On 5 May, 2020, Moody's Investor Services affirmed the Africa Finance Corporation's ("AFC" or "the Corporation") long-term issuer and senior unsecured ratings at A3. Concurrently, Moody's also affirmed the Corporation's provisional long-term foreign currency senior unsecured MTN programme rating at (P)A3, the short-term issuer rating at P-2 and the short-term rating at (P)P-2. The outlook has however changed from stable to negative.

According to Moody's the main driver for the change in outlook from stable to negative was the potential impact on AFC's Capital Adequacy Ratio ("CAR") of worsening asset performance due to the very severe COVID-19 driven economic shock across sub-Saharan Africa. AFC has maintained CAR of above 30% since inception consistent with internal prudential guidelines and as at 31 December, 2019 had a capital adequacy ratio of 32.9%.

Samaila Zubairu, President & Chief Executive Officer of AFC, said: "The COVID-19 pandemic has unleashed economic disruption across the world, including Africa. With the health and economic crises still unfolding, great uncertainty remains on the duration and impact of the virus outbreak. While addressing the COVID-19 pandemic must be the global priority, the virus will be defeated and when it is, Africa is positioned for transformational and beneficial change. The continent's vast natural resources, ripe opportunities for industrialisation, diversification and value-add processing, growing and predominantly young population, rising demand and the expected boost to intra-African trade are all factors that make Africa's economic growth prospects highly attractive. Delivering first-world infrastructure projects is also needed to unlock the potential and that is where AFC will be adding both value and impact by making infrastructure projects bankable and facilitating the financing."

We note that Moody's expects the Corporation as an A3 rated institution to sustain its strong liquidity buffers thanks to AFC's significant existing buffers available at the start of the crisis, adherence to its liquidity policy, in addition to the Corporation's stable and diverse sources of funding over the medium term. AFC's liquidity policy stipulates that the Corporation must retain liquidity buffers covering 18 months of net cash outflows. Currently, the Corporation's liquidity buffer stands at 23 months cover.

AFC's ongoing capital raising exercise, which commenced prior to the COVID-19 crisis, has received strong support, with new capital injections already in place from the African Development Bank, the Government of Gabon and the Arab Bank for Economic Development in Africa, despite the challenging economic environment in 2019. This ongoing process is creating sufficient capacity for the Corporation to continue to adhere to its internal policy of a minimum CAR of 30%, whilst funding its strategic growth targets over the medium and long term.

AFC is Africa's most important infrastructure, industrial and natural resources development and financing institution, and is steadfast in its commitment to provide the innovative and risk-mitigated solutions needed for Africa's policy makers as well as its young and vibrant population.

Our approach will remain conservative and innovative, with a beneficiation-based, ecosystem-focused development strategy, which will continue to create sustainable, value-accretive and employment generating economic growth, supported by quality infrastructure.

The support we continue to receive from our investors, member countries and development partners demonstrates that our mission of financing and facilitating Africa's infrastructure needs aligns with a shared vision for an industrialised and prosperous Africa, where commercial returns can be achieved for global capital channeled through credible African institutions such as the AFC.

AFC's Resilience

Africa Finance Corporation is a prudent and resilient multilateral financial institution, guided by conservative financial policies, and this is reflected in our A3 credit rating. The expansion of our portfolio in recent years - reflecting the pursuit of our mandate - is underpinned by strong risk-management practices coupled with rigorous and continuous portfolio monitoring and proactive management. We have a stable and diversified funding base, strong market access and a solid track record of debt repayment, which is supported by our conservative liquidity policy. AFC's shareholder base has also been diversified.

The Corporation entered this period of global economic stress with robust capital and liquidity buffers, as well as strong prospects for replenishing these further, despite the current environment. As an investment grade and frequent issuer in the bond and loan markets, AFC is well positioned to raise additional capital despite the current market conditions.

AFC's Financial Strength

Capital

AFC adheres to a very conservative capital policy, with a Capital Adequacy ratio (CAR) floor of 30% which has never been breached since the Corporation's inception.

The capital position remains strong, with fully paid in capital and retained earnings of US$1.7 billion (YE2019) and a CAR of 32.9% (YE2019), which is above the minimum capital adequacy ratio limit

Continued capital growth is driven by a strong internal capital generation capacity as reflected in a Return-on-Assets of 3.5% (YE2019) and new equity injections. AFC also changed its historical dividend policy in YE2019 to retain more profits.

In the context of our 5-year growth strategy, AFC embarked on an equity raise programme in Q4 2019 aimed at diversifying and increasing the average credit quality of our shareholder composition. The target increase was US$1bn by 2023, of which US$110m had already been raised by the end of Q1 2020. In a baseline case scenario, we expect additional equity injections during 2020 which would potentially raise our CAR to 35.1%, and in an optimistic scenario, the Corporation could raise its CAR to 38.3%.

Liquidity

AFC has one of the highest liquidity positions amongst our Moody's peer group. Liquidity Coverage was at 25 months at YE2019. AFC's projected months of liquidity coverage for 2020 is 23 months and around the same in 2021.

AFC's Moody's ALR (available liquid resource ratio) is on the high end of the rating scale. It was 130% cover of the next 18 months of net cash flows at YE2019, above the Moody's "aa" threshold of 120%. It is our current expectation that ALR will remain at 130% at YE2020, well above Moody's "aa" threshold of 120%.

Asset Quality

AFC's starting asset quality (0.9% NPL ratio at YE2019) is far better than most of its Moody's rated peers. Like other MDBs and financial institutions across the rating and geographical spectrum, AFC faces risks to asset performance from the deterioration in global economic conditions. Since mid-March - when the COVID-19 outbreak triggered a global economic slowdown and a collapse in crude oil prices - we have stepped up the monitoring of our portfolio, proactively engaging every single name in our portfolio, in order to anticipate any repayment difficulties that they might face. Our ongoing and proactive analysis concludes that the Corporation would be able to absorb any potential losses, while maintaining capital adequacy ratios within our prudential guidelines.