Business Times

RAM maintains 'BBB+' and 'P2' for state-owned CGF

Rating agency RAM has upheld the "BBB+" long term and "P2" short term financial enhancement rating, with stable out look, for Sri Lanka's Construction Guarantee Fund (CGF), saying that "ratings are supported by the [CGF’s] very strong capitalisation and stringent underwriting standards, as well as the expected financial support from the Sri Lankan government, albeit with a lower degree of importance than other state-owned financial institutions." It also added ratings were "pressured by [CGF's] weakening financial performance, small size and inherent dependence on a single sector."

Formed by the government in 1999 to play a strategic role in the construction industry by providing indirect financial assistance to construction contractors, CGF was allocated Rs. 100 million of seed capital, of which Rs. 55 million has already been used. It is said to have ready access to the balance Rs. 45 million. Further, compared to banks and insurance companies that also provide similar guarantees, CGF does not request collateral and charges lower fees, thus exposing itself to higher risk levels.

RAM also noted that CGF's "claims experience has been commendable owing to its stringent underwriting standards. Contractors requiring a guarantee from CGF must be registered with the Institute of Construction Training and Development [which] grades each contractor based on its financial capability and past performance; given ICTAD’s strict requirements, only around 38% of local contractors have obtained a grading. In addition, each application is vetted by an experienced team within CGF to ensure that the contractor has the ability to perform the contract. Moreover, most contracts are monitored regularly to ensure that the contractors are within the requisite specifications."

Further, its "income is related to the expenditure of the Road Development Authority [RDA], which has employed roughly 70% of the [CGF's] contractors in the recent past. In the Financial Year (FY) ending 31 December 2010], the [CGF's] premium income coninued trending downwards, clocking in at Rs. 31.55 million (FY Dec 2009: Rs. 33.93 million); this was because many large-scale construction projects funded by foreign governments do not require guarantees."

Also indicated; "net underwriting profit contracted 24.43% year-on-year [YoY] to Rs. 14.25 million in FY Dec 2010. CGF incurred a pre-tax loss of Rs. 15.28 million in FY Dec 2010 due to loan-loss provisioning - a prudential measure by the management to provide for a loan given to another state-owned organisation; the loan had been fully provided for by end-February 2011. However, the management has taken steps to recover this loan; we expect it to be recovered over the medium term, through the government’s intervention."

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