NEW YORK — Moody's Investors Service has assigned a first-time long-term issuer rating of A1 to the International Islamic Trade Finance Corporation (ITFC). The outlook on the rating is stable.

Moody's also assigned a first-time short-term issuer rating of P-1.

The key factors for ITFC's A1 rating are the following:

(1) 'Medium' assessment of ITFC's capital adequacy reflecting significant capital buffers, balanced against high concentration levels and relatively weak track record of asset quality, albeit mostly due to legacy exposures;

(2) 'High' assessment of ITFC's liquidity position, supported by prudent treasury investment practices and adequate liquidity management policies in anticipation of a moderate build-up of expected debt service requirements over the next three years;

(3) 'Medium' assessment of strength of member support driven by very high extraordinary support, balancing the lack of explicit contractual support in form of callable capital.

The A1 rating and the stable outlook take into account ITFC's planned moderate leveraging of the balance sheet, as well as the gradual improvement in the asset quality performance as legacy exposures are recovered or written off over the next two years.

ITFC's 'medium' capital adequacy assessment reflects a very high asset coverage ratio with equity at about 107% of development operations in reflection of the corporation's absence of leverage. Looking forward, the corporation aims to expand its leverage ratio up to a debt/equity ratio of 40% over the next three years which continues to support the corporation's very strong capitalization position.

ITFC's strong level of capitalization is balanced by the elevated concentration levels of the bank's top ten exposures with the four largest exposures to below investment grade rated sovereigns —namely to Egypt (B3 stable), Bangladesh (Ba3 stable), Pakistan (B3 stable) and Turkey (Ba1 negative)—accounting for 72% of total trade murabaha finance at the end of 2016 from 77.4% at the end of 2015.

With non-performing financing facilities at 12.9% as of 2016, ITFC's asset quality performs well below the non-performing loan median of 0.3% for A-rated MDBs and in comparison to other institutions that focus on trade finance, a business model that typically benefits from collateralization and government guarantee backstops. That said, the legacy nature of the ITFC's currently non-performing financing facilities, and the prospect of significant recoveries in the future mitigate the ITFC's asset quality challenges.

ITFC's liquidity assessment of 'high' is supported by prudent treasury investment practices and adequate liquidity management policies. ITFC's liquidity position benefits from the absence of debt service requirements as of 2016, and takes into account the moderate expected recourse to borrowing resulting in a debt service coverage as a share of liquid assets that Moody's expects to reach up to 180% by the end of 2020, a ratio comparable to other trade finance peers rated by Moody's, and which reflects the comparatively short average maturity of liabilities. As is the case with other trade finance institutions, ITFC's liquidity position remains supported by the low average maturity of the trade finance portfolio, with 73% of exposures liquidating within one year.

Despite ITFC's absence of market issuances and debt management history, Moody's believes that ITFC's membership in the Islamic Development Bank Group (IsDB, Aaa stable) will allow ITFC to access loan funding at similarly favorable terms as the Islamic Corporation for Development of the Private Sector (Aa3 stable).

The absence of formal contractual support in form of callable capital limits the contribution of member support to 'medium' under Moody's methodology. Despite the lack of explicit contractual support, ITFC benefits from strong implicit support from the IsDB as its main shareholder at 36.7% of paid-up capital, followed by Saudi Arabia (A1 stable) holding a further 16.5% directly and a further 11% indirectly.

Kuwait (Aa2 stable) also holds a 7% stake in ITFC. In addition, ITFC shares numerous operational, technical and physical assets with IsDB.

As with other associates of the IsDB group, the IsDB's goal is to make ITFC more independent financially, which they achieve by withholding from general capital increases without however fully relinquishing strategic oversight, underpinning Moody's assessment of very high extraordinary support.

The International Islamic Trade Finance Corporation is an autonomous entity within the Islamic Development Bank Group created with the purpose of advancing trade to improve the economic condition and livelihood of people across the Islamic world. ITFC has consolidated all the trade finance businesses that used to be handled by various windows within the IsDB group. It commenced operations in Muharram 1429H (January 2008).

ITFC's main source of income is Murabaha trade finance, a

shariah-compliant form of trade finance. Its primary focus is to

encourage intra-trade among the 57 member countries of the Organisation

of Islamic Cooperation (OIC). As a member of the IsDB group, ITFC has

privileged access to governments in its member countries and it works as

a facilitator to mobilize private and public resources towards achieving

its objectives of fostering economic development through trade. The

Corporation helps businesses in member countries gain better access to

trade finance and provides them with trade-related capacity building

tools.

The outlook for ITFC's rating is stable, reflecting Moody's expectation

that the corporation's leveraging of the balance sheet will remain

contained and that the formation of new non-performing assets will remain

muted and in line with other trade finance institutions in Moody's rated

MDB universe, while the main legacy exposures are being recovered or

written off. — SG