Proceeds from the issue will be used for general purposes and are expected to count as regulatory Tier 2 capital at the bank, although Fitch does not formally assign equity-credit to these notes. Interest will be paid semiannually. The notes may be redeemed at the option of the issuer no earlier than six years before they are due, subject to prior approval from the Colombian Superintendence of Finance (SFC), if the bank maintains its capital ratios in accordance with regulatory requirements.

 Key Rating Drivers

The upcoming issuance is expected to be rated two notches below GNB’s Viability Rating (VR) of ‘bb+’, to reflect loss severity exclusively. There will be no notching due to incremental nonperformance risk. The notes will be subordinated in right of payment to the prior payment in full, in cash or cash equivalents, of all outstanding obligations due in respect of the bank’s senior liabilities, whether outstanding on the issue date or incurred after that date. Additionally, the notes will be senior in right of payment only to subordinated instruments constituting Tier 2 capital subordinated indebtedness that is designated junior to the notes, subordinated instruments constituting Tier 1 capital and the bank’s capital stock.

The rating on the notes does not incorporate incremental nonperformance risk given the relatively low write-off trigger (regulatory common equity Tier 1 [CET1] at or below 4.5%) – which, in Fitch’s view, would only be effective at the point of nonviability and also considering the fact that coupons are not deferred or cancellable before the principal write-off trigger is activated. If GNB’s capital falls below 4.5%, the outstanding principal amount of these notes may be permanently reduced to the extent required to restore the bank’s capital ratio to 6%. This full write-down feature of the notes heavily influences the two-notch loss severity applied.

The securities, which are expected to comply with local Tier II capital requirements, will rank junior to all senior unsecured creditors, pari passu with all other present or future Tier II capital subordinated indebtedness and senior to the bank’s capital stock, including any other instrument that may qualify at Tier I capital according to local banking regulations.

Rating Sensitivities

Factors that could, individually or collectively, lead to positive rating action/upgrade:

As the expected subordinated debt rating is two notches below GNB’s VR anchor, the expected rating is sensitive to an upgrade in the bank’s VR. The rating is also sensitive to a narrower notching from the VR if there is a change in Fitch’s view on the nonperformance of these instruments on a going concern basis, which is not the baseline scenario.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

As the expected subordinated debt rating is two notches below GNB’s VR anchor, the expected rating is sensitive to a downgrade in the bank’s VR. The rating is also sensitive to a wider notching from the VR if there is a change in Fitch’s view on the nonperformance of these instruments on a going concern basis, which is not the baseline scenario.

For further information about the drivers and rating sensitivities for GNB’s ratings, please refer to the latest press release entitled, “Fitch Takes Actions on Colombian FIs & Related Entities After Sovereign Downgrade” (https://www.fitchratings.com/site/pr/10117458), published April 8, 2020 at www.fitchratings.com.

 Best & Worst Case Rating Scenarios

International scale credit ratings of Financial Institutions 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

Banco GNB Sudameris S.A.: 4; Governance Structure: 4

Unless otherwise disclosed in this section, the highest level of environmental, social and governance (ESG) credit relevance is a score of 3 – ESG issues are credit neutral or have only a minimal credit impact on the entity, due to either their nature or the way in which they are being managed by the entity. The governance structure subfactor has a score of 4 – mainly related to key person risk and business continuity considerations.

Proceeds from the reopening will be used to convert the TECAN plant to a closed cycle gas turbine plant from an open cycle and any remainder for general corporate purposes. The conversion is expected to increase TECAN’s installed capacity to 566MW from 324MW for approximately $35 million in additional EBITDA beginning in March 2022. Fitch currently rates TermoCandelaria Power Ltd. ‘BB+’/Outlook Stable.

Fitch has assigned a final rating of BB+ for the $200 million for the senior unsecured note reopening due 2029

TermoCandelaria’s ratings reflect the combined operations of TEBSA and TECAN, their relative competitive position in the electricity generation market in Colombia, as well as TermoCandelaria’s limited geographical diversification and asset mix. Also factored into the ratings, are Fitch’s expectations for increased consolidated EBITDA in the short to medium term, driven by the strong load factor in TEBSA, as well as the collection of reliability charges and regulated revenues not exposed to market dynamics.

