RAM Ratings Lanka reaffirms CGF's BBB+/P2 ratings

RAM Ratings Lanka has reaffirmed the Construction Guarantee Fund's (CGF) long and short-term financial enhancement ratings at BBB+ and P2; the long-term rating has a stable outlook.

The ratings are supported by the Fund'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.

However, the ratings are pressured by the Fund's weakening financial performance, small size and inherent dependence on a single sector. As a Government-owned entity with an economic objective, the Fund may also lend to other government institutions.

CGF was formed by the Government in 1999, to play a strategic role in the construction industry by providing indirect financial assistance to construction contractors. However, it is viewed to rank lower in priority than larger state-owned financial institutions within the Government's overall economic framework.

It has been allocated Rs. 100 million of seed capital, of which Rs 55 million has already been disbursed to it.

CGF differentiates itself from banks and insurance companies that also provide similar guarantees, by not requesting collateral and charging lower fees, thus exposing itself to higher risk levels.

Its 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 (ICTAD) which grades each contractor based on its financial capability and past performance.