Bank of Mongolia LLC is based in Ulaanbaatar. It is the largest banks in Mongolia by assets. At 31 March 2014, the bank's consolidated assets totaled MNT5.1 trillion ($2.8 billion).
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.
The first name below is the lead rating analyst for this Credit Rating and the last name below is the person primarily responsible for approving this Credit Rating.
Hyun Hee Park
Asst Vice President - Analyst
Financial Institutions Group
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077
Stephen Long
MD - Financial Institutions
Financial Institutions Group
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077
Releasing Office:
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077
At the same time, Moody's has assigned a B1 rating to TDBM's proposed senior unsecured notes, which will be drawn from the GMTN program.
All ratings have a negative outlook.
Originally, on 16 June, when Moody's had assigned the (P)B1 rating in a press release -- "Moody's assigns (P)B1 ratings to TDBM's GMTN program and B1 to TDBM's proposed drawdown" -- the program carried a letter of support from the Ministry of Finance on behalf of the Government of Mongolia (B1, negative).
However, subsequently, TDBM revised the program to exclude this letter of support.
RATINGS RATIONALE
According to Moody's assessment, the revision of the GMTN Program to exclude the letter of support from the government does not have any rating implications.
Moody's acknowledges that the letter was a credit positive but, as it also did not represent an explicit guarantee, we had not applied credit substitution when originally assigning the program's rating on 16 June. Moreover, TDBM's own senior unsecured debt rating is B1, which is the same as that of the Mongolian government. Therefore, the proposed letter of support did not provide any additional ratings uplift.
TDBM's B1 rating incorporates a one-notch uplift to its foreign currency and local currency debt rating, from its standalone credit profile of b2, based on Moody's assessment of systemic support. The high probability of support from the Government of Mongolia to TDBM is underpinned by the bank's systemically important position, as the largest bank in the country by assets.
Moody's does not consider that the decision to exclude the letter of support from the GMTN program documentation materially undermines our expectation of a high probability of support from the government in times of stress.
TDBM's baseline credit assessment (bca) of b2 reflects its: (1) solid market position as a leading corporate lender in foreign exchange and trade-related businesses; (2) sound profitability and good operating efficiency; and (3) diversified funding sources from both domestic depositors and foreign financial institutions.
However, the ratings are constrained by the bank's: (1) high concentration risk, against the backdrop of the limited diversity of Mongolia's economy, and which renders the economy vulnerable to external factors; (2) substantial capital needs, assuming that the Mongolian economy and the availability of credit continue to grow at a rapid pace; and (3) potential challenges related to corporate governance that could arise from its narrow shareholding structure.
Moody's changed the rating outlooks of all rated Mongolia banks to negative from stable in January 2014, reflecting their vulnerability to the intensification of adverse developments in the operating environment.
In addition, TDBM is vulnerable to a deterioration in asset quality, given its high loan concentration and portfolio of corporate loans.
Moody's notes that TDBM's top 20 group borrower exposures were equivalent to 45.5% of its total loans at end-2013. More than 50% of these borrowers were also in risky sectors, such as mining and construction. The latter accounted for 21.7% and 16.7% of the bank's total loans at end-2013.
An upgrade of the bank's ratings is unlikely, given that the B1 ratings assigned to TDBM are at the same rating level as the sovereign rating and the fact that outlooks on the ratings of both the bank and the government are negative.
Nonetheless, the bca could be raised if the bank substantially reduces its borrower concentration and exposure to risky sectors.
On the other hand, the following factors could exert negative pressure on TDBM's ratings: (1) corporate governance-related problems that cause a loss of depositor confidence, therefore increasing the threat of deposit flight; (2) a significant deterioration in asset quality; for example new non-performing loans to gross loans exceed 4.0%; (3) a rise in concentration, or a rise in exposures to risky sectors, in particular construction; (4) Tier 1 falls below 9%; or (5) a significant deterioration in profitability, such that net income is less than 1.4% of average risk weighted assets.
The bank's other ratings are:
- Bank financial strength of E+; local currency bank deposit rating of B1; foreign currency bank deposit rating of B2; issuer rating of B1; foreign currency long-term senior unsecured debt/subordinate debt of B1/B2; and foreign currency long-term senior unsecured MTN/subordinate MTN of (P)B1/(P)B2.
- Local currency/foreign currency short-term deposit rating of NP; local currency/foreign currency short-term issuer rating of NP; and other short-term rating of (P)NP.
Moody's does not intend to assign ratings to individual notes issued under the program with features linked to the performance of another obligor (credit-linked notes).
Nor does it intend to assign ratings to notes for which payment of principal or interest is variable and contractually dependent on the occurrence of a non-credit-linked event or the performance of an index (non-credit-linked notes).
The only exception will be for notes whose principal and coupon payments are affected by standard sources of variation (for more information, please see Moody's Special Comment, "Moody's Update on Rating Debt Obligations with Variable Promises," June 2009).
The principal methodology used in this rating was Global Banks published in May 2013. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.
Trade and Development Bank of Mongolia LLC is based in Ulaanbaatar. It is the largest banks in Mongolia by assets. At 31 March 2014, the bank's consolidated assets totaled MNT5.1 trillion ($2.8 billion).
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.
The first name below is the lead rating analyst for this Credit Rating and the last name below is the person primarily responsible for approving this Credit Rating.
Hyun Hee Park
Asst Vice President - Analyst
Financial Institutions Group
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077
Stephen Long
MD - Financial Institutions
Financial Institutions Group
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077
Releasing Office:
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077
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