Standard & Poor’s upgrades NIB’s financial profile

On 26 June, Standard and Poor’s published an updated rating report on the Nordic Investment Bank and changed the assessment of the Bank’s stand-alone credit profile from aa+ to aaa. NIB’s credit rating did not change; it remained AAA.

NIB Newsletter asked Lars Eibeholm, Head of Treasury, to explain what the upgrade means for investors.

The stand-alone credit profile is usually not something investors focus on, so how does it differ from NIB’s final credit rating?

“Ratings agencies employ different methodologies for different types of issuers. In the case of supranational issuers like NIB, S&P derives the final issuer credit rating by combining an assessment of the stand-alone credit profile with an appraisal of the extraordinary shareholder support.

The stand-alone credit profile itself comprises two parts: the issuer’s business profile, for which NIB scored ‘very strong’, and the financial profile, which was upgraded to the highest possible assessment of ‘extremely strong’.

One can interpret the stand-alone credit profile of aaa as an assessment of NIB, excluding the extraordinary shareholder support from the callable capital.

This means that NIB’s issuer credit rating doesn’t need any “uplifting” from the callable capital—one could say that NIB’s AAA issuer credit rating has become even more supported.”

What do you think made S&P change its view of NIB’s financial profile?

“We believe the main aspect is NIB’s capital position. Even though NIB is one of the few supranational organisations that pay dividends to their owners, the Bank has managed to improve its capital base. The credit quality in the loan book is robust and the Bank’s operations are profitable, so retained earnings increase the capital base.

Although, for us, the target is the AAA issuer credit rating, not the score of ‘aaa’ for the stand alone credit profile, it shows that NIB is in a good position to grow and fulfil its mandate in the coming years.”

There was another new piece of information in the rating report—NIB’s intention to move to bilateral credit support annexes on NIB’s derivatives counterparty portfolio. What can you tell us about this?

“As is the case with many of our peers, NIB has used ‘one-sided’ credit support annexes in derivative contracts. The term ‘one-sided’ means that NIB receives collateral from counterparties to mitigate funding and counterparty risk. However, the Bank would not post collateral if it were needed to mitigate the same risks for the counterparty.

The Bank has decided to look into changing these contracts to make them equally sided. This should reduce the costs of hedging with derivatives, increase the number of counterparties and facilitate the transferability of derivative contracts between counterparties.

Preparations have been ongoing for some time now, and one of the major changes has been the implementation of the new Liquidity Policy.”

Can you comment a little more on the new policy?

“Equally sided or bilateral credit support annexes mean that NIB needs to be prepared to post collateral. The Bank introduced stress testing of liquidity to simulate how much liquidity is needed under stressed marked conditions, but also to estimate how much collateral is needed to fulfil the equally sided collateral contracts. The amount of liquidity given by the result of the stress test prepares NIB to conduct its normal business for at least a year without having access to new funding.

We believe the new Liquidity Policy has enhanced liquidity planning significantly and we expect a more dynamic funding strategy, which will result in additional benchmark issuances—something investors most likely will welcome due to increased liquidity in NIB’s funding programme.”

Here you can find the latest reports on NIB’s rating:

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