Investcorpâ€™s Ratings Affirmed with a â€˜Stableâ€™ Outlook
Capital Intelligence Ratings (CI Ratings or CI), the international credit rating agency, announced today that it has affirmed Investcorp’s Financial Strength Rating (FSR) at ‘BBB’, with a ‘Stable’ Outlook, on the grounds of Investcorp’s diversified assets by geography (based mainly in US and Europe), good debt service record together with extended debt maturity profile, and well diversified sources of term borrowings.
The FSR is also supported by a sound capital base, still good profitability at both the operating and net levels (despite declines), and Investcorp’s established business franchise and track record. The factors constraining the FSR are the Bank’s high exposure to investment risk and vulnerability to fair value write-downs, dependence on wholesale funding and the resultant liquidity and funding risks (although mitigated by a considerable level of undrawn committed facilities). The ongoing challenging market conditions in Europe, despite improving economies, also constrain the FSR. The Bank’s Long- and Short-Term Foreign Currency Ratings are also affirmed at ‘BBB’ and ‘A3’, respectively, with a ‘Stable’ Outlook. Given its wholesale bank status, Investcorp does not have an official lender of last resort. The Support Rating of ‘4’ is therefore maintained to denote only a moderate likelihood of support in case of need.
Investcorp has a well-established business franchise and follows a clear business strategy. Notwithstanding the resumption in asset growth during recent periods, the past successive contractions seen in the asset base underscore the significant degree of deleveraging undertaken after the dislocation in capital markets post-Lehman. Given the regulatory restrictions applicable to wholesale banks in Bahrain, Investcorp is unable to accept retail deposits. This key constraint renders the Bank inherently reliant on wholesale sources of funding. That said, Investcorp’s funding strategy adheres to the principles of diversification through the process of sourcing long-term finance, combined with traditional medium-term syndicated facilities and bonds and, to a lesser extent, short-term institutional deposits. Importantly, the funding profile underscores the strong and geographically diverse bank relationships Investcorp has built over the years, as well as its effective access to capital markets. In this regard, the funding policy is prudent, as demonstrated by the extended debt maturity profile. Leverage remains at a sound level.
Investcorp’s balance sheet liquidity increased significantly at end H1 FY17 as surplus funds were deployed into bank placements. The effective liquidity – including the considerable undrawn committed facilities – also increased and continued to support the Bank’s ongoing timely fulfilment of debt repayments and other financial obligations over the near to medium-term. It is worth mentioning that Investcorp’s balance sheet liquidity is influenced by the different stages of the ‘investment cycle’, for different investments. Accordingly, a significant share of client deposits that the Bank receives are in fact transitory in nature since they relate to subscriptions pending investment in new deals or products, or exit proceeds pending distribution to clients.
Capital adequacy remains sound with a high CET1 component. A moderate dividend policy in recent years, notwithstanding a reduced ROAA, has underpinned a sound rate of internal capital generation. The nature of Investcorp’s business model and its high exposure to investment risk means that a sound capital base is crucial. Exposure to illiquid (unquoted) corporate investments continues to represent a high proportion of both total assets and total capital – although single name concentrations have reduced. Investments remain vulnerable to fair value write-downs in the context of possible renewed market volatility. That being said, the share of hedge funds in total assets has fallen markedly in recent years and is currently less than half the level seen pre-Lehman. More positively, Investcorp’s co-investments are now predominately funded by permanent capital (rather than debt), in line with management’s strategic objective.
Although Investcorp’s profitability at both the operating and net levels decreased in FY16 and into H1 FY17, it remained at a sound level. This underscores the Bank’s strong gross income generation capacity, with deal fees and assets under management (AUM) fees still by far the largest contributor to gross income. Notwithstanding the improved quality of earnings, income generation remains dependent on deal flow and, therefore, subject to some degree of volatility. Moreover, although hedge funds generated positive return in H1 FY17 (against a negative return in FY16), their performance over the past has been inconsistent. As regards operating efficiency, the Bank’s already high cost to income ratio deteriorated in the first half of the current financial year, pushed up by lower gross income. Investcorp also has a large cost base which, in turn, restricts operating profit and bottom line profitability. The very recent acquisition of 3i debt management business is expected to augment Investcorp’s gross income through a recurring stream of fees.
Investcorp was founded in 1982 and remains a management-controlled entity, with strategic partners and management effectively owning a majority of total shares. Investcorp is akin to an alternative asset manager performing the roles of principal and intermediary in international investments through operating centres in Bahrain, London and New York. Operating under a wholesale banking licence issued by the Central Bank of Bahrain, the Bank pursues a highly focused approach, offering its investment products to institutional and very high net worth individual clients, both in the Arabian Gulf and internationally. Investcorp also co-invests along with customers in all the alternative asset products it offers to its clients. As at end H1 FY2017, the Bank’s total assets were $2,693 million and total capital was $1 billion. Total AUM is estimated to have doubled to $22 billion following the purchase of 3i debt management business.