8 Oct 2013
Fitch Ratings-New York-07 October 2013: Fitch Ratings has affirmed the long-term Issuer Default Rating (IDR) of Investcorp Bank B.S.C. (Investcorp) at ‘BB’. The Rating Outlook remains Stable. A full list of ratings follows at the end of this release.
KEY RATING DRIVERS
The rating affirmation reflects the company’s successful refinancing of 2013 debt maturities and new debt issuance last year, both of which have lengthened its funding profile at a cost commensurate with its rating. The ratings also reflect an enhanced fee income stream through increased private equity and real estate deal flow, improved leverage and continued reduction in more volatile hedge fund co-investments. It should be noted that asset under management (AUM) fees declined by 8% due to falling AUM, while deal fees rose sharply by 73% through increased private equity and real estate placement and realizations.
During 2012, Investcorp entered into a $529 million forward start debt facility, with contractual amortizations in September 2013 and 2014 and final maturity in September 2015. The facility was provided by a syndicate of banks. Fitch notes that the new facility has stricter and more creditor-friendly net worth and leverage covenants; conversely, liquidity covenants were relaxed. In November 2012, Investcorp S.A. issued $250 million in unsecured five-year notes maturing on
Nov. 1, 2017. Proceeds of the forward start facility and debt issue were used to repay maturing obligations in March and April 2013 and extend debt maturities.
It should be noted that Investcorp has announced that it will potentially repurchase approximately $100 million of the $515 million in preferred stock at a slight premium. Based on its economic capital model, Investcorp has a sufficient capital cushion to cover this potential purchase and its regulatory capital ratio is well above the required minimum.
The Stable Outlook reflects Fitch’s view that Investcorp’s liquidity, leverage and funding profile have stabilized and could improve over the medium term, absent a material market stress.
RATING SENSITIVITIES
Fitch believes that near-term rating upside is likely limited due to Investcorp’s volatility in profitability (particularly asset-based income associated with private equity and hedge fund investments), a significant proportion of high-cost preferred stock in the capital base, and wholesale funding structure. A one-notch upgrade could be achievable over the longer term if Investcorp is able to successfully increase the proportion of fee income, decrease more volatile asset-based income and improve fixed charge coverage. This assumes that leverage metrics continue to improve, liquidity grows and the level of co-investments continues to decline according to management’s plans.
Should Investcorp be unable to generate sufficient earnings to cover fixed charges, reverse continued net AUM outflows and/or maintain the recent decline in co-investments, ratings could be downgraded. Furthermore, if the sovereign rating of Bahrain (rated ‘BBB’, Outlook Stable by Fitch) was downgraded significantly, Investcorp’s ratings would be downgraded as Fitch does not envision rating the issuer above the sovereign ratings.
Investcorp Bank B.S.C.
–Long-term Issuer Default Rating (IDR) affirmed at ‘BB’; Outlook Stable;
–Short-term IDR affirmed at ‘B’;
–Viability Rating affirmed at ‘bb’;
–Support Rating affirmed at ‘5’;
–Support Rating Floor affirmed at ‘NF’.
Investcorp S.A.
–Long-term IDR affirmed at ‘BB’; Outlook Stable;
–Short-term IDR affirmed at ‘B’;
–Senior unsecured debt affirmed at ‘BB’.
Investcorp Capital Ltd.
–Long-term IDR affirmed at ‘BB’; Outlook Stable;
–Short-term IDR affirmed at ‘B’;
–Senior unsecured debt affirmed at ‘BB’.
Contact:
Primary Analyst
Ed Thompson
Senior Director
+1-212-908-0364
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
Secondary Analyst
Ilya Ivashkov, CFA
Director
+1-212-908-0769
Committee Chairperson
Nathan Flanders
Managing Director
+1-212-908-0827
Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email:
brian.bertsch@fitchratings.com.
Additional information is available at ‘www.fitchratings.com’.