S&P Rates First Prefrd Creditor WB Guaranteed Issue.

NEW YORK--(BUSINESS WIRE)--Standard & Poor's CreditWire 9/18/98--The International Bank for Reconstruction and Development (World Bank) recently enhanced its Partial Credit Guarantee Program to include a 'rolling' interest guarantee, by which a sovereign indemnity makes the guaranteed obligation a preferred creditor status obligation of the sovereign.

Preferred creditor status obligations may be rated higher than the issuer credit rating of the sovereign providing the indemnity. Standard & Poor's has rated the first issue under the enhanced Partial Credit Guarantee Program, which is a US$300 million ten-year bullet bond by the Electricity Generating Authority of Thailand (EGAT), single-'A'-minus or three notches above the Kingdom of Thailand's triple-'B'-minus foreign currency issuer credit rating (see press release earlier today). Preferred creditor status Multilateral lenders, such as the triple-'A'-rated World Bank, enjoy preferred creditor status that, while fundamentally a political expression, reflects the incentives of a borrowing/guaranteeing government to place priority on loan repayment to the multilateral lending institutions. These incentives include continued access to fresh funds, the availability of generally lower-cost funds at longer-term maturities, technical assistance, and the threat of sanctions.

Preferred creditor status has contributed to the multilateral institutions' generally excellent loan repayment records. Of the 81 sovereigns that Standard & Poor's has identified as having defaulted since 1975, only 17 have been assigned nonaccrual status by the World Bank (with World Bank "nonaccrual status" defined as overdue by six months). Rating criteria Standard & Poor's has decided to make a rating distinction between sovereign preferred creditor status obligations and the sovereign foreign currency issuer credit rating, under certain conditions. Specifically, a preferred creditor status obligation may be rated as much as three notches over the sovereign foreign currency issuer credit rating if:

-- The government has not defaulted on any obligations to any multilateral with preferred creditor status, either in the preceding 15 years or under the auspices of the current regime. If recent or anticipated political changes suggest possible diminution of the priority accorded to preferred creditor status debt, the rating enhancement will be below three notches, even with an unblemished payment record.

-- The political regime has good relations with multilateral institutions and is integrated into global trade and financial systems. If the political system is less than fully open, or if some domestic interest groups advocate a more isolationist path, the rating enhancement is likely to be below three notches.

-- Preferred creditor status debt is a fairly modest portion of total external obligations. The higher the proportion of preferred creditor status debt, the lower the ability of the sovereign to accord it priority. If the proportion of preferred creditor status debt is low, but Standard & Poor's believes there is a significant probability that it will rise appreciably over the term of the issue, the rating enhancement will be below three notches.

Analysis will be on a case-by-case basis taking into account the above factors and possible interactions between them. If, over time, there is any change in the factors underpinning the sovereign's issuer credit rating, and Standard & Poor's decides that a change in the issuer credit rating is warranted, the preferred creditor status rating likely will be changed in a similar fashion. This assumes no change in the factors listed above.

There are circumstances in which the preferred creditor status could change by a different amount or, though less likely, without any change in the issuer credit rating. For example, negative political developments, as outlined in the first two points above, may result in a lowering of the preferred creditor status rating and a narrowing and possible elimination of the gap above the sovereign's foreign currency issuer credit rating. Conversely, positive political developments could result in a widening of the gap, assuming it was fewer than three notches to start.

Another example would involve an increase in the proportion of preferred creditor status debt, over and above expectations. However, multilateral lending policies are such that this situation could develop only in conjunction with deteriorating credit fundamentals and the lowering of both the issuer credit rating and the preferred creditor status rating. Deteriorating credit fundamentals do not necessarily lead to a high proportion of preferred creditor status debt, though, and therefore, the ratings most often would not converge. Evidence of this is provided by more than 60 sovereigns that have defaulted on foreign or local currency bank or bond debt since 1975, but have continued to make timely payments to multilaterals. World Bank Partial Credit Guarantee Program The World Bank's Partial Credit Guarantee Program is open to countries eligible for World Bank lending, but not to countries eligible only for loans from the International Development Association, the World Bank's soft loan window. The World Bank expects to make the program available for about five transactions per year, all of which will involve World Bank appraisal. The World Bank guarantee covers principal, on a nonaccelerable basis, and one interest payment, on a 'rolling' basis. The 'rolling' provision maintains the World Bank interest guarantee over the term of the issue provided that the sovereign reimburses the World Bank for any interest payments it makes within a 60 day period. Other structures could be considered for future transactions. The sovereign indemnifies the World Bank on any principal payments it makes as well. The Partial Credit Guarantee Program obligation ranks the same as all other World Bank loans for which the government is the obligor or guarantor. As described above, the greater incentive for the government to service such a partial guarantee transaction vis-(-vis one of its own (nonpreferred-creditor-status)bond obligations stems from the fact that not paying will affect its relationship with the World Bank, excluding the country from further participation in the partial guarantee program, and likely impairing the country's access to committed or new credits from the World Bank.

This methodology could be applied to other multilaterals employing similar guarantee programs.