Multilateral Development Bank Ratings and Preferred Creditor Status

Paper available here.

William Perraudin, Andrew Powell, Peng Yang

This paper analyses influences on the credit standing of Multilateral Development Banks (MDBs). We focus on the quality, diversification and single name concentration of their portfolios, and on the market practice known as Preferred Creditor Status (PCS). PCS refers to the fact that sovereigns which default on other debt rarely fail to meet their obligations to MDBs. The paper examines how rating agencies assess MDB ratings, looking, in particular, at how Standard & Poor’s(S&P) evaluates capital adequacy. We benchmark the agency’s approach against an industry-standard, ratings-based Credit Risk Model (CRM). We implement the approaches for a specific MDB: the Inter-American Development Bank (IDB).The paper shows that S&P’s approach is highly conservative in its treatment of single name concentration risk and makes insufficient allowance for PCS. Calibrating the CRM with risk-neutral distributions, we examine the effect of PCS on MDB funding spreads.