Key Rating Drivers

Credit Profile Linked to Subsidiaries: TermoCandelaria is a holding company that combines operations of two electricity generation companies (Gencos), TEBSA and TECAN, located on Colombia’s Caribbean coast. TermoCandelaria fully owns and controls TECAN and has a 57.38% stake in TEBSA. TermoCandelaria’s ratings are mostly related to TEBSA’s credit profile since TEBSA accounts for approximately 80% of TermoCandelaria’s consolidated EBITDA.

Moderate Leverage Ahead: TermoCandelaria’s bond reopening is expected to temporarily increase its consolidated total debt/EBITDA leverage ratio to more than 3.5x in 2020 due to the addition of $200 million in debt. Leverage is expected to return to 2.5x in 2021, as the company’s debt begins to amortize, and then fall to around 2.0x in 2022 due to further debt amortization and the closing of TECAN’s cycle. Future leverage will depend on the EBITDA generated by its subsidiaries, as additional debt on a consolidated basis over the rating horizon is not expected.

Limited Operational Diversification: TermoCandelaria’s credit profile is constrained by the limited diversification of its operations. The company is exposed to a higher degree of event risk than local and regional peers from unexpected outages or disaster disruptions. Although out-of-contract sales eliminate exposure to spot market volatility as a buyer, TermoCandelaria’s take-or-pay regasification contracts would put additional pressure on its subsidiaries’ cost structure in the event of an interruption in generation. TermoCandelaria combines the operations of 1,283 MW of thermal electric assets, which represent around 8% of the Colombian electricity generation matrix and around 27% of the thermal electric installed capacity in Colombia.

Positive Near-Term Supply/Demand Dynamics: TermoCandelaria benefits from the country’s transmission bottleneck in the northern coast, which results in persistent dispatch by TEBSA in order to meet demand despite the company’s comparative higher costs relative to non-coastal generation assets. TermoCandelaria’s ratings incorporate Fitch’s expectation that TEBSA will maintain a load factor around 50% in the medium term, which would be in line with its historical levels. Demand characteristics of the Caribbean coast also suggest relatively high growth through the medium term, supporting TEBSA’s continued dispatch as long as present transmission and capacity dynamics continue.

Structure Mitigates Exogenous Market Risks: In the long term, new investments in the transmission network or the development of non-conventional renewable energy projects in Colombia’s coastal region could displace TEBSA within the dispatch curve, resulting in lower EBITDA. The government planning unit is coordinating auction processes to encourage the incorporation of newly installed electric capacity in 2022-2023. In addition, a new transmission line that will permit up to 1,000MW of new projects to be installed in the Guajira region will be available in 2022. These risks are partially mitigated by TermoCandelaria’s amortizing structure and by the cash preservation mechanisms established under the issuance.

Medium-Term EBITDA Upside: TermoCandelaria is expected to maintain stable consolidated EBITDA generation over the rating horizon given the stability of electricity generation, coupled with a regulatory cost pass-through mechanism that applies in the market for out-of-merit generation. When a high hydrology condition prevails in the market, TEBSA has been maintaining its operations through out-of-merit electricity generation. In this situation, the company is remunerated based on its bid price, in which all of its variable costs are passed through the market, capped by its reported referential variable costs.

Inverted Hydrology Risk: TermoCandelaria’s EBITDA generation benefits from low hydrology conditions and hydrology cyclically, which periodically occur in Colombia. TEBSA and TECAN could maintain their operations through in-merit generation since variable costs could be below spot prices, which would translate into more profitable operations. Fitch’s base case contemplates a three-year delay in EPM’s 2,400MW Hidroituango hydroelectric project, which could result in higher spot prices through the medium term. The supply dynamic could cause TEBSA to be dispatched as a baseload generator in addition to its current role as an out-of-merit generator.

Stabilizing Cost Structure: TermoCandelaria’s consolidated CFO is relatively predictable due to recent changes to capacity remuneration in Colombia. Both TEBSA and TECAN will receive reliability payments until 2025 amounting to annual revenues of around USD 160 million in order to be able to dispatch its firm energy obligations when spot prices surpass the scarcity price as defined by the regulator. Both companies chose to elect the new scarcity price defined under CREG Resolution 140 2017 as the reported variable costs of the thermal electric matrix. This limits the possibility of being required to dispatch with a negative gross margin, a situation experienced by TECAN during the last El Niño phenomenon in 2015-2016.

