Fitch Ratings has affirmed the African Guarantee Fund for Small and Medium-sized Enterprises Ltd's (AGF) Insurer Financial Strength (IFS) Rating at 'AA-' (Very Strong).
The Outlook is Stable.
Key Rating Drivers
The rating reflects AGF's financially strong owners, very strong capital position and proven business model as provider of local-currency guarantees for small and medium-sized enterprises (SMEs) in Africa.
AGF is backed by public institutions, but it is run on a commercial basis, allowing shareholders to support the financing of SMEs in Africa without directly committing their own funds. It was founded by the development agencies of Denmark (AAA/Stable; DANIDA; 20.3% of capital at end-2020), Spain (A-/Stable; 11.1%) and France (AA/Negative; 7.8%). It is now also owned by KfW (AAA/Stable; 34.3%), the Nordic Development Fund (NDF; 9.5%), the Danish Investment Fund for Developing Countries (IFU; 8.6%) and the African Development Bank (AfDB; AAA/Stable; 8.3%).
The commitment of AGF's owners to the fund is underlined by their capital contributions to AGF to date and their plans to provide additional paid-in capital and subordinated debt to support AGF's growth strategy. However, there is no formal support, such as the subscription of callable capital or an unconditional guarantee from the public shareholders to support AGF. Consequently, future financial support from the seven development agencies cannot be guaranteed. AGF's rating reflects financially strong and committed sponsors but it is not aligned with that of the owners due to the absence of explicit support.
AGF's very strong capitalisation with an exceptionally strong net par-to-capital ratio of 1.3x at end-1H21 and end-2020 is a positive rating driver. AGF plans to further expand its capital base via capital increases and subordinated debt from its current owners, other highly rated development finance institutions and non-government organisations. In 9M21 AGF received USD20 million of additional paid-in capital from existing shareholder DANIDA and a USD10 million grant from Canada. Fitch expects capitalisation to remain commensurate with the rating and financial leverage to not exceed 20%.
AGF provides guarantees for SME loans and bonds to African banks as well as equity guarantees to banks and investors in African SMEs to facilitate growth opportunities for African countries. AGF's primary objective is to reduce the funding gap for African SMEs, so profitability is not the main performance metric. However, it was profitable during 2015-2018, proving a viable business model. In 2020, AGF reported a USD5.9 million loss, reflecting increased provision for expected guarantee losses due to the coronavirus pandemic, increased guarantee expenses and reduced fair-value gains that were partly offset by foreign-exchange gains. Fitch expects AGF to report a small loss in 2021, but to return to profitability in 2022. AGF has a long-term return-on-capital target of 2.5%-5%, which we view as achievable.
The company provides guarantees for non-US dollar-denominated debt of speculative-grade SMEs ('high-risk portfolio with currency risk' as defined in Fitch's Insurance Rating Criteria) and is exposed to currency risk. Fitch views this risk as manageable due to AGF'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.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative rating action/downgrade:
A reduction in the commitment of its owners to AGF, possibly as a result of a change in government- policy priorities.
A weaker capital position as manifested in a net par-to-capital ratio, including available capital in the form of subordinated debt, exceeding 2.5x.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
AGF's owners providing formal support.
Best/Worst Case Rating Scenario
International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
RATING ACTIONSENTITY/DEBT RATING PRIOR
African Guarantee Fund for Small and Medium-sized Enterprises Ltd. Ins Fin Str AA- Affirmed AA-
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Additional information is available on www.fitchratings.com
ALLIANZ SE 
