OREANDA-NEWS. Fitch Ratings has affirmed GuarantCo Limited's (GuarantCo) Insurer Financial Strength (IFS) rating at 'AA-'. The Outlook is Stable.

KEY RATING DRIVERS
The affirmation reflects GuarantCo's strong owners, solid capital position, established track record of providing local currency guarantees to finance private infrastructure projects in emerging markets and its low investment risk. These strengths are partly offset by the company's fairly small size and historically weak profitability.

Although GuarantCo is backed by public institutions, it is run on a commercial basis, allowing European countries to finance private sector projects in low-income countries without directly committing their own funds. It is indirectly owned by the development agencies of the UK (AA+/Stable), Switzerland (AAA/Stable) and Sweden (AAA/Stable), via the Private Infrastructure Development Group Trust (PIDG Trust; 87.8% at end-3Q15) and directly by the FMO (AAA/Stable; 12.2% at end-3Q15).

The capital contributions GuarantCo has received from its owners to date and the plans to increase paid-in capital to USD307m at end-2016 from USD277m at end-2014 are indicative of the owners' commitment to the company. The company received two additional tranches of paid-in capital totalling USD4m via the PIDG Trust from the Swiss development agency SECO in 2Q15 and 3Q15. However, there is no formal support, such as the subscription of callable capital (as for multilateral development banks) or unconditional guarantee from the public shareholders to support GuarantCo. Consequently, future financial support from the four development agencies cannot be guaranteed. While the rating reflects strong and committed sponsors, it is not aligned with those of the owners due to the absence of explicit support.

GuarantCo's capitalisation is strong, with a net par-to-capital ratio (excluding available capital from an USD450m counter-guarantee facility) at 1.0x at end-3Q15 (end-2014: 0.9x). Fitch regards the drawn tranches of the counter-guarantee facility (USD250m at end-3Q15) as equity in its capital assessment, which results in a solid adjusted par-to-capital ratio of 0.5x. Although Fitch expects GuarantCo's capitalisation to weaken as it grows, it should remain commensurate with the rating.

Fitch views GuarantCo as a small, highly specialised financial guarantor. However, the company's size is not a limiting rating factor as it is a public-sponsored organisation and its mission does not hinge on attaining material business volumes. Its products are intended to support government initiatives established by its sponsors.

As GuarantCo's primary objectives are to encourage private sector involvement in the domestic financing of infrastructure projects and to promote local capital market development, profitability is not a key performance metric. The company's profitability has been weak in recent years, largely driven by a low interest rate environment and fairly high fixed costs. However, the company is expected to return to profitability, and a return on capital target has been established over the longer term at 3%-6%.

The company provides guarantees for mainly non-US dollar denominated debt issued by speculative-grade issuers ("high frequency, high severity" guarantee portfolio) and it is exposed to currency risk. Fitch views this risk as manageable due to GuarantCo's strong capitalisation. However, it is possible that currency risk will increase as the company grows, and Fitch will continue to closely monitor this exposure.

At end-3Q15, GuarantCo's investments consisted of cash (19%), and two investment portfolios managed by Fidelity (money market instruments, global investment-grade corporate bonds and US Treasuries) and PIMCO (US dollar-denominated investment grade bonds and ABS). Fitch expects GuarantCo's investment risk to remain low.

RATING SENSITIVITIES
Fitch views an upgrade as unlikely in the medium term given the company's fairly small size. However, the extension of an explicit support agreement by the company's ultimate government-backed owners could result in an upgrade.

A downgrade may result from a weakened capital position evidenced by a net par-to-capital ratio, including available capital from the counter-guarantee facility, or in the future callable capital from development finance institutions, exceeding 2x. A reduction in the commitment by the owners to GuarantCo, possibly as a result of a change in government policy priorities, could also trigger a downgrade.