Secure Fuel Supply: TermoCandelaria has reduced its exposure to liquid fuel price volatility by entering into long-term gas supply contracts that extend to 2026 with the right to extend until 2031. TEBSA and TECAN will receive around $30 million in annual dollar denominated regulated revenues for securing this LNG access, which represents 50% of the of the fixed payments TermoCandelaria has to make to the LNG operator for granting access to this natural gas source. Fitch expects that TermoCandelaria’s regulated revenues along with reliability charges payments will continue to be enough to cover the company’s fixed costs, absent any interruption in the company’s generation capacity.

Derivation Summary

TermoCandelaria’s ratings are one notch above Nautilus Inkia Holding LLC’s (Inkia; BB/Negative), its closest peer. Although lacking Inkia’s geographical diversification and asset base mix provided by its key subsidiary Kallpa Generacion S.A. (BBB-/Negative), TermoCandelaria’s capital structure is more conservative, with leverage levels reaching 2.5x in 2020, while Fitch expects Inkia’s leverage to decrease to below 5x in 2019 and to around 4.5x in the medium term. In addition, Inkia’s debt is structurally subordinated to debt at the operating companies, while TermoCandelaria’s is not. TermoCandelaria’s capital structure also compares positively with Orazul Energy Egenor S. en C. por A (BB/Stable). Orazul’s high medium-term leverage of above 5.0x under Fitch’s forecast places it at the high end of its rating level.

Fitch considers TermoCandelaria’s business risk is higher than multi-asset energy regional investment grade peers such as AES Panama S.R.L. (BBB-/Stable), Kallpa and AES Gener (BBB-/Stable). All of these companies benefit from a strong contractual position in their respective markets. These companies’ PPAs support their cash flow stability through USD-linked payments and, in Kallpa’s case, pass-through clauses related to potential increases in fuel costs. This contributes to a higher EBITDA visibility in the long term, compared to TermoCandelaria, which remains exposed and exogenous supply/demand dynamics. Although TermoCandelaria’s key subsidiary TEBSA maintains relative cost efficiency that currently places it within the coastal base load, future additions to the local renewable energy matrix or expansion of the national transmission network could potentially displace the company from its strong competitive position in the coastal region in the long term.

TermoCandelaria ratings are one notch below those of Fenix Power Peru S.A. (BBB-/Stable). As a single-asset generator with a high proportion of take-or-pay costs and a deleverage trajectory that will reach 5x by 2021, Fitch views Fenix’s standalone credit quality as consistent with a ‘BB’ rating. However, Fenix’s ratings are buoyed by strong support from its parent Colbun S.A. (BBB/Positive).

Key Assumptions

Fitch’s Key Assumptions Within Its Rating Case for the Issuer
–TermoCandelaria places $200 million notes in a reopening of its 2029 international notes.
–No additional debt is contemplated at the TermoCandelaria’s holding level or subsidiaries over the rating horizon.
–TermoCandelaria’s combined annual generation over the medium term reaches at least 3,800 Gwh per year, similar to the level reported in 2017.
–TEBSA’s and TECAN’s strong availability factors at above 90%.

Rating Sensitivities

Developments That May, Individually or Collectively, Lead to Positive Rating Action
–A positive rating action is unlikely in the medium term, given TermoCandelaria’s limited asset diversification and long-term threats to its competitive position.

Developments That May, Individually or Collectively, Lead to Negative Rating Action
–Additional material debt at TEBSA’s or TECAN’s level that structurally subordinates debt repayments at TermoCandelaria’s holding level.
–A material deterioration of TEBSA’s or TECAN’s EBITDA’s generation capacity, declining to below $150 million on a sustained basis.
–Consolidated leverage levels above 3.5x on a sustained basis.

Liquidity

Adequate Liquidity: TermoCandelaria’s liquidity levels are explained by stable cash inflows from its subsidiaries and moderate financial debt at the holding level. As a holding company without operations, TermoCandelaria does not maintain a material cash balance on a non-consolidated basis. In the absence of execution of sizable projects (as is currently the case) any excess funds are paid in dividends. TermoCandelaria’s pro forma capital structure includes $410 million in an international bond issuance and an additional $200 million from the bond reopening. The bond amortizes gradually beginning in 2021 that will ease leverage pressure in 2023 when it is likely that TermoCandelaria’s EBITDA capacity will be pressured because of the expected increased installed capacity. Although the transaction implies a leverage increase, the debt maturity profile is manageable, and it also removed structural subordination.

All dollar amounts in this article are US Dollars, unless otherwise indicated.

