SAO PAULO & NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the ratings of GP Investments Ltd. (GP) as follows:
- Long-term Issuer Default Rating (IDR) at 'B+';
- Perpetual bonds at 'B+/RR4'.
The Rating Outlook is Stable.
RATING RATIONALE
GP's ratings reflect its sound franchise and experienced management, good capital base, ample sustained liquidity, and adequate debt profile.
Fitch's view of GP's creditworthiness is tempered by its concentrated portfolio, tight and sometimes negative recurring cash flow, and weak debt service-to-cashflow ratios.
When compared to debt service, GP's cash flow generation is quite tight, and the company relies on volatile investment revenues and its ample liquidity cushion to fulfill its commitments. In addition to that, the company resorts to using its volatile success fees, valuation profits, financial revenues, and dividends to meet its debt service. Fund management fees have been enough to cover the company's operating expenses on a cash basis. Since investment revenues fluctuate and depend on investment strategies and market conditions, Fitch does not consider such income as recurring, although recognizes the overall value of such in terms of profitability and liquidity sources.
GP has historically maintained a very high liquidity position (liquid assets after commitments equaled about USD225 million at September 2014) that has consistently covered all of its financial liabilities. From an operational standpoint, GP's current liquidity fully covers its annual operational expenses, debt service, and investment commitments for the next 24-30 months. Such liquidity is regularly fed by the aforementioned investment revenues. The company carries a conservative liquidity policy that should preserve such cushion in the future in order to cover its negative recurring income.
Given the size of the deals GP executes, concentration is structurally high and likely to remain so and is a weakness that results in volatility of its results. This is mitigated by the thorough and conservative investment policies that have been altered to target well-established companies that generate their own cash flows and have significant growth potential. A mix of mature and growing companies curbs execution risk, but concentration exposes results to volatility and sudden changes. Even so, Fitch recognizes that GP has a successful execution track record in extracting value from its investment and good IRR over time.
GP's leverage (debt-to equity ratio of 0.69x as of September 2014) is deemed conservative given its profile (57.4% of financial debt is a perpetual issuance), although it is higher than other alternative asset manager's. GP's capital base allows the company to pursue its investment plans while maintaining an adequate cushion against unexpected losses, a very important feature given the high volatility that affects the value of its investments.
GP's core liabilities are very long term and almost equally divided between perpetual bonds and a long-term loan maturing in 2020. This structure leaves plenty of room for GP to manage its short- to medium-term cash flows and focus on its investments, whose realization is contingent in nature, thus creating little short-term financial pressure.
GP's management has significant expertise in the private equity (PE) business after 20 years and more than USD5 billion in investments and is a top player in Brazil. Managed by entrepreneurs, GP has the network, contacts, and business acumen to be a top PE player in Brazil.
RATING SENSITIVITIES
GP's ratings would benefit from a larger and more stable recurring cash flow, and adequate debt and expense coverage metrics, as would a more diversified investment base.
On the other hand, a significant increase in leverage, deterioration in its recurring cash flow metrics, or dismal performance of its investments could negatively pressure its ratings.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Global Financial Institutions Rating Criteria' (Jan. 31, 2014);
--'Recovery Ratings for Financial Institutions' (Sep. 24, 2013);
--'Investment Manager and Alternative Funds Criteria' (Dec. 12, 2013).
Applicable Criteria and Related Research:
Investment Manager and Alternative Funds Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=725057
Recovery Ratings for Financial Institutions
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=717538
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=932815
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