Fitch Affirms Investcorp Bank B.S.C. at 'BB'; Outlook Stable

NEW YORK--()--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 is provided at the end of this release.

KEY RATING DRIVERS

The rating affirmation reflects the company's strong client franchise and high degree of brand name recognition in the Gulf, supported by its track record and long-term relationships in the region. The ratings also reflect the improved funding and liquidity profile, in particular, the long-dated debt and secured financing for its co-investment portfolio which has reduced the impact of refinancing and liquidity risk inherent in Investcorp's business model of originating and syndicating alternative asset investments. At the same time, Investcorp maintains strong capital levels that are well in excess of the Central Bank of Bahrain's minimum requirement.

Rating constraints include significant, albeit reduced, balance sheet co-investments in private equity, hedge funds and real estate. Relative to other alternative investment managers, Investcorp is also exposed to increased potential earnings volatility and placement risk given that transactions are originated and placed with investors on a deal by deal basis as opposed to raising dedicated funds with an investment/re-investment period.

Subsequent to the company's fiscal year ended June 30, 2014, Investcorp announced the redemption of 53,382 of its issued preference shares for an aggregate redemption price of $53.4 million. In total, the company has repurchased one-third of its outstanding preference shares. Given the dividend rate on the preferred shares (L+9.75%), Fitch believes the company could pursue additional preferred share redemptions in the future. Fitch believes that Investcorp presently has improved its fixed charge coverage, and sufficient economic flexibility and capital cushion to cover additional preferred share repurchases if executed at a measured pace.

The Stable Outlook reflects Fitch's view that Investcorp's liquidity, leverage and funding profile have stabilized and could continue to improve over the medium term, absent a material market stress.

Investcorp's 'BB' IDR is equalized with its 'bb' Viability Rating based on Fitch's view of limited likelihood of sovereign support. This is reflected in the Support Rating of '5' and the Support Rating Floor of 'No Floor'. The Support Rating of '5' reflects Fitch's view that external support cannot be relied upon. The Support Rating Floor of 'No Floor' reflects Fitch's view that there is no reasonable assumption that sovereign support will be forthcoming to Investcorp.

RATING SENSITIVITIES

Fitch believes Investcorp's ratings are likely limited to the 'BB' category in the near to intermediate term due to the company's business model, earnings volatility and balance sheet exposure to co-investments. The company's deal-by-deal business model could be a profitability constraint in a period of investment origination and/or placement activity weakness, while elevated co-investment exposure introduces balance sheet risk in the event of investment losses. Post-origination placement may also introduce temporary balance sheet risk if Investcorp is unable to place investments with clients.

A one-notch upgrade could be achievable if Investcorp is able to successfully increase the proportion of recurring management fee income generated from its assets under management (AUM), reduce the proportion of income based on origination, placement and performance of investments and continue to improve fixed charge coverage. This assumes that leverage metrics continue to improve, liquidity continues to grow and the level of co-investments continues to decline in line with management's plans.

Should Investcorp be unable to generate sufficient earnings to cover fixed charges, continue to grow net AUM and/or maintain the recent decline in co-investments, ratings could be downgraded.

Fitch has affirmed the following ratings:

Investcorp Bank B.S.C.

--Long-term IDR at 'BB'; Outlook Stable;

--Short-term IDR at 'B';

--Viability Rating at 'bb';

--Support Rating at '5';

--Support Rating Floor at 'NF'.

Investcorp S.A.

--Long-term IDR at 'BB'; Outlook Stable;

--Short-term IDR at 'B';

--Senior unsecured debt at 'BB'.

Investcorp Capital Ltd.

--Long-term IDR at 'BB'; Outlook Stable;

--Short-term IDR at 'B';

--Senior unsecured debt at 'BB'.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Global Financial Institutions Rating Criteria' (Jan. 31, 2014);

--'Investment Manager and Alternate Funds Criteria' (Dec. 12, 2013).

--'Securities Firms Criteria' (Jan. 31, 2014)

Applicable Criteria and Related Research:

Securities Firms Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732556

Investment Manager and Alternative Funds Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=725057

Global Financial Institutions Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732397

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=919535

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Contacts

Fitch Ratings
Primary Analyst
Ilya Ivashkov, CFA
Senior Director
+1-212-908-0769
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Tara Kriss
Senior Director
+1-212-908-0369
or
Media Relations:
Brian Bertsch, +1-212-908-0549 (New York)
brian.bertsch@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Ilya Ivashkov, CFA
Senior Director
+1-212-908-0769
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Tara Kriss
Senior Director
+1-212-908-0369
or
Media Relations:
Brian Bertsch, +1-212-908-0549 (New York)
brian.bertsch@fitchratings.com