Images courtesy of Termocandelaria

The bond, with total sum of $144 billion pesos and maturing in 2025, aims to promote the economic development of Latin America and the Caribbean through the private sector and “serves as a platform to attract international finance to the region and meet the growing demand of clients in local currencies,” said IDB Invest in a statement.

This is the 10th bond issuance by IDB Invest, which is a part of the Inter-American Development Bank (IDB) Group, and third issued in Colombian pesos.

The organization placed the bond as a part of its global emissions program (EMTN) as part of its “local currency capacity expansion strategy to provide more financing flexibility to its clients,” added IDB Invest.

The organization added that this also represents further progress in its plans to grow in the country. “As IDB Invest expands its operations in Colombia, its Bogotá office will grow to better serve clients and have a greater impact on development,” stated the organization.

The bonds were issued in the Colombian through a Dutch auction with an elevated demand that was 1.5 times above the offering, according to Colombian arm of the Brazilian bank.

This demand shows “the confidence of the market in Itaú,” said Derek Sassoon, vice president of treasury and global Markets at Banco Itaú Colombia, as reported by the Colombian publication La República,

This marks the fourth bond issuance within the current capital raising program.

(Photo credit: Thomas Hobbs)

The market demand of 1.2 billion pesos in bids was four times greater than the issuance level. Even before this figure was known, María Lorena Gutiérrez, Colombia’s minister of commerce, industry, and, tourism, said last week that the issuance could be later be extended by another $35 million USD.

Gutiérrez added that the ministry expects these bonds to help promote employment in areas of need and finance basic infrastructure — including drinking water, sewers and transportation — as well as health, education, and housing projects.

Bancóldex President Mario Suárez Melo highlighted the benefits the bonds will have for small business. “As a development bank for business growth, part of our purpose is to channel capital for micro and small entrepreneurs to formalize and access loans under favorable conditions that allow them to grow their businesses,” said Suárez.

The Bogotá-based development bank’s president added that the funds will support projects in line with Colombia’s effort to make progress in reaching the UN Sustainable Development Goals. Specifically, he said this will support “projects related to employment generation and formalization, inequality reduction, support to rural economies, access to credit, men/women wage gap reduction, and integration of excluded sectors into the productive economy.”

The bonds, which have terms of three and five years, were issued through the Colombian stock exchange, Bolsa de Valores de Colombia (BVC).

Bancóldex issued the bond with technical support from the Inter-American Development Bank (IDB) through a technical assistance program financed by Switzerland’s State Secretariat for Economic Affairs (SECO) in coordination with the Swiss embassy in Colombia.

The bond structure was reviewed by Sustainalytics, a Dutch firm that rates the sustainability of listed companies based on their environmental, social, and corporate governance performance.

“There is a huge opportunity for the private sector and individual investors to participate in a country’s development,” said Rafael de la Cruz, Andean region manager for the Inter-American Development Bank. “This type of instruments helps democratize participation in the financing of issues that are crucial for the development agenda, and at the same time boosts public investment transparency.”

READ MORE: Bancóldex Will Not Finance Public Transport Vehicles that Operate on Diesel

This marks the second time Bancóldex has made a large bond issuance that includes social goals in the past year. Last August, the bank issued some 200 billion pesos (nearly $70 million USD) in green bonds intended to finance projects that can help deal with the effects climate change. This issuance was also supported by IDB and SECO.

Along similar lines, Bancóldex also recently announced that it would no longer finance public transportation vehicles that run on diesel in an attempt to combat the country’s issues with air quality and pollution. Suárez categorized the decision as “a reaffirmation of a policy in line with improving quality of life of our population.”

According to the regional development bank, which is AAA-rated by Moody’s, the transaction will pay a semi-annual coupon of 2.5% and mature on January 18, 2023. It is “priced with a spread of 15.7 basis points over the 2.125% UST due December 31, 2022, which represents a yield of 2.500% s.a.,” said the IDB in a statement.

Orders exceeded $5.2 billion USD from more than 100 investors, which were distributed across the Americas (39% of the investors); Asia and the Pacific (22%); and Europe, Africa, and the Middle East (39%).

As for the types of investors, 48% are banks, 36% are central banks (and other “official institutions”), 13% are asset managers, and the remaining 3% are a collection of pension funds, insurance companies, and corporate investors.

“We usually issue $3 billion USD benchmarks in this maturity and so we are very pleased with the result,” said Laura Fan, head of funding at the IDB.

