CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the Issuer Default Ratings (IDRs) of Investcorp Bank B.S.C. (Investcorp) and affiliates, as well as the senior debt rating of affiliate Investcorp Capital Ltd. The Rating Outlook remains Negative. A complete list of ratings is provided at the end of this release.
Investcorp's ratings are constrained by high leverage, balance sheet co-investment concentrations, and a capital mix heavily weighted toward preference shares. These concerns are offset by some favorable rating factors including the company's strong Gulf-based alternative investment franchise, its diversified mix of alternative assets under management (AUM) and adequate balance sheet liquidity and capital.
The affirmation of the IDRs and debt rating reflects Investcorp's ability to improve profitability, reduce balance sheet leverage and increase liquidity and capital during a relatively sluggish macro environment. Earnings have returned to positive territory after severe losses during the financial crisis in fiscal year 2009 (FY09; ended June 30 2009) but still remain well below pre-crisis levels. In addition, Investcorp has demonstrated good access to capital markets even in difficult conditions. Management issued preference shares to replenish its capital base during the height of the crisis in early 2009, and refinanced bank loans maturing in 2010 and 2011 with a new facility maturing in March 2013.
In addition, Fitch has downgraded the Individual rating of Investcorp and its affiliates to 'C/D' from 'C'. The downgrade of the Individual rating reflects the sluggish macro environment, earnings that are still well below historical levels, and a business model that has proven sensitive to conditions in the private equity and alternative investment markets.
Investcorp returned to profitability during FY10 (ended June 30, 2010) and remained profitable during the first half of 2011 (1H'11). Improved performance since the end of FY09 has resulted from strongly profitable hedge fund operations and positive mark to market trends in private equity and real estate co-investments.
Tier 1 regulatory capital improved at 1H'11 to 23.2% from 22.9% at FY10 and 20% at FY09. The capital mix remains heavily tilted toward non-cumulative perpetual preference shares issued during FY09 at the height of the financial crisis to replenish capital. These securities bear a 12% annual dividend until a first optional redemption date in 2H'14.
The operating environment is slowly improving. Corporate investment valuations recovered somewhat during FY10, and real estate valuations began to recover in 1H'11. Investment and exit opportunities have returned, with Investcorp negotiating exits and new placements in both sectors during 2H'10 and 1H'11.
While Fitch notes political unrest in Investcorp's headquarters location in the Kingdom of Bahrain, Fitch believes that the risk is largely mitigated by structural protections. Investcorp's group corporate structure contains force majeure provisions that transfer Bahraini shareholder interests to a subsidiary domiciled in the Cayman Islands. Moreover, most assets and core operations are outside the Gulf area. Over time, disruption in the Gulf economies could make it more difficult for Investcorp to raise funds and place assets with Gulf-based clients. However, this risk is already incorporated in Investcorp's current long-term IDR.
The Negative Outlook reflects the potential for a renewed downturn in alternative investment markets that could put renewed pressure on co-investment valuations, activity fees and earnings before the company has the ability to rebuild financial flexibility through ongoing earnings. A prolonged period of market stability, on the other hand, would help Investcorp progress toward a Stable Outlook. Over time, if management is successful in reducing balance sheet co-investments in relation to AUM, the company has the potential for higher ratings.
Fitch has withdrawn the support floor of affiliate Investcorp S.A., reflecting that entity's change of domicile to the Cayman Islands.
Investcorp, headquartered in Bahrain with operations in London and New York, combines private equity investing with private client advisory services. Its investing focus is on U.S., European and to a lesser extent Middle East/North African) corporations, U.S. real estate, hedge funds, and small cap technology investments. Its clients are principally high net worth individuals and institutions.
Fitch has taken the following rating actions:
Investcorp Bank B.S.C.
--Long-term Issuer Default Rating (IDR) affirmed at 'BB+';
--Short-term IDR affirmed at 'B';
--Individual downgraded to 'C/D' from 'C';
--Support affirmed at '5';
--Support Floor affirmed at 'NF';
--Rating Outlook Negative.
Investcorp S.A.
--Long-term IDR affirmed at 'BB+';
--Short-term IDR affirmed at 'B';
--Individual downgraded to 'C/D' from 'C';
--Support affirmed at '5';
--Support Floor of 'NF' withdrawn;
--Rating Outlook Negative.
Investcorp Capital Ltd.
--Long-term IDR affirmed at 'BB+';
--Long-term senior debt affirmed at 'BB+'
--Short-term IDR affirmed at `B';
--Individual downgraded to 'C/D' from 'C';
--Support affirmed at '5';
--Rating Outlook Negative.
Additional information is available at www.fitchratings.com
Applicable Criteria and Related Research:
--'Global Financial Institutions Rating Criteria' (Aug. 16, 2010);
--'Investment Manger and Alternate Funds Criteria' (Dec. 23, 2010);
--'Equity Credit for Hybrids and Other Capital Securities' (Dec. 29, 2009).
Applicable Criteria and Related Research:
Global Financial Institutions Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=547685
Equity Credit for Hybrids and Other Capital Securities: Market Feedback and Fitch's Responses
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=291784
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