SAO PAULO & NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the ratings for GP Investments Ltd. (GP) as follows:
--Long-term Issuer Default Rating (IDR) at 'B+';
--Perpetual bonds at 'B+/RR4'.
The Rating Outlook is Stable.
GP's ratings reflect its good franchise and experienced management, solid capital base, satisfactory liquidity and adequate debt profile. Fitch's view of GP's creditworthiness is tempered by its concentrated portfolio, tight recurring cash flow, and high debt service to cash flow ratios. Also, the negative prospects on the Brazilian economy should impact the company's divestment strategies and also affect its appetite for new investments within its managed private equity funds.
When compared to debt service, GP's cash flow generation is quite tight, and the company relies on volatile investment revenues and its good liquidity cushion to fulfill its commitments. In addition, the company resorts to 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.
Since investment revenues fluctuate and depend on investment strategies and market conditions, GP's recurring EBITDA is usually low, and does 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 the thorough and conservative investment policies changed 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 its results to volatility and sudden changes. However, Fitch recognizes that GP has a successful execution track record in extracting value from its investment and good IRR over time.
In spite of the challenging scenario, GP's overall financial profile continues to benefit from a very low debt to equity leverage (0.58x at September 2015), and a significant capital base that allows the company to pursue its investment plans while maintaining an adequate cushion against unexpected losses. These are very important features given the high volatility that affects the value of its investments.
GP has historically maintained a very high liquidity position (liquid assets after commitments equaled about US$200 million at September 2015) 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.
GP's core liabilities are very long term and consists of perpetual bonds (US$150 million) and a long-term loan (BRL140 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 is contingent in nature, thus creating little short-term financial pressure. Pressure has been further reduced after the company partially prepaid part of this long-term loan. And given the current macroeconomic scenario, the company has limited appetite for carrying out new investments. This is also one reason for the more intense share buyback programs, which have resulted in over US$35 million of shares repurchased during 2015.
GP's management has significant expertise in the private equity (PE) business after 20 years and more than US$5 billion in investments; however, key man risk is present, as is the case in many similar companies. GP's company profile is tempered by its narrow geographical focus and smaller assets under management compared to global players in an industry with low barriers of entry. Locally, GP franchises are more relevant with an extensive network of contacts and good access to investors in Brazil.
GP's ratings would benefit from a larger and stable recurring cash flow and adequate debt and expenses coverage metrics may benefit GP's ratings, as would a more diversified investment base.
However, a significant increase of its leverage, deterioration on its recurring cash flow metrics, or dismal performance of its investments could negatively pressure its ratings.
Additional information is available on www.fitchratings.com
Global Non-Bank Financial Institutions Rating Criteria (pub. 28 Apr 2015)
Dodd-Frank Rating Information Disclosure Form