The joint lead managers are Bank of America Merrill Lynch, BMO Capital Markets, RBC Capital Markets, and TD Securities. The co-lead managers are BNP Paribas, Citibank, Deutsche, Goldman, HSBC, JPM, Mizuho, Nomura, NatWest, and Wells Fargo.

Fen added that the “typical strong demand in January” for the bond issuance made it particularly significant in a number of ways. “It is our largest five-year primary U.S. dollar global benchmark, our largest five-year order book, and a record number of investors for a five-year bond,” she said.

“We placed  a billion dollars at less than the interest rate the government received in January,” said the President, during the Agenda Colombia program.

Santos said that this issue demonstrates international confidence in the Colombian economy, despite falling oil prices.

The Colombian debt issue, placed by Deutsche Bank Securities Inc., HSBC Securities (USA) Inc. and Itau BBA USA Securities, Inc., was purchased by investors in the United States, Europe, Latin America and Asia.

The President explained that “we are paying less than what we were charged in January, meaning that there is more confidence despite all the problems we’ve seen in the neighborhood with the drop in oil prices.” President Santos acknowledged that the “bajonazo” (great fall) in oil prices has affected the country. “But however you take the projections of the Colombian economy, we suggest that (global) markets are increasingly believing in Colombia.”

“It turns out that the issue yesterday was surprising, because I thought the interest rate would be a little higher since the situation has not been easy; So there is a lot of confidence,” said Santos.

International confidence

The sovereign 30 year long bond issue, maturing in June 2045, was conducted by Minhacienda, Colombia’s Ministry of Finance,through the General Directorate of Public Credit and National Treasury. These bonds, explained Minhacienda, were placed at a yield of 5.041%, brings the total amount raised to $2.5 billion (USD) in this series of debt financing. The total demand was for $4.9 billion, almost 100% oversubscribed.

• 236 institutional investors participated in this issuance. The largest number for any sovereign long bond issuance in Colombian history.
• This issue has the lowest coupon achieved by the Republic of Colombia in its history of 30 year bond issuances.

Finance Minister Mauricio Cardenas said “The result of the operation is very successful. The big appetite of international investors for Colombian bonds reflects confidence in the institutions and economic policies of the country. It is a recognition of the flexibility that Colombia has to adapt to uncertain international conditions,” said Finance Minister Mauricio Cardenas. “Achieving a lower rate on the bonds than the ones issued in January (5.06%) reflects the fact that confidence in the Colombian economy has been growing,” a situation that generated due to “international markets rewarding the responsible day to day management of public finances in an environment of low inflation and soundness of the financial system.”

More than 50 Experts from Global Fixed Income will speak including:

• Alberto Graña, President, Banco Central del Uruguay
• Marco Ruiz, Head of International Investment, Central Bank of Colombia
• Ervin Novas Bello, Chief Executive Officer, Banco Central de la República Dominicana
• Joshua Abreu Boss, Head of Investments- Reserve Management Department, Central Bank of Paraguay
• José Olivares, Director at Directorate of Financial Markets Management, Ministry of Economy and Finance
• Imane Rahmouni, Senior Economist, Bank for international Settlements
• Abdiel Santiago, Secretary, Sovereign Wealth Fund of the Republic of Panama
• Juan Carlos Alfaro, Chief Risk Officer, Fondo Latinoamericano de Reservas
• Martín Rodriguez, Chief Investment Officer, Intergración AFAP
• Luiz Claudio Levy Cardoso, Chief Investment Officer, Nucleos Instituto de Seguridade Social

The delegation, through a series of interactive discussions and presentations will gain a fresh perspective on how the region’s Central Banks are influencing markets and stabilizing reserves through allocations to Fixed Income Instruments.

Firms interested in attending or joining the speaker faculty may contact Victor Tolentino victor.tolentino@marketsgroup.org +1 646-415-9161.

To register, view a full list of speakers and the event agenda, visit

https://www.marketsgroup.org/forums/latin-america-fixed-income-investors-forum-2015

Finance Colombia readers may obtain an exclusive 15% discount by using discount code FILAST14. Fiance Colombia is a media sponsor of the Latin America Fixed Income Investors Forum.

Davivienda’s capitalization and profitability have the highest influence on its VR and IDRs. Davivienda’s ratings also consider its consistent performance, strong asset quality and risk management and its clear long-term strategy and adequate execution. Fitch’s view of Davivienda’s creditworthiness is tempered by the bank’s moderate but improving efficiency, which is weaker than its higher rated international peers (emerging market commercial banks).

