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+'; Outlook revised to Positive from Stable;
--Senior unsecured bonds at 'B+/RR4'.
KEY RATING DRIVERS
The affirmation of GP's IDR and issue ratings reflects its continued satisfactory performance in a challenging operating environment, its good franchise, seasoned management, and satisfactory credit metrics. The company's rating continues to be constrained by Brazil's weak operating environment, which is still where the company has most of its investments. Although there appear to be positive economic signals and lower political uncertainties, the continued challenging operating environment in Brazil could impact the company's divestment strategies and also affect its appetite for new investments within its managed private equity funds. GP's ratings are also affected by the investment portfolio concentration in Brazil and the still tight recurring cash flows.
The Rating Outlook has been revised to Positive in view of the improved capitalization, lower leverage, the increased diversification and on the expectation of favorable impact of a less adverse operating environment. Fitch's expectation that the operating environment in Brazil will strengthen is reflected in GDP growth forecast of a positive 1.2% during 2017 and even higher in 2018; this follows the negative growth seen in 2016, which has limited the performance of many of GP's current investments.
During the first nine months of 2016, GP continued to strengthen its capital base. It also continues to strengthen its franchise through the diversification of its investment portfolio. The ratings and now Positive Outlook also reflect the company's risk appetite and risk controls along with the depth of its seasoned management team which continues to ensure the company's comfortable liquidity and improved debt profile. Despite the expected continuation of these positive factors, Fitch expects that a potential ratings upgrade will still be tempered by the degree of the portfolio concentration and the level of recurring cash flow, which could impact debt service to cash flow ratios.
When compared to debt service, GP's recurring cash flow generation has been tight, and the company has relied on its investment revenues and its good liquidity cushion to meet its commitments. In addition, the company is partially dependent on volatile success fees, valuation profits, financial revenues, and dividends to generate cash to meet its debt service. Fund management fees have been enough to cover most the company's operating expenses. Since investment revenues fluctuate and depend on investment strategies and market conditions, GP's recurring EBITDA may not adequately cover the company's debt service. However, GP has consistently been able to maintain ample liquidity that is regularly fed by the aforementioned investment revenues, allowing the company to handily fulfil its financial commitments.
Given the size of the deals GP executes, concentration is structurally high and likely to remain so. This is mitigated by thorough and conservative investment policies that target well-established companies and that generate their own cash flows and have significant growth potential. A mix of mature and growing companies mitigates execution risk, but concentration exposes results to volatility. However, Fitch recognizes that GP has a successful execution track record in extracting value from its investments over time.
In spite of the current challenging scenario, GP's overall financial profile continues to benefit from a very low debt to equity leverage (0.5x at September 2016), and a significant capital base that allows the company to pursue its investment plans while maintaining an adequate cushion against unexpected losses.
GP has historically maintained a very high liquidity position (liquid assets equalled about US$174 million at Sept. 30, 2016) 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 at least for the next 24 months.
GP's core liabilities are very long term and consist of perpetual bonds (US$149.2 million) and a long-term loan (BRL 145 million) 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 will usually occur over a longer timeframe, thus creating little short-term financial pressure. Pressure has been further reduced after the company partially prepaid part of this long-term loan repurchased during 2015.
GP's management has significant expertise in the private equity (PE) business after 23 years in this niche and more than USD $5 billion in investments. Although the company is controlled by nearly a dozen partners with many years of diverse experience and benefits from the expertise of advisers, there is still some element of key man risk, as is the case in many similar companies. GP's company profile has been tempered by its narrow geographical focus; however, this is also expected to improve with the increased investment focus in Europe (Spice Private Equity) and North America (World Kitchen).
RATING SENSITIVITIES
GP's ratings could benefit from:
--An operating environment expected to stabilize and potentially show some mild improvements;
--Reduced sector concentration in its investment holdings.
Favourable conditions for a ratings upgrade would include:
--A continued positive trend in terms of concentration combined with a growth in the revenue-to-operating expense ratio that leads to an improvement in GP's debt or expenses coverage metrics. However, this is contingent on a material stabilization or some improvement in the operating environment for its main businesses.
Negative pressure on the ratings could occur given the following:
--A significant increase of leverage, deterioration of recurring cash flow metrics, or dismal investment performance.
--In addition, an unexpected worsening of the operating environment in Brazil could impact cash flows resulting in further pressure on the rating or a reversal of the Rating Outlook back to Stable.
Additional information is available on www.fitchratings.com.
Applicable Criteria
Global Non-Bank Financial Institutions Rating Criteria (pub. 15 Jul 2016)
https://www.fitchratings.com/site/re/884128
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1015048
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1015048
Endorsement Policy
https://www.fitchratings.com/regulatory
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