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SUPRANATIONALS such as Asian Development Bank (ADB) have a limited appetite for risk, says Moody's, which has assigned it a triple-A counterparty rating for derivatives activity.

  It said the ADB was one of 15 supranationals rated, only three of which did not receive the top triple-A rating.

  While supranationals generally have the top triple-A credit rating, some of their counterparties, who take the other side of a derivative transaction, often have significantly lower ratings.

   Derivatives have come under fire in the past year, with US authorities questioning whether they are appropriately used. While derivatives can be used for risk management, some have invested in them for speculative purposes.

  Procter & Gamble lost US$102 million through derivatives investment and sued Bankers Trust for $130 million.

   Gibson Greeting Cards lost money on derivatives bought from Bankers Trust and sued it for $73 million before settling out of court.

  But Moody's studies found that the risk appetites of the rated supranationals were broadly modest with controls generally appropriate to the level and nature of their derivatives activities.

  'We do not expect that supranationals' derivatives activity will be a serious concern for any rated supranational over the immediate term,' Moody's said.

  'The potential risks of the supranationals' increased derivatives activity is mitigated by their generally conservative financial policies.

  'The fact that they are mainly end users of derivatives also helps to keep their risk appetites low.'   Supranationals used derivatives mainly as asset/liability management tools, to decrease their funding costs and to manage their investment portfolios, the rating agency said.

  'The use of derivatives enables supranationals to access many debt markets and to diversify their sources of funding across markets, currencies and instruments,' Moody's said.

  'Some supranationals also act as intermediaries to help their customers access capital markets and to hedge their balance sheet risks by arranging or transacting swaps with them.

  'But this activity is mostly on an ad hoc basis and only very few would consider it a separate business.'   It said that the volume and sophistication of supranationals' derivatives activity had increased in recent years.

  There was wider use of exchange-traded and over-the-counter options, forward contracts, swaps and debt instruments such as structured notes with embedded derivatives.

   It found distinct differences in the scope and structure of the supranationals' activities, many of which were a function of their diverse policy mandates.

  Of greater concern was the supranationals' exposure to counterparty credit risk in their derivatives activity, but counterparty rating guidelines - usually single-A or better - helped to reduce this worry, Moody's said.

  It assigned Aaa ratings to the African Development Bank, the ADB, Eurofima, European Atomic Energy Community, European Coal & Steel Community, European Bank for Reconstruction and Development, European Economic Community, European Investment Bank, the World Bank, the Inter-American Development Bank, International Finance Corp and Nordic Investment Bank.

      Banco Latinoamericano de Exportaciones was rated Baa2, Corporacion Andina de Fomento Baa3 and Council of Europe Social Development Fund Aa1.



Moody's gives low-risk ADB its top rating