Capital ratios declined after the acquisition as risk weighted assets (RWA) increased while goodwill and other adjustments eroded the capital base. Sustained growth and lower yet positive profitability helped improve capital along with a conservative dividend payout policy. As of September 2014, Davivienda’s Fitch Core Capital ratio was 9.8% and it has hovered in the 9.5%-10.0% range during 2014; a level that compares well to that of similarly rated peers.

Fitch has affirmed the following ratings:

–Long-term foreign currency IDR at ‘BBB-‘; Outlook Revised to ‘Positive’;
–Long-term local currency IDR at ‘BBB-‘; Outlook Revised to ‘Positive’;
–Short-term foreign currency IDR at ‘F3’;
–Short-term local currency IDR at ‘F3’;
–Viability rating at ‘bbb-‘;
–Support Rating at ‘2’;
–Support Rating Floor at ‘BBB-‘;
–Senior unsecured debt at ‘BBB-‘;
–Subordinated debt at ‘BB+’;
–National Long term rating at ‘AAA(Col)’; Outlook Stable;
–National Short term rating at ‘F1+(Col)’.

Sustained loan growth in Colombia and abroad has driven the bank’s performance which in spite of the lower profitability of the new subsidiaries remains healthy. ROAA stood at about 1.72% at September 2014, above the 1.57% at September 2013 and poised to improve gradually in line with the performance of the new subsidiaries.

Given the still sound economic prospects at home and the positive impact that lower oil prices should have on Central American economies, Davivienda should gradually continue to perform well, maintain good asset quality and underpin its capital.

Davivienda’s newly acquired subsidiaries have shown an improvement in their performance; they have resumed asset growth and re-balanced their funding while they gained in efficiency and improved asset quality to be, on average, at par with Davivienda Colombia. As expected, Davivienda’s consolidated capital and profitability had declined after the acquisition but these metrics improved since 2012 and are well in line with previous projections.

Owing to its sound risk management policies and mature organization, the bank kept asset quality under control while bolstering reserves under increasingly stringent regulation. Davivienda’s asset quality ratios (90-day NPLs: 1.6% at Sept. 2014, unchanged from a year earlier but improving in Central America) compare well to those of its peers even though its loan portfolio has a slightly riskier profile.

Davivienda has a proven ability to devise and execute a clear long-term strategy. Building patiently around its core mortgage business, Davivienda became a universal bank, a regional player and diversified its target market, revenue sources, funding base, and loan portfolio. In the process, the bank’s management gained in depth and expertise; this was key to ensure an uneventful integration of its new subsidiaries.

Davivienda’s funding remains stable at home and has somewhat changed its mix abroad – deposit growth in Central America was mainly driven by time deposits – but remains adequate to its growth needs. The bank tapped global and local markets for senior and subordinated debt and remains an attractive name for investors at home and abroad. In addition, its use of capital markets funding improves its asset/liability matching.

Support and Support Rating Floor

Given Davivienda’s size, systemic importance and historic support policy, Fitch believes there is a high probability of support from Colombia’s central bank, whose ability to provide support reflects the country’s financial and fiscal standing (Colombia is currently rated ‘BBB’/’BBB+’ with a Stable Outlook). This underpins the bank’s Support (SR) and Support Rating Floor (SRF) ratings.

RATING SENSITIVITIES

Viability and Issuer Default Ratings

Davivienda’s VR and IDRs could benefit from the continued strengthening of its capital base (Fitch Core Capital Ratio consolidating around 10%) and/or a sustainable increase of its profitability (ROAA around 1.8%), while maintaining reasonable asset quality and sound reserves.

A significant decline in its performance and or weaker asset quality that would erode the core capital/reserve cushion (below 8.5% or 100%, respectively) could negatively affect the bank’s VR. Davivienda’s IDRs would be underpinned by the SRF.

Support and Support Rating Floor

Changes in the support rating and support rating floor are contingent on changes in Colombia’s sovereign ratings or Fitch’s view of Colombia’s willingness to support this bank.

Davivienda is Colombia’s third largest bank with a market share of about 12% – 13% by assets and has a presence in all segments, with a particular stronghold in retail. The bank has rapidly grown in the past decade organically and through targeted acquisitions. Since late 2012 it has an international franchise with banks in Costa Rica, El Salvador and Honduras that add to its banks in Panama and branch in the US.